Abstract

You want to start investing in commercial real estate. But how do you avoid the
money pits and find the true gems? In this excerpt from Confessions of a Real
Estate Entrepreneur, get advice on what to do before you make your first
purchase.

I. Introduction

When it comes to making money in commercial real estate investing, there are
only a handful of ways to do it. Though the concepts are simple to understand,
don't be fooled into thinking they can be easily implemented and executed.
Grab a notebook and pencil, because, in the next points, I'll walk you through a
brief overview to help you understand the basics of commercial real estate and
how successful real estate investors work to maximise their earnings.

How Investing In Commercial Real Estate Works

Commercial properties can produce income from the aforementioned sources,

with basic rent again being the most common, but can also add one more in the
form of option income. Many commercial tenants will pay fees for contractual
options like the right of first refusal on the office next door; they pay a premium
to hold these options whether they exercise them or not. Options income
sometimes exist for raw land and even residential property, but they are far
from common.

 Commercial real estate is all around us, and includes apartments, offices,
retail space, and more.
 Income and appreciation are the two ways commercial real estate earns
money. Income is produced through the operation of the building, while
appreciation is an increase in the property’s value over time.
 While investing in commercial real estate normally requires more capital,
expertise and time than the everyday investor has, we makes it possible
for anyone to have a diversified portfolio of commercial real estate.
Commercial real estate is a broad term describing real property used to
generate a profit. Examples of commercial real estate include office buildings,
industrial property, medical centers, hotels, malls, farmland, apartment
buildings, and warehouses.

Historically, investing in commercial real estate as an alternative asset has

provided millions of investors with attractive risk-adjusted returns and
portfolio diversification. But, many investors still don’t understand how
commercial real estate works as an investment vehicle.

There are some key differences between commercial real estate investing and
traditional investments such as stocks and bonds. Unlike stocks and bonds
traded frequently on a secondary market, real estate is a scarce resource and
holds intrinsic value as hard asset. Most often, stocks are purchased for their
selling potential rather than their capacity as a source of income, hence the “buy
low, sell high” heuristic of the stock market.

The investment strategy for commercial real estate is simple: there is inherent
demand for real estate in a given area. Investors purchase the property and
make money in two ways: first, by leasing the property and charging tenants
rent in exchange for use of the property; and second by appreciation in the
value of the property over time. Let’s examine these two aspects of the
investment opportunities a little more closely:

 Rental Income

Tenants differ across all types of commercial real estate investment properties.
With different tenants comes different arrangements, property management
needs, and lease agreements. Here are a few examples:

 Office: Cubicles and parking decks. Example tenants would be a law firm
or start-up company. The company pays the rent, and has lease terms
often in the five-year to ten -year range.
  Apartment Buildings: Multi-family apartment buildings typically have
individuals or families as tenants. Leases can be short term or long term,
but most are not for longer than a year, and some can even be month to
month. This building can have more tenants and leases to manage, and
more payments to account for each month.

 Industrial: Warehouses and smokestacks. A typical tenant might be a

manufacturing or distribution company. These properties aren’t
generally located in areas that would be very desirable for a residential
or retail property. Lease lengths are typically for five years or more.

 Appreciation and Value Add

The second opportunity for potential returns from a commercial real estate
investment comes from an increase in the property’s value over the period that
the investor holds it. Properties can also lose value, and even the most
disciplined, proven investment strategies can’t ensure gains due to outside
economic forces that may arise.

In general, real estate is a unique and scarce asset class. More land can’t simply
be “created.” In the middle of a major city, this scarcity is increased by demand.
If demand increases for your property, or in the area right around your
property, there’s a good chance that tenants will be willing to pay higher rent,
and prospective buyers will be willing to pay a higher price than you paid
originally to take it off your hands.

Appreciation through demand isn’t the only way the value of a property
increases. Many investors take an active “value-add” approach to commercial
real estate, making improvements to the property to increase its intrinsic value
or its ability to earn income. One example of this would be updating cosmetic
details or appliances of a multi-family apartment building. Updates such as
these can allow the owner to charge higher rent for nicer apartments. Methods
outside of improving the property might include rezoning an adjacent parcel of
land, say from residential to multi-family, so that more apartments can be built.
Any money spent to renovating a building can potentially boost the selling price
of the building in the future.

