Downside of Owning Commercial Real Estate

This warning is targeted at inexperienced investors who may be thinking of jumping into Commercial Real Estate Investments.

My warning is “Walk before you run”.

Although the allure of high Commercial Real Estate returns may seem too good to resist, it’s wise to hone your skills in residential real estate before you move to commercial real estate.

Commercial Real Estate generally requires a larger investment

Commercial property is generally more expensive than residential property. It’s often larger in land size, it’s purchased by more sophisticated investors who have more money to spend, and many good commercial properties are in highly sought-after locations.

So to buy an office, shopfront, factory or warehouse as your first real estate investment may take significantly more money than it would to buy a unit, townhouse or three-bed’er.

In fact, you might be able to buy several residential properties for the cost of one commercial property. And by spreading your investment, you also spread your risk.

The Commercial Real Estate market is smaller

Everyone lives in a house.But not everyone rents or owns a commercial property.

The commercial real estate market is smaller than the residential real estate market. There are less people out there buying commercial real estate, there are less commercial properties available on the market, and there are less potential tenants who want to rent commercial property.

So you might own a perfectly good commercial property – only to find that there’s nobody who wants to lease it, and nobody who wants to buy it from you.

Commercial Real Estate market is more cut-throat

The people who are in the commercial real estate market generally know what they’re doing.

On the one side, you have tenants – who are often hard-nosed businesspeople intent on screwing you down to the lowest possible rent so that they can maximise their business profits.

On the other side, you have investors – who want to sell to you at the maximum possible price, and buy from you at the maximum possible discounts.

Unless you can hold your own against these people, then your returns from commercial real estate may be diminished.

Suggestions for first-time Commercial Real Estate investors

If you’re thinking of becoming a Commercial Real Estate investor, then here are some suggestions on what you can do to prepare yourself.

Begin in Residential Real Estate

Before you even start going through Commercial Real Estate Listings, it’s wise to have already cut your teeth on residential real estate.

Get a few deals under your belt. Go through the whole gamut of finding, buying, managing and selling a property – and still ending up with a profit.

If you can do this consistently, then you’re on your way to being able to handle Commercial Real Estate.

Start Small

Don’t try and make a fortune on your first deal.

Perhaps start with a small warehouse unit, or a small office – one which already has a secure long-term tenant.

Too often I see investors who bite off more than they can chew.

They try and make a killing, and end up getting slaughtered in the market.

Starting small help to mitigate your investment risks, and allows you to get a “feel” for the market before you dive in – because the commercial property has some key differences to the residential real estate market.

Educate Yourself

And finally, spend some time and money finding out more about commercial real estate, and refining your investing skills before you dive in.

Speaking from experience – The more you know about the investing market you’re in, the more opportunities for profits you’ll be able to see, and the more money you will make.

Ever driven past a property in your neighbourhood which was being developed, and said to yourself “Man! I wish I had have thought of that.”? I did it myself earlier this month.

And the difference between me and the guy who is now making bucket loads of money out of that development is he knew something I didn’t – and as a result of what he knew, he was able to see an opportunity where I wasn’t, and is now raking in the money.

That’s why you should spend some time educating yourself – to put yourself ahead of the other investors in the market.