Baron Realty has been in the commercial real estate business for over 20 years. During this time, the CEO Cory Petcoff has seen his fair share of commercial real estate investors come and go.
By carefully watching both the successes and failures of these investors, Cory has noticed a few key “rookie” mistakes these failed investors make. The commercial real estate market is enticing; it’s easy to get caught up in the opportunity of large income streams.
These potential gains can influence your thinking process. If you are a commercial real estate investor, property owner, or simply looking to know more about the marketplace, be wary of these lapses in judgement.
1. Not planning for future vacancy
If you are making a commercial property purchase already filled with happy tenants, it’s easy to believe that these tenants are going to stick around forever. The reality is, businesses expand, change locations, and even fail.
Believing that you will have a 100% occupancy rate at all times is a big assumption. And you know what they say about assumptions! Instead, make sure you calculate a percentage of vacancy into your estimations. Better safe than sorry.
2. Failing to plan for new tenant buildouts
So, just like you predicted, a tenant has decided to move on. Luckily, you’ve got more potential businesses on the waiting list! You take a business owner to the open space, and start talking. Soon, you realize the needs of this new tenants are drastically different than the tenants of the past. Renovations are in order.
This is called a buildout cost, and it can be huge. When a new tenant enters your building, you will probably have to negotiate a buildout deal to turn the space into something workable for your new occupants. Again, take into account an average buildout cost combined with your vacancy rate. New tenants means long term cash-flow, but be wary of the short-term hit.
3. Neglecting to take into account the dark side of depreciation
Every business owner loves depreciation. Just by owning an asset over time, you’ll be able to expense the lowered value of that asset every year. That sounds like a great deal, right? However, most business owners neglect to take into account the dark side of depreciation when it comes to real estate.
When a machine in a factory depreciates, eventually it will need to be replaced. That’s a big investment. When it comes to a building you own, re-investing in the state of the property is even more important. When you don’t make consistent repairs, like a new parking lot, all of your tenants suffer. Unhappy tenants doesn’t help anyone. Make sure you understand that a property can have both recurring and unscheduled upkeep costs.
There’s a formula to commercial real estate investing. But as with any venture, there will always be a measure of risk that has to be taken into account. At the end of the day, it’s up to you how tenacious or reserved you want to be. The Baron Realty blog article is here to provide you with as much information as possible to make high quality decisions. Click here to see how else Baron Realty can help you!