Unlike stocks, commercial real estate investments often provide stable cash
flows in the form of rental income.
Commercial real estate is a hard asset that is also a scarce resource. It always
has intrinsic value, and usually appreciates in value over time.
The value of commercial real estate is derived by the larger growth of the
economy as a whole.
Historically, direct commercial real estate investment has been out of reach for
the everyday investor. This is because investments in commercial real estate
are typically dominated by institutional investors as projects require millions
of dollars in capital and a deep reservoir of expertise for improving and
operating a property.

II. How to Develop Your Commercial Property Strategy

In commercial or retail real-estate investment, make decisions about your

tenancy, lease, and cash flow with a view to adding value to the investment over
time, says real estate agent and property manager Melbourne Acquisitions.

The strategic approach to adding value to commercial property

Melbourne

In commercial or retail real-estate investment, wherever and whenever

possible, formulate your tenancy, lease, and monetary decisions with a bias
towards adding value to the investment. Consider the decisions you make
‘strategically’ to support the investment over time.

It doesn’t matter whether you own an office or retail property, every decision
you make is critical to the investment over time. In every decision, consider
how you can enhance or improve net income and/or capital value.

The property market changes throughout the year in Melbourne, as do rents,

prices, occupancy costs, and vacancy factors. Look at supply and demand in the
sectors you are investing in, and in your preferred suburbs. As an owner of an
investment property, you need to think about how to improve the property’s
income, occupancy, or capital value.

Here are some common examples of strategic decisions made for commercial
and retail property today. Some of these factors may impact your property
investments, tenants, or income opportunities in Melbourne.

1. Selection of tenant

Don’t be too quick to accept any new tenant into your property simply to fill a
vacancy. Understand the tenant and their business history as you consider the
details of the offer of lease. Look at everything in balance with the tenant’s offer,
and particularly the stability of the business over time. The logic here is to
position the best tenant into the property given the surrounding tenants in the
mix.
2. Lease documentation

Many property investors fail to concentrate on the quality of lease

documentation used in their asset. Any professional property investor should
spend time with their legal advisors at an early stage to structure a standard
lease document to suit the investment, the property market, and the required
cash flow targets. Any property with several tenants in occupancy, supported
by well-crafted lease documentation, will be eminently more saleable to
another investor when the time for property sale and disposal arises.

3. Maintenance costs

When spending money in the common areas of the property, look at how a
visual enhancement or property reconfiguration can improve the opportunity
for more lettable space and or other tenants. Is one thing to maintain a
property; it is another to improve it through strategic property changes and
upgrades.
4. Capital purchases

Most commercial and retail investment properties will require reasonable

capital expenditure over time on larger items of plant and equipment, property
upgrade, and renovation. Plan your capital expenditure to a budget over a
period of five years. In that way, you can instigate the larger maintenance
projects when cash flow and time permits.

5. Professional property management services

Most property investors do not have the time and/or the required knowledge
to manage and lease their asset professionally to achieve the best outcomes.
While a professional property manager will always be a cost to the property,
that cost should be recoverable through property outgoings as nominated in
the standard lease for the asset. That single strategy thereby releases the owner
from the stresses of day-to-day management and cash flow stability. It then
allows the investor to concentrate on the bigger picture of budgets, tenant
placements, and net income.

So the message here is that a property investor in Melbourne today should

concentrate on the bigger picture for their asset, and formulate most of the
decisions based on adding value strategically to the property over time. Allow
your property investment to improve and grow by carefully managing tenancy
mix, cash flow, and capital value.

III. Can You Really Make Money With Commercial Real Estate Investing?

Investing in commercial real estate may sound like an intimidating proposition

to many, but in fact it is the most rewarding venture that proves beneficial if
done right. From dazzling skyscrapers touching the skyline of Melbourne to
small office complexes speckled in the suburban regions of the nation,
commercial property can be seen everywhere. The soaring prices of these
physical assets have turned many seasoned investors into millionaires who
chose the right markets at the right time. However, an air of skepticism still
shrouds the purchase decision of the investing population who avoid charting
the territory of commercial property for sale in Australia. These doubts can be
easily quashed by the remarkable performance of the industry over the past
few years.

