Did you know that real estate investments can provide investors with an average return of 10 percent? This means that if you put $100,000 into a real estate investment, in just five years, you could earn $50,000 – in ten years, you could double your money. But before you dive into your first real estate investment, it’s important to learn about the pitfalls you could hit.
As with any investment, real estate investing comes with risk, but smart investors can avoid some of these downfalls. Read on to discover common commercial real estate investment mistakes and learn how to make smarter investments.
Choosing the Wrong Property
When you’re first investing in commercial real estate, one of the biggest mistakes you can make is choosing the wrong type of property to put your money into. There are four primary types of commercial real estate: office, industrial, retail, and multifamily housing. You can also invest in storage facilities, special- or mixed-use properties, or even undeveloped land.
Which type of property you invest in depends on your priorities and goals. For instance, multifamily housing investments tend to have higher returns, but they also require a lot more management and maintenance. You need to make sure to pick an investment that suits both your time needs and your financial goals.
Not Doing Your Homework
As you’re trying to decide which property to invest in, it’s a good idea to do some research and learn about your local real estate market. You need to know about how much properties in that area go for, what direction the market is moving, and how many properties are available. This will help you recognize a good deal when one comes up and make education decisions about when it’s time to dive in with a property.
In Orange County, the median price per square foot for real estate is about $600 as of this writing. Right now, properties are selling for a little under list price in an average of two months. It is strongly a seller’s market, meaning there are more people looking for properties than there are properties available.
Not Planning for Taxes
Although commercial real estate investment is a type of passive income, it does still count as income and is taxed as such. When you’re planning your investment, it can be easy to get caught up in the profit you’re making and forget about those taxes. And unlike your other income, taxes may not be automatically deducted from these profits before you get them.
Work with a financial professional or tax advisor and figure out what percentage of your profits you can expect to pay in taxes. Then make sure you account for any potential tax liabilities you may face, including rising property taxes. And in the long-term life of your investment, you need to prepare for capital gains tax if you eventually sell your investment for more than you bought it for.
Overreaching
When you start looking at your potential return from an investment in Orange County real estate, it can be easy to get swept up in the profits. You might be tempted to put as much money as you can afford into this investment – after all, the more you spend, the more you earn. But while real estate can be very lucrative, it also comes with its fair share of risks.
You want to avoid going into too much debt for your business investment – in fact, if possible, it’s best to avoid going into debt at all. Instead, start investing with the money you have saved, and don’t immediately dump all of that into one real estate investment. Remember that real estate investing is a long game, and give your money time to grow before you start pouring funds into the major investment properties.
Forgetting Renovation Costs
Oftentimes, the best deal you can get on real estate is on properties that may need a little love before they’re ready to go on the market. Buying properties that need some work can be a great way to get into real estate investing if your budget is limited and to make your money work for you. But you need to make sure to account for those renovation costs when you’re budgeting for your investment.
Ideally, you shouldn’t go into any debt to finance the renovations for your new property. You also need to build a buffer into your renovation budget to cover any unexpected costs. It’s almost guaranteed that you’ll find something you weren’t planning on, a job will be more expensive than you expected, or you’ll have to call in a professional to help you finish a job on time.
Flying Solo
The phrase “two heads are better than one” is an important lesson for any commercial real estate investor to learn. The truth of the matter is that, no matter how much research you do, you aren’t going to have all the answers about how to manage your property. An unexpected situation will come up, and you don’t want to try to flounder on your own for answers.
Instead, reach out to investment professionals, trusted colleagues, and a network of fellow investors for advice. There is no situation you’ll come up against that someone in the investing world hasn’t already faced. Learn from their experience, and don’t be too proud to ask for advice when you’re in over your head.
Learn More About Commercial Real Estate Investment
Commercial real estate can be an incredible investment, but it’s not without its risks. There are a number of common mistakes new investors make, but with the right precautions, you can avoid these and make smarter investments. Always do as much research as you can, choose a property that fits your priorities, and be sure to live yourself some wiggle room in your financial plan.
If you’d like to learn more about commercial real estate investment, check out the rest of our site at Commercial Orange County. We are a full-service commercial real estate brokerage proudly serving Orange County. Give us a call today and find the hottest listings in Orange County.
