As an expert in Austrian and German property, I’m often asked about where to start in commercial real estate. It’s a daunting area for beginners. These top tips for investing in commercial property will help you to avoid the potential pitfalls of this complex sector.
- Real estate is a complex business – so get expert help
Hopefully these points will give you a head start. But investing in commercial real estate is complex, and full of potential risks as well as opportunities. One of my top tips for investing in commercial real estate is to focus on building your team first. You’ll need legal experts who understand the rules and regulations you and your tenants need to follow. And find local commercial real estate agents who know the area intimately. And if you’re looking to add value to a property, you’ll need a team of trusted builders too.
- You can never do too much background
One of the reasons commercial real estate transactions can take so long is that the due diligence process is necessarily tough.
My advice is to commission more reports and surveys than you need, and always act on their findings. It is an investment you won’t regret.
- There are as many risks as opportunities
Commercial property investment offers the chance of fantastic returns – but the associated risks can be higher too.
As a commercial landlord you’re usually responsible for the actions of your tenants. This includes everything from liability for illegal activities on your premises to the cost of waste management. So, always build these potential risks and liabilities into your decision-making process.
- Remember, this is an investment
A basic point, but one that is easy to forget. In the same way that you buy shares in a stock market listed company, real estate is vehicle for you to make money.
The issue is this is easy to forget, as your property portfolio grows and the web of financial liabilities becomes more complex.
So, be clear-headed about your investments. If you aren’t getting a regular income (or worse, you’re losing money) from them, they are no longer an investment, just a burden.
- Try to understand what the future might look like
We cannot predict the future. But we can look at the available data and make informed, measured judgements.
By looking at factors such as where the major employers in the area are, or where people spend their money, we can narrow our search for profitable properties.
So, never take short cuts in researching the economic health of the area you are looking at.
- Prepare for litigation
It may never happen. But when you have high numbers of people passing through your investment every day, the chances of injury claims are high.
So, understand what you could be liable for, and make sure you have the resources to protect yourself against it.
- Accept that everything will take longer to process
If you are used to the rapid buying and selling of stocks and shares on the financial markets, you may be in for a shock when it comes to real estate.
Buying and selling real estate takes a long time, unless you’re investing via a real estate investment trust (REIT). Background checks, legal due diligence and local regulations will all slow the process down – so build this into your business plan.
- Always look at where you can add the most value.
By looking for undervalued units in areas on the up, you can invest in improvements in time to take advantage as the market improves.
The key to doing this is engaging a local expert who can help you see the true value of an area. Yield and occupancy rates are a good guide, but nothing beats local knowledge.
- Get yourself a mentor
Building on that last point, in my experience it is impossible to overstate the value of finding a mentor you trust. This is true of all real estate investment, but particularly in the complex commercial sector. So, find a role model and lean on them for support whenever you can.
- Know your appetite for risk
Commercial real estate investment, like any investment, is a risk. Understanding how much of that risk you are prepared to take on in pursuit of its many benefits is key.
So, as you set out your investment strategy and begin buying commercial units, always know exactly what you are willing and able to lose too.
As investors we tend to be optimists. But the reality is that costs can spiral, legal work can take longer than expected, or units might stay emptier than you have planned for.
Always make these considerations a part of your plans – and prepare for them to mitigate any risks.