According to the Property Council of Australia, the property industry is the

biggest employer in the country. There has been a significant contribution of
the sector in the GDP. As per a 2012 report, the expected Australian
institutional grade commercial property stock was approximately $681 billion.
(Source: https://australiancentre.com.au/publication/australian-commercial-
property-investment-market-styles-performance-and-funding/)The report
further stated that the size of the market including offices, retail spaces, and
industrial units is $280 billion, and 70% of this segment is owned by home-
grown institutions. With rising qualified professional population, Sydney and
Melbourne boast of the best investment opportunities that are being sought
from people across the globe.
Since the trading of commercial properties usually happens behind closed
doors with minimum public disclosure, their value is not genuinely appreciated
in the capital market. This valuable asset generates money through income and
appreciation. Renting out commercial spaces to retailers, industries and
businesses yields an ongoing income and appreciation comes through increase
in the cost of the property over the years.

Here is a rundown on how one can really make money through commercial real
estate investment:

1. Renting Out The Commercial Property

A commercial space yields better rents than a residential property. For

example, if you buy a retail shop in a busy area, you can ask for a profitable rent
which would be much higher than putting up a flat or house for rent in the same
locality. Similarly, office spaces generate a high return on investment with a
steady monthly cash flow. If the office is located in a business district, it is bound
to be rented out by an established company with high paying capacity. Also,
being in a strategic location means that you can negotiate further to crack the
most successful deal. Also, the lease term is longer in case of commercial
properties usually ranging from 3 to 5 years whereas the lease term for
residential homes expires after 6 months or a year. This makes the owner get
into the trouble of looking for a tenant every few months.

2. Offering Advertising Spaces In The Building

Even after renting out the office spaces in a building, the owner retains the
control on the outer structure and the inside common areas. These can be
offered to brands for being utilised for outdoor advertising using flex, posters,
billboards or signage. A huge billboard on the rooftop of a building in a busy
area can fetch good rent and add to the investment portfolio of the owner. That
is why it is recommended to buy a commercial property for sale in Melbourne
or any other high-growth business area that promises better takings.

3. Appreciation Of The Property

Though the real estate sector is volatile and subject to the risk of changing
economic forces, these changes prove fruitful when the real estate prices go up
and the purchasing power of the population follows suit. Just like appreciation
of residential properties, the commercial property sector also appreciates with
time. Often this appreciation is faster and higher than other sectors. Also,
renovation and refurbishment further add to the value of the asset and
increases its cost in the market. In some cases, the tenant invests in beautifying
the premises as he wants to display an inviting space to his clients. Thus it saves
the money spent in the maintenance and brings in more capital at the time of
selling or entering a new contract.

4. Gain From Additional Services

Every office building will have a parking space and garbage disposal system.
While renting out the office space, you can charge for these services
additionally for more income. Also, you can exclude the parking area from the
rent agreement and use it for renting out to other parties and reserve a few
slots for the tenant at a discounted price. Most of the tenants would happily pay
for these additional services as they would not want to hire other companies
for these facilities.

5. More Gains And Less Expenditure

Investing in commercial property for sale in Melbourne or other parts of the
country offers generous tax benefits with considerable depreciation
allowances. The value and rentals of a commercial asset are usually unaffected
by the inflation as they do not depend on consumer spending capacity. Most of
the outings are paid by the tenant of a commercial building such as taxes and
insurance and maintenance and repair work. They also work on the
beatification of the premises which adds to the value of the estate.

IV. Five Commercial Property Trends That Will Define 2019

The underlying drivers of growth remain largely in place and Australia retains
its attraction as a global investment destination. While growth is expected to
slow, we expect the economy to remain resilient and supportive of the property
market, with sustained employment growth underpinning demand and
absorption.

Looking ahead for 2019 there are five trends that will define the market over
the next 12 months.

