Top 5 Mistakes in Commercial Real Estate Investments

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Top 5 Mistakes in Commercial Real Estate
Investments
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Investing in the commercial real estate sector is
always rewarding, however, there are certain
mistakes that you as an investor must avoid
committing.
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Here are the top 5 mistakes in commercial real
estate investments that you should know about.
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Unable to understand the local market
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This is one of the most common mistakes committed
by the majority of the investors investing in the
commercial real estate sector.
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Moreover, as the value of a commercial property
is determined by the local market conditions
which make it important to obtain some local
demographic statistics before investing in a
commercial property.
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Demographic factors like existing population,
projected population growth, projected job growth
average household income are some the things
that affect the future growth prospect of a
commercial property.
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Too much importance to returns
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Most of the time it is seen that investors always
prefer the commercial property with the highest
rate of interest without considering any other
property.
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There are four ways to make money and higher
gains in the commercial real estate sector and
they are cash flow, appreciation, equity growth
tax benefits.
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Due to this one cannot look at returns alone as
the rate on equity provides a better measure of
the speed of wealth creation and the tax
efficiency in doing so.
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Not underwriting the current tenants
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Moreover, it is very important to consider the
financial condition of your tenants before
renting them the commercial property.
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If you are leasing a large part of your
commercial property, then you must compile all
the data of your various tenants who are working
in different sectors categorize them on the
basis of their job profile.
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This will help you in the long run like if a
particular industry is facing financial
instability, then the tenants who are working in
that sector will face problem in paying rents.
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Not bankrolling the sponsor
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Just as it is important to understand the local
market and ensuring the commercial property, you
should also bankroll the sponsor of your
commercial property.
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Moreover, you must also look at the way the
previous deals which have been finalized by the
sponsor are turning out presently.
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It is also equally vital to make sure that the
sponsor is not involved in any litigations and
has not been sued by any previous investors.
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Not understanding the risks
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It is a well-known truth that investing in the
commercial real estate sector is fraught with
many risks and as an investor, you should be
aware of all these risks.
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The sponsor of your commercial property should
disclose all the risk factors involved in the
particular commercial property in which you are
investing.
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Furthermore, it is important to not only review
the risk factors in the commercial property but
also to understand the risks of this type of
investments.
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