Real estate investing is perhaps one of the most solid investment opportunities out there. After all, unlike stocks, it’s nearly impossible for real estate holdings to lose their value entirely. In fact, Andrew Carnegie is attributed with saying that real estate is how 90% of millionaires make their money.
However, all types of investing, including real estate, are risky and it’s possible for you to lose money. To reduce the chances of that happening, you need to know the signs of a bad investment you should be watching out for. Here are some things to think about here.
Location
Location is everything in real estate. To understand location attributes, its important not only see the property and surrounding areas but also study the facts and demographics of each location. This is often the number one factor in how well (or how poorly) your investment will do.
As a general rule, you want to buy in an up-and-coming area of town or well established areas with strong employment bases and demographics. If you can buy in a hot spot before the prices go up, the value of your investment will skyrocket shortly after. Of course, trying to predict what will happen in the future is always a trick.
You also have to be aware of what might happen in the near future. For example, say you want to buy a property for commercial development. It turns out the area is too close to a wetland or the property itself is declared a swamp shortly after you purchase it. Now, you can’t do anything with the property and it’s unlikely you’ll be able to sell it for anything close to what you bought it for.
Length of Time on the Market
What if you find a commercial property that seems to check all your boxes? You’ve started checking the other factors on this list and everything looks great.
But then you ask how long the property has been on the market and discover that it’s been sitting for months. Why?
You’ll need to take a closer look to find out. Even if it isn’t obviously apparent, there is some reason that other investors have been avoiding the property. You need to find out what it is before you can think about buying it.
Building Condition
A building in poor condition isn’t always necessarily a bad investment. For example, many fix and flip investors make good money from buying problematic properties, fixing them up, and reselling them. This can be done with all commercial property types but is usually most common with multi-family and retail properties.
Depending on the types of repairs that are needed, value-add fixer uppers can be incredible opportunities to quickly increase the value of your investment. Shelling out for a few repairs can be worth it if you get a great deal on the property. But major issues like foundation problems or ongoing maintenance issues in an old building can be a problem. If the cost of maintenance is too high, you’re going to have trouble making a profit.
The Numbers Don’t Add Up
Always double-check the numbers and base your data on facts where possible, not estimates. Unfortunately, sellers and their agents can misrepresent real estate deals. They might overstate the investment opportunities, understate the property’s drawbacks, or fail to disclose accurate financial data to determine potential ROI.
Take your time to investigate and crunch the numbers before walking into a deal. If all the numbers are based on the owner’s estimations, walk away. If they don’t have hard data for you, something’s up.
For example, if you want to buy an apartment building you should ask to see seller’s actual profit and loss statements for several years, current rent rolls, accounts receivable ledgers and more. Insist on seeing these numbers or walk away. You should also perform your own investigations of statistics for the area such as vacancy rates, neighborhood allure, demographics, crime stats and more.
Shady Behavior
Always keep a sharp eye out for behaviors or statements that don’t add up. A seller might not outright lie to you, but perhaps they’ll avoid telling you about a major water leak that may have left lasting mold damage in the walls. They might even go so far as to cover it up by painting an area with water stains.
Sellers usually sell the property “As-Is” and unlike in residential real estate where the Buyer is afforded consumer protections and sellers are required to provide disclosures, the principle of Caveat Emptor applies in commercial real estate. Meaning ‘let the buyer beware’ in Latin, it implies that the Buyer is solely responsible for doing its own due diligence before closing. Sellers are usually required to make some representations and warranties but those are typically somewhat limited. Do your property and environmental inspections, obtain surveys, soils reports, etc. and check all aspects of a property before closing.
If you notice seller behavior appears to be hiding issues, investigate a bit deeper. If they’re trying to cover something up, it’s usually because it will not be in their best interest for you to find it.
Investing in Real Estate
There is a lot to learn to avoid the pitfalls of investing in real estate. However, a shrewd deal can be a lucrative investment and is worth the time and effort it takes to sniff it out.
Interested in learning more about investing in commercial properties? Read more of our blogs here! And if you need the right experts to help guide you in commercial real estate investments, please contact us now.