 Slower capital growth, with rental growth key to prospects: After a

strong and sustained run, the pace of capital growth is likely to slow in
2019 as broad-based yield compression wanes. Rental growth and asset-
 specific factors will increasingly need to drive performance as the market
enters a new phase.
 Industrial portfolios at a premium: The weight of demand for
investable industrial and logistics stock continues to outweigh supply, to
the point where in 2019 we may see investors willing to pay a premium
to access scale through portfolio acquisitions. This could spur the
amalgamation and curation of balanced portfolios while investors
explore a variety of creative approaches to access the market.
 Dollar depreciation to buoy high-end retail: Moderating retail
spending and the ongoing impact of new technology will drive continued
polarisation in the retail space. The shopping centres and retail spaces
that offer a premium experience will continue to outperform; while the
depreciation of the Australian dollar is clearly supporting tourist arrivals
and will benefit retailers exposed to visitor spend.
 The growth of urban logistics: The nature of logistics demand is
changing and urban logistics will experience significant growth
throughout 2019 as e-retailers seek space in city fringe locations as a way
to speed up delivery times and remain competitive. This will see demand
shift inward, closer to the end user rather than outer city locations.
 Resilient demand, but tighter liquidity: Demand for property will not
be adversely affected by slower global growth and rising allocations to
real estate from global private equity and domestic super funds will
ensure they maintain their appetite.

However, lower capital growth may contribute to trade abating slightly

resulting in lower investment volumes in 2019.

V. Commercial Real Estate Melbourne Investing: How to Get Started

While many are sceptical of investing in commercial real estate due to the
perceived higher risk (compared to investing in residential property),
commercial property can provide significant cash flow benefits, greater rental
certainty due to longer rental periods and fewer ongoing expenses.
If you do your research, practise due diligence and understand the risks
involved, commercial real estate could be a valuable addition to your property
portfolio – an option that you may not have previously had on your radar.

 Pros of investing in commercial

real estate Melbourne

 Higher return: Commercial

property generally provides a higher
return on investment (ROI) compared
to residential properties. According to
CoreLogic (2015), the average rental yield for commercial properties,
such as a warehouse, is between 8-10%, whereas the rental return for
residential properties is 3.6% on average.
 Longer lease period: The average lease for a commercial property is
between 3-10 years, whereas the lease for a residential tenant may be
just 6-12 months with no guarantee of renewal. Commercial tenants tend
to stay in the premises for longer, particularly if they’ve invested some
capital in acquiring the property from the outset. For example, if the
tenant decides to upgrade the fit-out of the space by investing $50,000
into the project, this will provide you with some certainty and security of
rental income which can facilitate your cash flow planning.
 Fewer ongoing expenses: For commercial properties, the tenants
typically cover rates such as council, water, insurance or body corporate
fees, so there are fewer ongoing costs compared to managing a
residential property.
 Value-adding activities: For well-chosen commercial properties,
tenants are likely to make improvements to the structure and layout of
the space, which can increase the property’s value. As rent is reviewed
annually, this means you can charge a higher rental amount to better
reflect the upgraded premises following an improvement.
 Price stability: The value of commercial real estate is set by expert
property valuers. Commercial property prices have historically shown
lower levels of fluctuation compared to other investment types.
 Price appreciation: Lease agreements often contain a term for rent
increases in accordance with inflation. Because valuations are
determined by the level of rent paid, commercial property prices tend to
rise over time.

 Cons of investing in commercial real estate Melbourne

 Lack of research. Some of the greatest drawbacks of investing in

commercial property can be a lack of property knowledge and research,
letting to the wrong tenant and not inspecting the property adequately.
 Untenanted periods: Commercial properties run the risk of being
untenanted for extended periods of time, such as months or even years,
which means you may have to cover expenses during the interim until
you can find another tenant.
 Vulnerable to economic factors: An economic downturn, rising interest
rates, high unemployment or poor business confidence may mean that
there is less demand for commercial property, which could mean that it’s
difficult to find quality tenants.
 Costly upgrades: Although the cost of upgrades will depend on the type
of property, renovating a commercial property, such as a retail or office
situation, may be relatively expensive compared to renovating a home.
This is because upgrades for a commercial property may require a
greater scope of work for a larger area and include major tasks such as
the removal of asbestos, fire and safety issues, changing the fit-out or
restructuring the space to meet the tenant's business needs, whereas
upgrades to a home may include inexpensive tasks such as painting or
installing new appliances.

