5 Things to Consider Before Buying Commercial Property

Purchasing commercial property as part of your wealth-building strategy is smart. It costs more than residential real estate, but the profits are higher, so it’s worth pursuing and learning everything you can along the way.

Real estate investing isn’t as easy as some make it seem. However, with commitment and determination, you can learn how to find profitable opportunities and avoid money pits.

When you’re just starting out, the signs of a bad deal aren’t always obvious, and sometimes negative aspects don’t indicate a bad deal. So, if you’re new to commercial real estate, consider the following issues. These can be deal-breakers under certain circumstances.

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1. A Failing Transformer

No electrical transformer will last forever, but they shouldn’t fail prematurely. Moreover, if you buy a commercial property with a bad transformer, you can expect to spend many thousands of dollars on a replacement before too long.

Before you buy commercial property, hire a professional to inspect the transformer. If it’s not in good shape, or if its useful lifespan is soon coming to an end, use that information to negotiate a lower price. If you know you’ll need to spend, say, $10,000 on a new dry-type transformer, that should be a good reason for the seller to reduce the price.

2. Hidden Problems with the Building

There’s always a chance that you’ll end up with undesirable surprises after you buy commercial property. For example, there could be hidden problems that not even your home inspector notices. It actually happens all the time.

It’s not that problems themselves are deal-breakers. However, they can be when the seller won’t lower the price to account for the issues, or when you don’t want to spend the time and energy fixing them. Some of the most time-consuming, expensive, and tedious issues to deal with include:

Plumbing problems, like old pipes and repeating issues
A crumbling foundation
A failing HVAC system
A roof that is approaching the end of its life
A roof that was never properly waterproofed
Unpermitted work discovered during an inspection

These are just some of the fundamental issues you might have to deal with when purchasing commercial property. They can be dealt with, but you’ll need to decide what’s worth your energy, time, and money.

3. Overpriced Commercial Property

You’d think sellers couldn’t get away with pricing their properties too high, but it happens all the time. In fact, this is one of the most common mistakes new investors make when getting into commercial real estate.

If you don’t know the market rate for commercial leases, and what similar buildings in the area are selling for, there’s a good chance you’ll end up paying far more than you should for a property. An overpriced property isn’t an automatic deal-breaker, but it should be if you can’t talk the seller down to a reasonable price. You need a really good reason to pay more than market value for a property.

4. Existing Tenant Problems

Another challenge you might face is acquiring a property with existing tenants, like a business park or office complex. If the building has tenants who routinely pay rent late, skip rent payments, refuse to follow the lease agreements, attract shady characters, or if the police show up regularly, you’re probably looking at a difficult investment. It won’t be easy to evict everyone and turn over the whole building, because the process can be slow, and in some states, evictions are strictly regulated. What’s more, the tenants might come together to sue you.

It’s risky to buy commercial property with tenants who aren’t reliable. Chances are, this is more likely to happen in a bad neighborhood, so if you’re not looking to buy property in a bad area, you’re probably fine. However, you need to know what you’re getting into regarding tenant behavior and history.

5. Poor Economic Growth

Owning profitable commercial property requires some kind of economic stability, because if people are struggling financially, they’re not going to spend much money, which means businesses might end up shutting down. If you’re trying to rent commercial space to business owners, you want the property to be in an area with decent job growth and other positive economic factors.

Weigh Your Own Pros and Cons Before Investing in Commercial Property

No commercial property will be free from issues. It’s just a matter of knowing your limits and choosing what you’re willing to manage. Not every imperfection will be a deal-breaker, and the more investment experience you gain, the easier it will be to make that determination.