Commercial real estate as an investment can provide great returns, but it can also cause some serious headaches if you do not do your homework and go into the deal with your eyes wide open.
Commercial property can include residential multiplexes and apartment complexes as well as more traditional business and warehouse buildings. Whether you are buying commercial real estate for profit or simply to house your own company, before you buy you should do all you can to avoid the following common pitfalls.
Have a Thorough Title Search Performed
Before making any real estate purchase, whether it is residential or commercial it is essential to get a complete title search to identify any liens or other problems with the title. The title of a property is basically the history of the deed changing hands and whether or not there are any unresolved claims to the deed by previous lenders or contractors.
A title company can research the entire history of the deed from the first loan ever made on it and make sure that any liens against the property have been paid off. They also need to make sure that no one has prior claim on the property because loans or services were not completely paid for.
Understand All the Loan Terms
There are many important terms and clauses included in a commercial real estate mortgage contract. Some of the fine print may interfere with your plans for the property.
For instance, many real estate loans require you to keep your net equity up to a specified level at all times, and other call for large financial penalties if you pay off your loan, either by paying off the principal or by refinancing, before the designated years are up.
Be sure you understand exactly what your lender is requiring of you and that the terms match your own desires as well before you sign your name on any dotted lines.
Avoid Zoning Problems
There are lots of laws and statutes governing the use of land for certain purposes. If you want to operate a business in your commercial real estate, you will obviously need to make sure to buy a property in an area that is zoned by the city for business.
You should also check the surrounding areas to see how they are zoned and if the location is accommodating enough to bring in all the traffic and customers you are hoping for.
Plan for Market Fluctuations
There are no guarantees in the real estate world. The value of both residential and commercial properties is subject to ups and downs based on economic conditions and on changes in nearby development.
You have to be prepared for fluctuating tenancy rates if you use your real estate as an investment property, or for possible changes in customer base and the values of properties around yours.
All of these factors influence the worth of your real estate as well as your ability to make your mortgage payments. Make sure you choose a property that you can easily afford even during months (or years!) when the economy is not in your favor.
Sellers have the upper hand in a sellers’ real estate market. They can ask for higher prices and make more demands of the buyers, because they know that they are competing for their home.
