Commercial Real Estate: Do’s and Don’ts:
Investing in commercial real estate property can be a challenging task and the likelihood is that many amateur investors will get it wrong when they enter this wrought-with-challenges segment. So to give you a head start, we have compiled a list of do’s and don’ts when buying commercial real estate property, which will hopefully aid in creating a simplified and successful real estate investing process.
Some Important Do’s:
- Plan your finances well ahead of your purchase so that you are not in for some last minute surprises. As it is, it’s hard negotiating a real estate deal. You don’t want the deal to be called off for something that could have been well avoided with proper planning.
- Always maintain buffers or a leeway when you plan your finances. There is always a possibility that you may be overestimating or underestimating some factors in the deal. You don’t want to be in for a surprise later.
- Make sure that you have a backup plan in place to compensate for any loss in income that you may have from a tenant vacating the premises.
- Hire a competent real estate agent who has plenty of experience in dealing with commercial property matters. Do keep in mind that this is a different ball game compared to residential property. They are also connected to other players in the industry that specialize in commercial real estate such as lenders, lawyers, valuers/appraisers and property inspectors. These connections could save you the time and possible money when using their services.
- Conduct as much research as possible on the neighbourhood. Everything from past occupants, potential litigations, crime rates in the area and transportation available. All of this data is essential not only for self-validation of the investment but also can be used to pitch when leasing out to commercial establishments.
- Check for zoning restrictions. You don’t want be caught on the wrong foot after investing a significant amount of money on a property, only to later realize that your business cannot be conducted in that area. It is best if you know this well ahead of time.
- Always compare prices for similar units in the neighbourhood. You can also approach your real estate agent to validate pricing. You don’t want to be paying over the odds for a commercial property unless you see more value in it.
- Make sure that you are exactly aware of how old the property is and plan accordingly to make repairs/modifications in the future. Even if these are needed by you or your tenant, the regulator/government may impose changes that would require you to make these changes.
- Get your Insurance in place, be it for a mortgage or for the property. It is essential you protect your financials interests on both these accords.
- Establish clear rules and legal obligation with your tenants, so that there are no conflicts at a future date.
- It is critical that you get pre-approved for a mortgage before entering into negotiations with a seller for buying a commercial property.
- Ensure that the legal terms used in the control are professionally drafted by a lawyer with experience in the industry.
Some Not to be Missed at Any Cost Don’ts:
- Don’t invest on a commercial property without a viable plan. What is your plan for investing? Is it for self-use? Or are you planning to lease this out to tenants? Ideally there will be a different approach in place for each option.
- Ensure that you define a timeframe for your investment. Every investor must go in with a plan as to how long they intend to hold onto the property. Buying a property becomes easier when this objective is defined.
- Don’t look at flipping commercial real estate. Many brokers and advertisements might lead you to believe that this is very lucrative, but more often than not people trying to flip a real estate property end up suffering losses. This is mainly due to the nature of flipping, which is short term and you can expect very little movement in prices in the short term. So unless you are a professional investor with experience don’t attempt flipping.
- Don’t buy space that you aren’t going to use. Be very clear as to how much space you need or plan to own. If there is additional space, there is very little you can do with it and you are going to end up paying more than what you need.
- Don’t restrict your research on the property to the premises alone. You need to have a clear look around the neighbourhood to make sure the surroundings are clean, safe and there is no possibility of any environmental hazard. Risking a contamination or excessive pollution could lead to punitive damages in the future.
- Don’t conduct all your negotiations orally. This can lead to complications and assumptions in the deal that were never there in the first place. By conducting your negotiations orally you or the selling/leasing party will not be able to keep track of key points, promises and other elements of the deal. It is highly recommended that negotiations are conducted via e-mail or at least minutes of the meeting following an oral discussion is posted in an email in order to ensure that every detail is well documented and all parties are on the same page, during various stages of the negotiations.
- Don’t limit your research to the internet. While the internet can be a great medium for sourcing information, when it comes to commercial real estate is it imperative that buyers get on the ground and visually look at the premise and the surroundings. Online listings can sometimes be deceptive, so make sure you know what you are getting before making a firm offer.
- Don’t be afraid to negotiate. Despite a seller quoting a fixed price there is always a possibility that there is a margin built into this and ultimately there could be a breaking point in terms of price or terms. So don’t think twice about negotiating down to get a better deal.
With these dos and dont’s and with the capable guidance of a knowledgeable and experienced realtor, you can easily invest in Commercial properties without a hitch and smile all the way to the bank!