Top 5 mistakes with commercial property investment

Top 5 mistakes with commercial property investment

November 27, 2019

If you are in an industry long enough you can quickly pick up patterns and traps that people typically fall into. Working in conveyancing for over a decade gives me a hell of a lot of information and experience about what people typically get wrong when it comes to buying and selling a property. Commercial property, just like any other property investment has its fair share of risks and trip-up points. Here's what I've seen time and time again. What I notice is it's the really simple mistakes that get made the most often.

And I think that is because people are aware of the big issues and will do a lot of work and research into the complex elements of the property purchase and they are so busy and consumed looking for these big problems that they just completely miss the little stuff. So I'm talking here about things like a lack of due diligence before making a purchase and afterwards they are of course kicking themselves because it seems so amateur, especially since quite often these investors have a lot of experience in buying property, and maybe most of their property portfolio to date has been residential property, but even then, they probably should have known about these particular traps in commercial property as well.

So I thought I'd just point these five very simple mistakes out for everyone so you can be aware of them and you can put some energy into them and have a smooth purchasing experience when it comes to your commercial property investment.

Buying the wrong property type

When you are buying a commercial property for your own business you know what type of property type you need to make that business work. You wouldn't buy a factory to sell flowers out of, and you wouldn't buy a small bank if you wanted to run a telemarketing operation.

Just because you are buying your commercial property as an investment doesn't mean anything goes. You still need to have clear goals and boundaries in place for what property type will work for you because there are distinct differences between the outcomes for a factory purchase, retail or office.

Before you even start to look at the commercial property market sit down and plan out your financial goals and what risks you can safely take. For example, can you afford for your investment to sit empty for four months? Can you afford to do a complete overall to please a potential long-term lease? Are you willing to forgo higher rental returns to receive high capital gain?

Whatever your reason is for your commercial property purchase i.e. capital growth, rental return, or to run your own business from, you must be very clear about your motivations so you can be sure the property type you select will get the results you want.

Some commercial properties can indeed offer much higher returns than residential properties, however, you need to balance out the risks involved and know what it will cost you if things aren't exactly sunshine and rainbows day in and day out. If you plan for rainy weather, you will be well set to survive the worst and come up roses when you get back on track

Poor fit with tenant needs

Wrong location is another big mistake I see investors make with their commercial property choice.  The location of your asset, especially with what else lies around it, will greatly advance or hinder its performance and how favourable it is to potential renters.

Now that you have finalised the type of property you want to own think about what type of business will rent this building and what their needs might be. Do they need onsite parking, easy access to public transport, staff kitchen?

Another important part of a location is zoning. This will determine what tenants you attract in the future and how flexible your asset will be if there are any changes.

Independent checks

It takes time and it costs a little extra but no matter what type of property you are buying it is always worth the additional effort to get independent checks completed.

Commercial properties see a lot of renovations and new building works, which can be structural and also façade, because of the frequency of these changes it's essential you get professional checks to make sure the buildings and all improvements are compliant to local, state and federal standards.

As well as this you need to invest in checks that will review the current deed and any amendments, building code certifications and building permits, zoning as well as any existing and future area developments.

No customer interest

To have a market (and get your rent paid) you need to have a supply and demand. This is a factor you bank or lender will take into consideration when determining your business loan terms and availability.

Looking beyond flashy fit-outs and all the modern conveniences, is there a local supply and demand that makes this investment worthwhile in this location right now? While capital growth isn't necessarily a big takeaway in commercial investment properties, you don't want to accidentally buy into a situation where you lose financial ground due to poor capital growth location.

If capital gain is part of your investment goals then your perfect property may have a less attractive yield. So saying, if your number one aim for your commercial property investment is the rental income, then you may not want to factor in capital gain factors if you know your yield will be high and dependable.

Distracted by emotions

I really can't stress enough how important it is to make any property transaction about business only. While this is especially tough for first home buyers looking to move into their first-ever home together, this is still a mistake I see often in investment properties, including commercial investment. Getting caught up in the thrill of high yields or excitement that you found a property that you can afford will blind you to really obvious factors, like, this is the right investment choice for me. Put those emotions aside and also forget about your personal shopping preferences, office set up or factory configurations. The big picture is your tenants, and the really big picture is their ability to perform well in the current market.

Rather than dollar signs hunt down the property's historical performance, thoroughly investigate the location and know the costs that will come with that high yield.

Look back on your long-term goals and your objectives and make your decision slowly. This is the best way to manage your risks and improve the investment outcomes of your property.

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