 Commercial investment objectives

Before investing in commercial real estate, you need to think about what you’re
trying to achieve from the investment. For instance, you may want to think
about the purpose of your investment, such as one of the following:

 Diversify your portfolio. Are you investing in commercial property to

diversify your portfolio and minimise your investment risk by purchasing
a different property type in a different area?
 Income. Are you trying to maximise your return? If so, what’s your
expected rental return? Have you looked at average rental yields for
similar properties in the area?
 Capital growth. Is achieving capital growth your main objective? If so,
how much do you hope to gain and by when?
 Tax benefits. Are you investing in non-residential property to reap the
tax benefits such as claiming back GST?
 Degree of risk. You’ll need to determine the amount of risk you’re
comfortable with pursuing for this investment. Will you take steps to
reduce your investment risk such as sourcing a ‘blue chip’ client or
ensuring that you have a sufficient buffer of funds to cope with potential
unvacated periods?

 What to consider when buying commercial real estate Melbourne

When investing in commercial real estate Melbourne, investors should be

aware of local prices and market conditions, council restrictions and zoning
regulations, and the condition of the property including any safety hazards.

 Location

When selecting the location of your commercial property, you should consider
its accessibility to transport hubs, surrounding business enterprises that could
offer support to your tenant’s business, as well as a lack of similar properties in
the suburb to ensure that there is not an oversupply of commercial properties.

 Infrastructure developments
Review current infrastructure plans that are currently underway, but also
consider future infrastructure developments that could put upward pressure
on property prices. You can do this by logging onto the local council website or
speaking with local real estate agents.

 Tenant quality

Find a strong corporate or ‘blue chip’ tenant that has financial resources to meet
the rental payments and is unlikely to default on the rent.

 Building structure

Consider the structure or ‘bones’ of the property and whether the layout can be
easily changed to attract different types of tenants. A multi-purpose space can
also help you attract a wider pool of potential tenants.

Here are the example of commercial real estate for lease Melbourne:

Innovative working environment | Great onsite facilities | Enviable location

Type: FOR LEASE

Property Features

Category : Offices

Building Area: 38

Tenancy: Vacant

Building features

· Abundance of natural light

· Air conditioning

· Car parking - in building (Paid)

· Conference facilities available

· Dedicated men and ladies bathrooms

· Direct access to public transport

· End of trip facilities e.g showers, bike racks

· Gym and fitness centre close by

· Modern communal food preparation areas

· Open plan layout

· Print, scan and copy facilities

· Quick access to major airports

For further inquiry or to arrange inspection, explore

https://www.commercialproperty2sell.com.au/details/innovative-working-
environment--great-onsite-facilities--enviab.php

And if you want to invest in commercial real estate Melbourne, here you can go
for better options: https://www.commercialproperty2sell.com.au/real-
estate/vic/melbourne/

 What factors influence demand for commercial real estate?

A major factor in commercial property growth is demand, which is largely

driven by economic indicators such as population growth.

 Interest rates

The current low interest rate environment will support demand for both
property and borrowing.

 Infrastructure projects

Large infrastructure projects can boost demand for commercial property.

 Population demographics

Australia’s ageing wave of baby boomers has greatly increased demand for
health care services such as aged care facilities and medical centres.

 Population growth
Suburbs with strong population growth undergoing gentrification may require
new services such as shopping centres, financial service companies and
restaurants.

 How is commercial real estate Melbourne valued

The value of the commercial property will be determined by a variety of factors.

These may include the size of the property and some of the features of the
building itself. The amount of people traffic shouldn’t be the main reason as to
determining the value, consider the land value as well. For example, industrial
zones generally have low land value, but may be suitable for particular types of
businesses like a taxi depot because it may be close to public transport. (Source:
https://www.finder.com.au/commercial-property-investing)

VI. Property Investment in Melbourne - Suburbs Analysis & Expert

Advice

The Melbourne property market has been one of the strongest and most
consistent performers over the last few decades.

