Commercial real estate is back and firing on all cylinders with growth expected for cities like Edmonton over the coming decade. However, drug investment and portfolio performance can vary widely, even in strong economic provinces such as Alberta. Recognizing the mistakes others have made and investing accordingly can go a long way in minimizing risk and potentially elevating returns. Here are five common commercial real estate investment mistakes today's commercial real estate investors make:
1) Neglecting Due Diligence Investing in commercial real estate in rapidly growing cities like Edmonton is exciting. However, just because other investors are making money in the commercial property market or because the general outlook is bright, doesn't mean it's time to rush into the market blind. Double checking property values and rents, and having a team of experts, such as commercial real estate brokers, accountants, and attorneys, can go a long way to help ensure a safer and more rewarding investment.
2) Lack of Liquidity A lack of liquidity is a serious risk with any commercial real estate development. Currently, there are more ways to invest in Canadian commercial real estate than acquiring a building and leasing it out. Those that take on entire buildings or projects themselves, and either put everything into one basket or overleverage themselves, need to be realistic about what market changes could mean for their entire financial status. In contrast, partnering up to invest smaller amounts across several commercial properties can improve liquidity and diversification.
3) Ignoring the Tax Ramifications Few investors enjoy paying, preparing, or even thinking about taxes. Unfortunately, the head in the sand approach isn't very profitable. The most successful investors look at taxes and find ways to minimize them, which allows them to invest for maximum rewards. Neglecting this factor alone could easily mean double-digit differences in your annual returns, and far more over a lifetime.
4) Investing Outside of the €˜Circle of Competence' Legendary investor Warren Buffett is one of the most outspoken experts on the need for investors to stick to investments they can understand. For many Canadians, real estate stocks such as giant publicly traded REITs, and industrial property investments may be beyond their circle of expertise. If it is not clearly understood who is managing an investment, what factors detract from returns, how values change, and how they produce income, these type of investments can be more risky than walking into a casino for the first time, having never played a hand of cards in your life. Contrast this with investing in properties like local shopping plazas. Most Canadians have shopped at one during their lifetimes. They understand that consumers, like themselves, spend money in the shops, whose store owners in turn pay rent to building owners. Over time rents go up and property values and lease incomes increase, creating better returns for the investor-owners.
5) Waiting too long As with many other types of investment, many commercial property investors often miss out on the best gains and income returns by waiting too long. This can simply come from not taking action with their investment dollars or waiting until a market proves that it is incredibly profitable. By then, earlier investors have claimed the best gains in value and income.
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