Introduction
The Indian commercial real estate industry can be a lucrative way of earning long-term wealth and diversifying your portfolio. After all, the sector is expected to reach $1 trillion by 2030. Despite this growing number, many investors, while navigating through the complex waters of commercial real estate, reach a pitfall. In order to avoid any obstacles and streamline your investment journey, the following blog explores the top 10 mistakes you should avoid while investing in commercial real estate.
Source: IBEF
However, before diving into the details, let’s understand what commercial real estate means.
What is Commercial Real Estate?
In simple terms, commercial real estate is utilized as a workspace or business-related operations and not for living purposes. It is common for tenants to lease commercial real estate to conduct income-generating activities. Across a wide range of properties, you can find everything from a single storefront to a multimillion-dollar shopping mall. Commercial real estate can be diversified into four main categories: industrial, multifamily rental, office, and retail space.
Investors can invest in commercial real estate through a direct method wherein they own and operate a property. This can be done by collaborating with a real estate broker or agent. An indirect method, on the other hand, involves having a stake in the company that owns the property. People who choose the indirect method of investing in commercial real estate are called passive real estate investors.
Commercial Real Estate Investment: Top 10 Mistakes to Avoid
Listed below are the top 10 mistakes that you, as a commercial real estate investor, should avoid.
- Opting Wrong Property Type
There are various types of properties you will witness after entering the commercial real estate market. Each type of property, whether it is an office space or raw land, is unique and comes with different benefits and risks. For instance, some properties may have a higher ROI and some low. Therefore, it is necessary to understand each type of property and whether it is suited for you or not to make an informed decision.
- Lack of Research
Conducting thorough research about the property, financial aspects like the viability of the asset, and other vital information is crucial. Moreover, you should inspect the legal aspects of the property and carry out in-depth research so as to not face any surprises in the long run.
- Tax Planning
Although commercial real estate investment comes with numerous tax advantages, there are still some liabilities that you should keep a check on. Good tax planning is crucial while investing, as property tax might fluctuate and cause an unforeseen expensive situation.
- Overlooking the Importance of Diversity
Diversifying your portfolio is a crucial aspect mainly necessary for minimizing risk. There is more to investing in real estate than buying a property directly. Diversifiers such as REITs, ETFs, and other real estate funds can also be utilized to increase your diversification. You can learn more about portfolio diversification from your financial advisor.
- Investing Alone
Doing everything alone is not necessary. Even the most experienced investor is not equipped with all the answers and solutions. It is advisable to take help from time to time in order to make a smart decision.
- Underestimating the Costs of Repairs and Other Expenses
One of the major mistakes that an investor makes while investing in commercial real estate is overlooking or underestimating certain expenses. These may include repairs, upkeep expenses, or for instance, the cost of putting a new roof on the house. It is advised that you should list down all the monthly expenses, even the tiniest ones, before making a bid.
- Choosing the Wrong Location
The location of the commercial property is a crucial aspect. If the location is plausible, then it is sure to have a good value; however, if you choose the wrong location, then you might have to face slow rental growth.
- Not Devising a Plan
Having a well-laid-out and well-structured plan is necessary when it comes to investing in commercial real estate. By devising a plan, you will be able to curate the best strategy for your goals and make secure investments.
- Focusing Only on ROI
Many investors make the mistake of focusing only on the return on investment. While ROI is a major component to be kept in mind, there are other factors like scope of appreciation in the property, internal rate of return, or the recurring cash flow that should be looked after.
- Overlooking Hidden Charges
You, as an investor, should be careful about certain fees and charges while investing in commercial properties. These charges may include hidden costs of repairs, insurance of the property, or local taxes that the owner or seller is liable to pay.
Conclusion
Commercial real estate investment can be a great way of building your wealth and overall investment portfolio. However, from researching the intricate details to having a well-structured plan, everything should be top-notch to make a smart and informed decision. Furthermore, if you wish to expand your knowledge or start your investment journey, head over to the Bhive Alts website.
References
https://www.bankrate.com/real-estate/commercial-real-estate/
https://www.realcommercial.com.au/news/common-mistakes-to-avoid-when-buying-commercial-property
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