Nearly everyone thinks of real estate as a financial investment. You’re in it to build wealth, expand the monetary gains of your portfolio, and create a nest egg for the future. Yet, there’s more to commercial real estate than the bottom line. As an investor, you’ll also have potential non-monetary gains and losses.
Examples include resources such as time, expertise, and tenant trust. Yes, these factors can eventually lead to the loss of money. But they simultaneously risk eroding the qualitative gains that go into building a commercial real estate empire. Here’s how four mistakes can cost you more than dollars and ways to avoid these errors.
1. Overlooking Zoning Laws Can Shut Out Promising Opportunities
Zoning regulations determine what types of commercial real estate properties can go where. These regulations could also stipulate the conditions for various commercial real estate investments, including mobile home parks. For instance, Kentucky’s Harrison County says manufactured homes must be placed on lots with at least 10 acres.
Overlooking zoning laws before investing can lead to missing out on future promising opportunities. You might automatically dismiss mobile home parks as a sound investment. You think you’ll sink more into the property than you’ll get out of it. Or, you’ll have difficulties with high vacancy rates from a lack of tenants. However, zoning laws can work in your favor in terms of long-term potential.
Regarding mobile home parks, Lifestyle Investing expert Justin Donald says, “Mobile home parks are still great. You still have approximately 44,000 parks in the U.S. and less than 10% consolidation from institutional money.” There’s untapped potential in manufactured housing because local zoning can limit the number of parks in one area. When it’s more challenging to get the zoning, an investor gains a long-term advantage.
You don’t have as much competition. Owners of mobile homes aren’t going to be able to pick up their homes and leave. You have the opportunity, and can build long-term relationships with your tenants and make attractive improvements to the community. Depending on what the regulations allow, you also have the potential to expand an existing park to accommodate additional homes. Knowing the zoning laws before you leap helps determine an investment’s full promise.
2. Not Researching Compliance Issues Can Spell Legal Trouble
Before you invest in a commercial property, you want to look at more than the numbers. Sure, those profit and loss sheets are essential. Yet, what you may not find is that there are hidden issues with the property’s compliance. For example, a failure to keep the building up to code may wipe out any initial gains you could earn. Furthermore, it could prevent you from operating the property in the future.
You don’t want to get shut down before you’ve begun. That’s why researching the property’s code compliance, permits, and any laws impacting its operations is a must. Otherwise, you could find yourself with a few legal battles. Naturally, trouble with any laws are issues that are costly.
Not only can lawsuits and court cases erode your pocketbook, but they can also chip away at your business reputation. The loss of trust and reputation goes beyond one property, too. You may have trouble securing financing and key business partnerships when you want to expand your commercial real estate portfolio. You could also invite further scrutiny on other commercial properties you own. Doing your due diligence upfront will save you professional and legal woes later on.
3. Failure To Consider Market Dynamics Can Lead to Mismatches
As a commercial real estate investor, you have specific goals. Some of those are financially oriented, such as earning a 10% return over five years. Other objectives may be less motivated by the almighty dollar, such as expanding high-quality office space in an up-and-coming community. Nevertheless, you want the properties you acquire to align with your goals.
Neglecting research on the local market dynamics can lead to mismatches that cause you to fall short of quantitative and qualitative goals. Let’s say your research uncovers that office space vacancies increased by 19.6% in 2023’s fourth quarter. This data point may have you thinking investing in office space isn’t the best idea.
Keep in mind this figure is a national average. It doesn’t account for local occupancy trends or other additional information. A deeper dive might uncover data showing the vacancy rate is much lower in specific markets. Broader research could show a growing need for office space, particularly for sole proprietors and startups.
You’ll want to uncover current and future predictions about an area to ensure you can meet or exceed your goals. There’s a chance an area’s economic conditions and market trends in your area go against the national grain. In addition, there will be unique dynamics in each market you want to invest in. Know your deck of cards before you strategize your plays.
4. Doing Everything Yourself Can Compound Errors
Before you make commercial real estate investment decisions, you should do your due diligence. Simultaneously, you shouldn’t reasonably expect to do it all by yourself. Chances are you’re not a lawyer, a tax expert, or even a renovation pro. You’ll want others by your side to save you from the wasted resources from poor or misinformed choices.
While having a contingency fund and plan is wise, do you really want to use them? It would be ideal not to. For example, you might want to discuss prospective properties with a financial advisor. They can help sort out the current and future numbers to determine whether a property will match your goals.
Perhaps the existing rental rates are promising, but the building will need some TLC soon. Without those renovations, tenants will start to vacate. Financial advisors will help project whether a property makes sense now and in the long run. Likewise, real estate lawyers can help you navigate contracts, compliance regulations, financing options, and zoning laws. You’ll save yourself time while devising an optimal strategy for your needs.
In addition, don’t overlook the value of investment partnerships. You don’t have to manage everything yourself if you’re not keen on managing a property. It’s also not a requirement to invest in a commercial building or lot all by your lonesome. Syndication deals and business colleagues are ways to share the burden and the wealth. As a plus, you could find a mentor with an investment partner.
Avoiding Commercial Real Estate Mistakes
Making mistakes is a vital part of the learning process. You discover what you don’t know and how to become a better investor. However, you want to avoid the biggest whoppers and rookie errors that can cost you more than just money. Applying the knowledge you’ve gained from this article will make you ahead of the game.