The temptation for the business owner is there. He’s the proud owner of a thriving enterprise but hates the idea of scratching out a monthly check to the building’s landlord. Wouldn’t it be better to own the real estate instead? Well, if you’re talking about a self-storage facility or a mobile home park, we’d be more inclined to agree with you. When it comes to the larger commercial real estate market in general, we’re not so quick to recommend an investor pull the trigger right now.
Of course, the major caveat is always whether or not the deal makes financial sense the day you sign on the dotted line. Until that criteria is met, you shouldn’t be thinking about buying anything. At the Commercial Investing Center, we love a great deal as much as the next guy, but there are three risks we see all too often when it comes to buying commercial real estate. Let’s look at each in turn.
1. The Incredible Location Backfire: In commercial real estate even more than residential, we see the “hot” area suddenly turn cold faster than you can imagine. Business locations are trendy and that which trends upward can turn around and trend downward even faster. Sometimes developers run out of cash and those pie-in-the-sky projections of a shopper’s paradise never quite materialize, so there you are owning a plum property in the middle of nowhere. They built it but no one ever came. Why is commercial real estate so much more erratic than residential? We’ve thought about that one long and hard and the best answer we can come up with is the concept of “universal demand.” Put simply, we all need a place to live but nobody needs to go shopping at your store.
2. Liquidity: The idea of liquidity can cut both ways when it comes to buying commercial real estate. A business that ties up too much liquidity through the process of buying real estate could end up shorting itself of critical cash flow and reserves. On the other hand, a struggling business that owns real estate at least has something of value to liquidate and raise cash from the sale. The problem is that you can’t always unload a piece of property when you need to. There are these things called slumps that tend to happen every now and then, and Murphy’s Law dictates that the time you need to need to sell property in the worst way will be the time that nobody’s buying. There’s no logical reason that this should be the case – but it almost always is.
3. Skating on Thin Ice: There are a couple of variables that can throw your commercial real estate venture into complete disarray. The first is when a tenant (s) stops paying rent, throwing your cash flow into chaos. That’s why a reliable tenant is worth their weight gold and unreliables a serious pain in the neck. While it’s usually easier to evict a commercial tenant than a residential tenant, it stills plays havoc with your monthly budget. The other variable that can upset the apple cart all at once is major repairs or maintenance, which can run into the hundreds of thousands of dollars if you have the misfortune to lose a major system like heating or air conditioning in a shopping center. Or plumbing. Or any of a dozen different minor or major catastrophes that must be fixed quickly.
Consider also the fact that buying commercial real estate very likely involves the services of an entire professional team that you’re going to have to create. It’s not as simple as a residential buy where you can tend to most matters yourself. When it comes to buying a multi-million dollar property, you’ll need at least an accountant, lawyer, commercial broker, and mortgage broker. You’re playing with the big boys now and can’t afford to make the kind of financial mistake that sinks your investing business for good.
We’re not trying to scare you out of ever investing in commercial real estate, but only to make sure you realize exactly what you’re getting into. Yes, the potential for incredible profit is there, as is the chance to go completely bust. In recent years, we’ve seen better opportunity in self-storage facilities and mobile home parks, which combine a relatively low investment (when compared to commercial property) but a higher rate of return than most residential deals. If you don’t believe us, do your research. Jason Hartman interviewed self-storage investing guru, Scott Meyers, about the profit potential in owning and operating this type of property investment. There are worse ways to spend 39 minutes and 22 seconds of your life.
The Commercial Investing Center Team
(Flickr / Hub)