People choose to buy commercial real estate for various reasons including investments, as a shop or business premises or for property development involving conversion, modification or renovation.
Purchasing commercial real estate comes with specific disadvantages and the stakes are usually higher in comparison to buying private domestic property.
Often you will have help from individuals including your business collaborators, mortgage lenders, surveyors and legal advisers. However it’s always beneficial to personally understand the potential problems so that you can easily address them as they arise.
Read on for 12 mistakes to avoid when buying commercial real estate.
Not Preparing Adequately
Preparation is both a short-term and long-term process. You have to know why you’re buying a property, which is obvious, but knowing where you’ll take it in the long-term is pivotal. Short-term, you’ll have to prepare things you need immediately, this will initially include a full structural survey and it’s best to research who you’ll use and contact them for availability. You may also need other specialists to check out parts of the building, e.g. plumbers or electricians.
If you intend on modifying the building in any way then you will need to obtain the relevant planning permission, also its recommended to view a use class order document for more information on how to legally modify the commercial property.
Poorly Managed The Budget
You may be using money almost entirely from lenders, almost all of your own money, or a mix of the two and other investor’s money in the case of joint ventures. Regardless of your funding sources, costing everything in fine detail is crucial. It’s surprisingly easy to make mistakes that account to thousands. In the case of major investments, it’s always best to involve accountants and other independent financial advisers. Always seek out advice where possible. Your budget is foundational to your plans and establishing it in detail is one of the first things you should do.
- How to do a commercial property income and expenditure budget for landlords.
- 14 best practices to create an annual budget for your commercial property.
Not Researching Your Services
When purchasing a commercial property you’ll need to hire a few services. You have the estate agents and mortgage lenders or other financial providers, commercial chartered surveyors and potentially also other professionals. Everyone you involve should be researched comprehensively and it’s best to find those with specific experience in your commercial area.
Locating reviews is often the best indication of performance, testimonials and other posts on forums and social media can provide first-hand insight into how the services you intend to involve performed on similar projects.
Here are some suggestions for identifying high quality suppliers:
- Customer Testimonials Research: View their Google My Business page, Facebook and Trust-pilot page.
- Active Online Market Presence: Check if the company regularly blog or have regular Social Media content.
- Ask for references: Once you have a list of ~ 1 – 3 companies for every role, you can ask for previous case studies or references to ensure that the company can effectively deliver its service.
Choosing The Wrong Building
Choosing a building involves all the senses and it can be tempting to act on impulse and impressions. You may view many buildings or just a few, or maybe even one or two and thus, your choice may not be so complex but it’s best to think through every aspect of your building alongside your surveyor if possible.
Commercial Surveyors are your best tool for advice here, they can provide clues on the building and the environment in which it’s embedded. Everything from historical area statistics to future development plans in the surrounding area, etc, plays its part in building choice. Ultimately, your building choice depends not only on the building itself but on the location, it may sometimes even be best to go with a building you are less attached to just because the surrounding area is so perfect – prepare to make these difficult decisions and compromises!
Incorrectly Valuing A Property
Value is dynamic and changes throughout time but not always steadily and predictably. Some areas and building types are far more volatile than others. Investments can be long-term or short-term and you may be looking to extract long-term value or short-term value in anticipation of a market move. Assessing these things inevitably requires a degree of conjecture and prediction but failing to make any sort of assessment of long and short-term value will impede your finances and leave you in a tricky situation if things don’t go your way. When it comes to value, look at both the best and worst-case scenarios.
The Building Isn’t Fit For Purpose
Commercial property takes many forms ranging from factories to shop floors, offices to warehouses and so on. Some investment opportunities may present themselves as conversions or renovations, for example, an empty warehouse could provide an economic foundation for the development of office spaces. Whilst building modifications are possible, not every building is fit for any purpose. The scale of your property development plans should be assessed in maximum detail from building work to wiring, plumbing, access and of course, planning permission and other legal costs, constraints or factors.
Ignoring the Market
Ignoring local and national markets is the downfall of many commercial property investors who fail to see the bigger market picture when decision-making. There can always be a reason why a property is as cheap as it is, even if it seems unjustified, and you may need to simply look at the bigger market picture to understand that you’re investing in the midst of an emerging trend that is greatly influencing prices. Everything from culture to politics can affect property markets, never ignore any level of the property market from micro to macro.
Your Ideas Don’t Sit With Your Tenants
If you’re acquiring commercial property to rent to businesses like shops then consider their own views and intentions. Maybe you have tenants in mind already, maybe not, but either way, you’ll need to view the building from the perspective of those who are likely to be interested. If they’re rapidly up-scaling then they might not just need a bigger building, they might need one with plenty of parking, or if they’re planning on starting a large-scale e-commerce operation then floor space may be sacrificed for warehousing. Work closely with prospective tenants or clients to fit the building to their needs.
Not Assessing Your Tenants and Their Businesses
Properly screening tenants involves credit reports of various kinds and also the creation of often complex legal paperwork and contracts. Hiring legal advisers is crucial when drawing up contracts for complex long-term relationships and in-depth checks on both tenants and their businesses are extremely important.
Inaccurately Assessing Repairs
Almost all buildings need at least some work and repairs but some may need far more covering various specific areas like the building’s plumbing, electricity and structural integrity. Surveyors play a big part here and they’ll be able to provide a report on potential costs but don’t stop there, cross-check and ask specialists to perform in-depth checks where necessary.
Failing to Calculate Ongoing Expenses
Ongoing expenses can make or break a business or investment. Expenses cover everything from developments, renovations and repairs to cleaning, energy costs, parking costs and legal costs. Your surveyor plays a big part here yet again and will be able to assess whether the building will need one-time, sporadic or ongoing repairs. It can be tempting to gloss over some expenses because you trust your gut feeling or have the hunger and desire to make your plans work regardless but adopting a realist perspective pays when it comes to property.
Failing Legal Compliance
Never get yourself into a situation where you can’t legally complete what you intended to do with a building. It’s crushing to get your plans knocked back because of trivialities so check everything to the nth degree and discuss at-length your plans with your surveyor and appropriate legal advisers. Surveyors and legal advisers can work alongside councils to square plans and developments.
Investing in commercial property is stressful and requires skillful navigation and judgement but armed with the right knowledge and the best individuals to assist you, you can make a life-changing investment whilst avoiding the mistakes that can compromise the entire process.