Commercial real estate goes through a period of correction or a crash that lowers prices, making it the right time to buy. Experts have difficulty pinpointing the exact time to purchase to make a profit, and for a lot of businesses, it makes sense to lease commercial space rather than buying.
Pitfalls that businesses need to consider when buying commercial real estate are:
1. Location Isn’t Always a “Sure Thing” in Small Towns
Location isn’t always a sure thing, especially in small towns. Purchasing property in Manhattan may be fruitful for the foreseeable future, but I have seen many commercial real estate spaces where I grew up be demolished to widen roads.
The “hotspot” to go shopping is now gone.
The desirable locations of today may backfire, and this means that you’ll be left with a building that:
- Loses value
- Doesn’t lure in customers
- Can’t easily be rented out
But locations can also do well. Prices can increase. Demand can increase. Rent prices may increase.
2. Liquidity Loss and High Prices
Commercial real estate is expensive to purchase, and small businesses that are trying to pay their bills may find that liquidity is a problem. Tying liquidity up in real estate is both good and bad.
Businesses may not have the cash to pursue ventures, but real estate is an asset hat can be sold for a cash infusion.
Leasing commercial space is often the go-to choice for new businesses that are just starting. Even businesses that have been open for decades can’t justify the upfront and continual costs of owning commercial real estate.
There are a lot of factors that go into the ownership equation, so sit down with your accountant and discuss your options before diving in.
3. Improvements to Meet Current Codes
Older buildings may not be up to code, and this means that the owner of the building will need to make the proper improvements to get the building up to current standards. There are also considerations of the Americans with Disabilities Act.
Ramps might be needed to allow patrons on wheelchairs to visit a facility.
Bathroom stalls may need to be widened. Doorways might need widening. Curb cuts may need to be made.
You’ll need to do your research on the commercial property you’re interested in to make sure that unexpected costs don’t arise. Sometimes, the person leasing the building may need to make the updates, depending on the contract.
Do your due diligence before purchasing any commercial real estate.
4. Not Having a Plan in Place
Commercial real estate requires a plan to be in place. Buying too much space is a common problem, and without a plan, the space may go unused. Lease the space, make money off of it, but don’t let it sit.
Investors and businesses considering commercial real estate need a plan.
Not knowing the local area is a big mistake, and this means hiring someone to do research on the area and understanding if a purchase is viable. Partnering can also be part of a plan, but it may be a bad part that involves conflict, disagreements and the other party not holding up their end of the bargain.