Buying commercial real estate is a great way to produce passive income – if it’s done right. But, for an inexperienced investor, this type of venture could turn into a huge money sink. We’ve compiled a practical guide on the typical mistakes to avoid when acquiring commercial real estate.
Not Understanding the Market & Property Values
Many people think that commercial and residential property is valued the same way. But, that is simply not true. Residential units are valued for their location, socioeconomic elements, and exterior and interior design.
Commercial buildings are valued according to the level of income they generate in the long haul. This means that you should do a comparative market analysis instead of buying commercial real estate on a whim.
Closing Before Zoning is Approved
In many cases, investors close a deal on real estate that is not zoned properly. This makes it difficult to make use of the land and deviate from the rules.
Zoning is a fundamental thing to consider when purchasing commercial real estate. That’s because the zoning ordinances, regulations, and laws set by the city will have a drastic impact on your business plans in the foreseeable future.
Here is an example: Let’s say you want to own a commercial office in a specific area of the city. This might not work if that land is zoned for industrial or residential purposes. Other than the type of property you can work with, zoning can also affect aspects like:
- Height or size of the building
- Waste management
- Industrial pollutants
- Noise level
- Utility lines
- Parking area
Unauthorized Improvements
Some business tenants tend to make improvements to their property either at the start or during the lease. This can include structural alterations, expanding the workspace, installing air-conditioning, etc. The problem is, many people don’t seek adequate formal authorization when making these changes. This can lead to significant losses.
For example, the tenant might need to reinstate the work area to its original condition. This costs a lot of money and affects workflow. Or, they might be asked to pay additional rent, which can have a serious impact on their expenses. We suggest you talk to a landlord first and get their consent if you plan to make any improvements to the work area.
Bad Negotiations
Negotiating is the cornerstone of making good purchases. But, new buyers often try to buy real estate without improving their negotiating tactics. Some of these mistakes include:
- Showing the seller just how much you want their property.
- Being too greedy or threatening.
- Trying to control the situation to get the upper hand.
- Letting emotions get in the way.
We recommend you do some research to help you back up the reasoning for your price. Think about the pros and cons of your purchase and try not to overreact to the first response. Having realistic expectations, negotiating skills, and determination can help the process go smoothly.
An Undocumented Rent Review
Every rent review should be adequately recorded, often by signing a Rent Review Memoranda. This keeps you safe from inflation. It also makes sure that the rents remain in accordance with the market trends.
But, one mistake people make is that they don’t check if their rent review has been formally documented. This could backfire and you might end up with bigger rents and much higher payments than what you anticipated.
Taking Too Long
The longer you wait to buy commercial real estate, the higher the chances that you will lose that property. Odds are, other people may be interested in that exact same real estate. Another reason you shouldn’t wait too long is that properties such as these often have fluctuating prices. So, you might want to hold off to get a cheaper deal, but end up paying more because the prices skyrocketed.
Let Rochford Law Help You with Your Commercial Real Estate Purchase
Our team at Rochford Law & Real Estate can simplify the buying process for you. We are here to help you make smarter investment decisions with every commercial real estate purchase. Give us a call at (615) 269-7676 and we will be happy to help.