Here are some stats from Corelogic showing the cyclical nature of the
Melbourne real estate market over the last 20 years…
While Melbourne property values are declining, it’s not all bad news; dwelling
values remain significantly higher than they were five years ago and the recent
declines have provided an improvement to housing affordability.

So…is it too late to get into the Melbourne property market?

Like most things in real estate, the answer is – it depends.

While some areas still have strong growth ahead, certain submarkets should be
avoided like the plague.

I’m going to examine the many factors that are driving Melbourne’s various
property markets in detail in this blog which is a little longer than normal, so if
you’re looking for a particular element of the Melbourne property market, use
these links to skip down the page.

If you’re looking for some key pointers to the future of Melbourne

property consider these:

 The Victorian economy continues to strengthen creating more (higher

paying) jobs
 Record international and interstate migration will continue.
 1,500 new households are being formed in Melbourne each week and the
supply of new housing is struggling to keep up with this burgeoning
demand.
  Melbourne’s rental market is tightening, with low vacancy rates and
rising rentals.
 First home buyers are back in the market
 There continues to be strong foreign interest in Melbourne from tourists,
migrants, investors and developers

 What types of properties perform well in Melbourne?

Commercial properties, (retail shops, factories, warehouses, and office spaces)

are in a very different league residential property and out of the domain of the
every-day investor.

Whilst there are many benefits of

investing in commercial properties,
they are more suitable for the
sophisticated and experienced
investor, particularly as they are more
yield-driven than capital growth-
driven.

Consider it this way: for most advanced

investors, your job is to build your asset
base.

Once your portfolio is big and robust enough, you begin transferring into a cash
flow strategy and at this point, a commercial property can be a good
investment.

 How do I choose an investment property in Melbourne?

We believe that 80% of your property’s performance is related to its location

(one that outperforms the averages ) and 20% or so is related to buying the
right property in that location.

Here are some of the factors to look for when selecting an investment grade
property:-

 INTRINSIC VALUE
I’m a big believer in buying property for below its intrinsic value – that’s why I
avoid new and off the plan properties, which generally attract a premium price
tag.

I also look for properties with a high Land to Asset ratio – but remember
apartments have an attributable land value underneath them

 OUTPERFORMING AVERAGES

In other words in an area that has a long, proven history of strong capital
growth and one that is likely to continue to outperform the averages, and this
is largely because of the demographics in the area and the future economic
prospects for the area.

These suburbs tend to be those where a large number of owner occupiers

desire to live in the area, because of lifestyle choices of the offer.

I look for suburbs where wages (and therefore disposable income) is increasing
above average.

This translates to being an area where locals are able to and prepared to pay a
premium price to live there, putting a financial floor under your investment
property.

 PROPERTIES WITH A TWIST

An investment must have something unique, or special, or different or scarce –

some ‘X factor’ that makes it stand out from its neighbours – in order to land on
my shortlist.

 POTENTIAL CAPITAL GROWTH

An ideal investment is one in which you can manufacture capital growth

through refurbishment, renovations or redevelopment. (Source:
https://propertyupdate.com.au/commercial-property-a-property-investors-
guide/)

VII. How to Make Money from a Commercial Property Melbourne

 Commercial property, also known as investment property, is any type of real
estate that you own for the purpose of generating a profit. The category
includes shopping centers, office buildings, hotels and multifamily apartment
buildings. The ways to make money from commercial property is as diverse as
the types of properties that can fit into this category, and some types of revenue
are unique to certain types of property. Generally, however, a few basic ways
to make money from commercial property are standard across all property
types.

 Fee for Occupany

One of the primary ways to make money from commercial property is to charge
other people to occupy it.

 Appreciation

Another way to make money from commercial property is to sell it once the
property has appreciated, or increased in value. Commercial real estate can rise
in value if you put work into improving the look of the property, if a traffic
pattern is established that substantiates the value of the location, if the
surrounding area experiences a tourist boom, or any of a hundred other
reasons that can affect the market.

 Advertising

Many types of commercial real estate have some capacity to make money from
advertising. You can sell access to billboards or signage on the property. You
can publish a directory of services that tenants provide and sell print
advertising in the book

 Services

One of the best ways to make money from commercial property is to charge the
users for additional services that you provide.

