5 Traps Commercial Real Estate Investors Should Avoid

Posted on November 08, 2018

Commercial real estate (CRE) has proven to be a stable asset class for investors to balance portfolio risk, generate a steady and predictable stream of income, and yield historically strong returns over the long term. Still, investing in CRE does not come without risks. Before investing your hard-earned dollars in a commercial project, be wary of the following traps:

 

• Speculating on Property Appreciation. Well-maintained commercial property will appreciate over time. Rather than assessing property based on a speculation of what will be, investors should instead evaluate real estate based on the cash flow it currently generates and the potential income that it can yield in the future.

 

• Investing with Emotions. Investing in commercial property should involve meticulous due diligence and a laser-targeted focus on the facts surrounding a property, including its location, historic and current operating expenses and cash flow, and the value of the underlying land and real estate assets. It is also crucial for investors to consider how an investment in CRE will fit into their long-term financial strategy and not their immediate emotional needs.
• Failing to Have an Exit Strategy. Before investing in commercial property, investors should know their end-game and how and when then plan to dispose of the property in the future. Having the benefit of this information from the onset will help investors to meet their individual investment goals, whether they are building retirement savings, generating monthly income or realizing the tax benefits of CRE investments.
• Failing to Consider and Plan for Tax Implications. Short-term investments will have different tax consequences than longer-term investments. Are you prepared to pay capital gains tax on the disposition on a CRE property, or can you defer taxes through a 1031 exchange? Meet with qualified real estate and tax advisors before investing in a property to understand your liabilities and plan for ways to minimize your tax burden as much as possible.
• Going it Alone. The number one reason why investors lose money in commercial real estate is that they jump in, feet first, without the guidance of professional advisors who have local market knowledge and deep experience in a particular asset class. Assemble a team early on to help guide you in your decision-making and handle all of the details of managing, leasing and maintaining the property for you.

 

With offices in Miami, Orlando, New York City and Geneva, the team at Orion works with investors, developers, property owners and brokers through all phases of real estate transactions, from strategic planning and analysis to financing, negotiation, property management and disposition. For more information, call (305) 278-8400 or email info@orionmiami.com.