Commercial Property Investment: 5 Pitfalls to Avoid - PropertyBlawg

Commercial Property Investment: 5 Pitfalls to Avoid

by cbennett on September 28, 2012

Property is one of the classic investments. As cities grow and farmers seek out additional land, land often appreciates. Unfortunately, many people simply purchase land without doing the research. Simply adding some property to an investment portfolio does not make property a lucrative investment. Individuals interested in buying property should avoid several pitfalls.

1. No Plan

One serious problem with new investors is that they often lack any sort of plan for making money on the property. A building can be rented out, sold, or kept on file to show a loss for tax reasons. Land can be developed into various types of commercial property or left vacant. The experts at state that investors should have solid intentions for what to do with a property before buying any buildings; the processes for renovating existing structures, demolishing existing structures, building new structures, or simply sitting on the property are all quite different. Alterations frequently must meet state and local building codes and zoning laws. Easements, zoning restrictions, and extensive permit requirements can either make an investment impossible or eliminate the expected profit. Buyers should know in advance what they want to do and whether it will be feasible.

Investors should also ensure that they can execute their plans before buying any property. Investment groups that want to build a strip mall or office building must know in advance whether they have the available cash or the financing to complete the job. Selling a property with a construction project that is completed halfway will often result in a substantial loss for the original investor. Individuals who fail to plan, plan to fail.

2. Exposure to Liability

Insurance costs should be factored into the initial plan. One of the quickest ways to turn property from an asset into a liability is for an individual to become injured on the property. Obtaining insurance will often prevent property owners from paying large sums in the event of an accident. Most financial institutions will want the property to be insured before they agree to finance it, but even if insurance is optional, owners should obtain insurance.

For larger properties, individuals will often form investment groups to pool capital. A properly formed limited liability company or corporation can help prevent the property owners from personal exposure to lawsuits. Depending upon the circumstances, simply forming a legal entity may not provide adequate protection for the owners. Consult legal counsel in the property’s jurisdiction if the property is highly valuable.

3. Poor Location

Property that is located in a high-crime or an economically underdeveloped area will often not appreciate quickly and will be more susceptible to vandalism. Low-quality property that is renovated and built upon may not attract the intended clientele if the neighborhood is a slum. With that said, the worst property in even a lower-income area can be a good investment.

4. Overpayment

Property owners must seek out the lowest possible cash outlay for their investment. Making low-ball offers to sellers will insult some, but savvy investors know that some owners will agree to unusually low offers simply to get rid of the property – never hurts to try.

5. Poor or Malicious Property Management

Maintaining a remote investment property requires a property management company. Investors must research their management companies, as not all property managers are competent. Disreputable companies may even rent out the property, pocket the rent, and lie about the property being occupied. Property that appears to be abandoned will often be vandalized or targeted by thieves. Be sure to hire licensed managers, preferably members of the local realty associations; state real estate divisions oversee them and protect the public from abuse by strict regulation.

Investing in property can be a wise decision, but it is full of pitfalls for the unwary. With some basic precautions, investors will help secure their investment and ensure that the property becomes a valuable part of their portfolio.

Chris Bennett is a freelance writer and a contributing author for Construction projects are complex endeavors with many potential issues, but the risk, if mitigated properly, can produce great reward. Construx Solutions is a professional services firm experienced in supporting entities in all facets of the construction process.

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