VIII. Commercial Property Risks | What Investors Need To Know

 Vulnerable to economic shocks

During an economic downturn, demand for commercial property generally falls
due to sluggish economic growth and poor business confidence. It’s also
important to consider whether or not the investment may be susceptible to
major economic downturns.

 Lease terms

While long lease terms can be advantageous in providing rental certainty, they
can also present a risk in the sense that it may take longer for you to find a
tenant once the premises are vacated. If your property is vacated for an
extended period of time, you’ll need to ensure that you’re well equipped to
cover the carrying costs until you can find a new tenant.

 Property size

Keep in mind that larger commercial properties may be more difficult to lease
than smaller properties and will typically be more expensive to hold.

 Changes in supply

It’s a good idea to keep tabs on the supply indicators of the area. For instance,
an increase in property within the area may create a threat since existing
tenants may look to upgrade or expand.

IX. Top Mistakes in Commercial Real Estate Investing

Investing in commercial real estate can be financially rewarding, but it also

comes with risks. To improve your chances of success, it’s important to learn
from the experience of others and know which commercial real estate investing
mistakes to avoid. We asked experts to share the most common pitfalls in
commercial real estate investing.

The top 24 mistakes when investing in commercial real estate include:

1. Failing to Understand the Terms of Balloon Financing

2. Incorrectly Assessing the Value of a Property

3. Focusing Too Much on Gross Income

4. Relying on Information in Public Listings

5. Not Knowing Your LTV & DSCR

6. Failing to Do Due Diligence

7. Not Working With a Team of Professionals

8. Not Having a Cost Segregation Study

9. Neglecting to Hire a Good Property Manager

10. Failing to Structure a Holding Entity Correctly

11. Miscalculating Cash Flow

12. Skimping on Due Diligence

13. Underestimating Vacancy & Tenant Improvement Costs

14. Failing to Understand the Lender’s Underwriting Requirements

15. Not Planning Ahead

16. Buying Too Small a Property

17. Timing Your Move Incorrectly

18. Choosing the Wrong Location

19. Not Checking Local Zoning Ordinances

20. Forgetting About Occupancy Licenses

21. Relying Too Much on Your Broker

22. Buying the Property in a Rush

23. Being Moved Solely by the Asset, Not the Market

24. Underestimating the Process Involved in Obtaining Mortgage

Investing in commercial real estate for beginners can be a great breakthrough

for your business. However, it’s important to spend time making strategic
decisions when purchasing a property, as this is both your business asset and
investment. Also, make sure to minimize your risks by avoiding these common
commercial real estate investing mistakes.

X. Conclusion

One of the great opportunities in real estate for making a considerable amount
of money is to invest in commercial real estate. Commercial real estate
developers focus not only on flipping properties but also on developing them,
adding value to properties in order to increase their net incomes through
renovations and upgrades. They also consult on projects that might take more
seasoned real estate investors to see to fruition.

Expert Investors says, commercial real estate is one of the most lucrative
sources for both income and profits in the real estate market. As long as you can
find ways to add value to the exchange, investing in commercial real estate can
be one of the largest income generators you'll find.

References

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Business Know How, Retrieved 01 August, 2019 from,

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Can You Really Make Money With Commercial Real Estate Investing? |
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https://www.commercialproperty2sell.com.au/blog/2018/07/can-you-
really-make-money-with-commercial-rea.php

By Terry Masters. | How to Make Money From a Commercial Property |

smallbusiness.chron, Retrieved 02 August, 2019 from,
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Investopedia, Retrieved 02 August, 2019 from,

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https://fundrise.com/education/blog-posts/how-investing-in-commercial-
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The strategic approach to adding value to commercial property: Melbourne

Acquisitions | The Real-estate Conversation, Retrieved 02 August, 2019 from,

https://www.therealestateconversation.com.au/news/2017/02/01/the-
strategic-approach-adding-value-commercial-property-melbourne-
acquisitions

By Ben Burston. (2019) | Five commercial property trends that will define
2019 | smh, Retrieved 02 August, 2019 from,

https://www.smh.com.au/business/companies/five-commercial-property-
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https://fitsmallbusiness.com/commercial-real-estate-investing-mistakes/