Investors often make mistakes when purchasing commercial properties. The buyers make a blind purchase and don’t complete all the necessary steps for evaluating and researching the investment properly. It is a major investment regardless of the reason for the purchase, and buyers could face financial hardships if they don’t learn everything imaginable about the property first. Investors start by reviewing the 4 crucial mistakes to avoid when investing is commercial properties.
1. A Failure to Do Their Due Diligence When Researching Properties
A physical evaluation of the property determines if it is in the condition specified in the listing. Never take the word of the real estate agent or the seller. They are motivated to sell the property, and investors must take steps to protect their own interests.
Too often commercial spaces that are abandoned for a long duration succumb to squatters. Conducting a walk-through of the property enables investors to determine if the property was used illegally and if consequently it was damaged.
A title search defines if the seller has the legal right to sell the property to anyone, especially a commercial investor. Attorneys often hire a title company to conduct the searches and identify the rightful owner of the property. The outcome could lead to delays that don’t make it feasible to continue the venture.
Property inspections are necessary for all real estate transactions. However, the investor isn’t restricted to the owner’s preferred inspection company. An official inspection determines if the property complies with commercial building standards and fire safety regulations, such as having sprinkler systems, fire alarms, emergency exits, and well-light exit signs installed. If the safety installations don’t work properly, it presents issues for the prospective buyer, too.
2. Placing Too Much Emphasis on Gross Income
Investors researching potential properties place far too much emphasis on the gross income of the business that owns the property currently. The dollar amounts entice the investor to buy based on the notion that the gross income is exactly what they can hope to generate from the venture. However, they are completely wrong. The gross income shows earnings before the company’s expenses are paid. When investing in commercial real estate, buyers must review the net income and the expenses incurred by the seller.
3. Failing to Get Full Tax Benefits Out of the Investment
A cost segregation study shows the new owner all possible tax deductions. For example, depreciation deductions are invaluable within the first few years of ownership. The study defines how much of a depreciation deduction the owner receives for their building and land. It also defines when the deduction provides better savings, such as the first year or over a period of several years.
4. Failing to Assess Property Values Properly
All variables must be considered when assessing property values. Commercial properties aren’t one size fits all when it comes to pricing. Buyers need a fair and reasonable price based on facts and not the seller’s desired listing price. The location of the property and the local economy in the area are factors that affect market values.
Investors start by completing their due diligence and discovering everything about the property itself. Did someone live in it illegally, or is it damaged? Next, the buyer reviews the potential earnings they could accumulate from the property.
The net income provides a more realistic picture. A cost segregation study shows them what tax deductions are available. By completing the right steps, investors avoid major pitfalls they always prove costly.