Common Mistakes in Commercial Real Estate Investing

​Commercial real estate (CRE) comprises stores, malls, hotels, warehouses, healthcare facilities, and multifamily rental properties with over five units. CRE investing involves construction or acquisition, marketing, and management, each of which may have costly pitfalls. CRE is one of the most dependable investment vehicles. The real estate market is relatively steady and not prone to erratic fluctuations. However, CRE investing comes with unique risks.

One of the most common mistakes is choosing the wrong property type. For example, owning a hotel's opportunities and challenges differ from owning an office complex. A multifamily rental property may promise higher returns but be more demanding in management and maintenance than a warehouse.

The consequences of purchasing the wrong property type include mismanagement and poor returns. The key is understanding the unique risks and benefits of the various property types, given the buyer's risk profile and financial and personal goals. This may necessitate talking to a financial planner or other industry expert to understand each type's implications better.

Another mistake when investing in CRE is overlooking or underestimating property expenses. Real estate investing is full of surprises. An investor could buy a property expecting minimal renovations only to discover the building needs major repairs, which limits the return on investment (ROI).

Buyers should consider property management expenses, utilities, and possible renovations when evaluating a property's financial viability. Property inspections help buyers get an accurate picture of the updates a property needs.

CRE offers several tax advantages, from interest expense deductions to depreciation deductions. Unfortunately, unexpected tax bills owing to poor tax planning not only deny many investors these benefits but also eat into their returns.

Some tax bills like capital gains tax (paid upon selling a property profitably) are unavoidable. Still, one can defer it by exchanging their property for another of a similar or greater value. Investors should work with a real estate tax expert to avoid unexpected tax bills and maximize their ROI.

Another mistake is going it alone. Only industry experts can uncover some pitfalls. Investors should consult experienced professionals, such as real estate attorneys and agents, to help them navigate the CRE and make informed decisions.

Beginner CRE investors are better off investing in one property type initially. The mistake many make is failing to diversify. Once they experience success with a particular property type, they acquire more of the same property, thus increasing risk exposure.

Each property type is subject to unique drivers. Different factors drive demand and supply. Take hotels, for example. They are prone to seasonal fluctuations. Putting all the capital into hotels may not be a good idea. Investing in different property types in various locations cushions an investor against a slump in a particular property market.

Although diversification helps spread risks, overextending one's portfolio by acquiring too many properties too quickly may strain an investor financially. One should carefully assess one's financial abilities before purchasing additional properties and gradually and cautiously expand.

Investors must also have an exit strategy. Proper due diligence, rigorous research of local market dynamics, and working with experts can help them avoid costly mistakes. When building a portfolio, it's important to prioritize quality over quantity and ensure each investment receives the attention it deserves.

Derek Copeland

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