Every investor should know how to spot a bad commercial real estate deal. First time investments are usually a huge commitment for those starting out. And while it can take time to learn the ins and outs of a property, it’s well worth it to make sure your money is safe. Here are three signs that should raise a red flag for anyone investing in a commercial property.
It’s in a Bad Area
You’ve found the perfect commercial property. Clean exterior. Low cost renovations for the interior. Offered below market price. But before you shake hands and seal the deal, take the time to research the area.
Sites like Movoto or NeighborhoodScout provide information on a zip code’s demographics, crime rates, house prices and more. In under ten minutes, you can know if the property has a prominent risk of being vandalized, or if the income levels are high enough to support your dream retail tenant.
Don’t just sit behind a computer learning about the community either. Hit the street and meet the people and business owners who would be your neighbors. Ask them about the area and try to glean insights into what it’s like to operate their day-to-day. Perhaps a loud train often rolls through and makes customer interaction difficult. Or maybe the local income level is low, but high earners from out of town frequently visit the shops. Online searches can give you a broad picture of what a neighborhood is like, but you won’t really know until you’ve talked to the people.
Learning more about the area your building is in may be time consuming, but it will help you spot a bad commercial real estate deal.
It’s Been on the Market a Long Time
If the building you’re looking at now has been on the market for a long time, it may be a bad deal. When it comes to commercial real estate, there’s usually more buyers than sellers. New properties, especially promising ones, tend to get snatched up quickly by eager investors.
Do some research and look for reasons the property hasn’t already been purchased. Call around to your local brokers and ask if they have any concerns about the property that may not be immediately evident.
The Numbers Don’t Add Up
Commercial real estate is purely a numbers game. If something isn’t adding up, it’s a warning sign about the health of the property. Verify as many of the seller’s numbers as possible. If they predict a 5% increase in rent prices over the coming year, find the report they’re referencing and examine the data for yourself.
Use MyNOI’s free IPV calculator to check the income/expense ratio and generate a ten year forecast on the property. Experiment with different levels of rent prices and growth to find out how much you’ll need to bring in to keep your investment afloat. Be careful you’re not overly optimistic about low vacancy rates or expenses.
In the end, the best way to spot a bad commercial real estate deal is to do your own independent research of the property. That way you’ll know exactly what you’re getting yourself into.