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Avoiding the 10 Common Pitfalls in Commercial Real Estate Development

Avoiding the 10 Common Pitfalls in Commercial Real Estate Development

Avoiding the 10 Common Pitfalls in Commercial Real Estate Development

Poorly constructed investment decisions is the #1 reason investors realize minimal or negative returns real estate. Investment goals become increasingly difficult to achieve when a variety of investment types are considered. For example, purchasing a strip mall presents concerns that are far different from those encountered when investing in mixed-use or multi-family housing. There are 10 Common Pitfalls in Commercial Real Estate Development that investors can avoid through systematic planning and control.

  1. Not Knowing the Area

Every area has periods of growth and retraction. That means investors must be fully aware of the neighborhood property trends. Purchasing property in an area that’s already peaked is unlikely to generate significant profits, especially if the likelihood of declining values is looming on the horizon.

  1. Failing to Understanding the Risks of Each Type of Property Being Considered

Investors may be well-versed in the nuances of purchasing in one type of property, but may not be fully up to speed on another. That lack of knowledge is dangerous and can easily threaten the investment’s viability. Potential investments, no matter how enticing, always pose some level of risk, suggesting it’s vitally important to understand the types and levels of risks involved in a specific investment prior to committing. For example, there are Differences between Commercial Real Estate and Residential real estate that govern development and, by extension, profits.

  1. Not Getting Legal Advice Related to Titles

Obtaining legal advice can be costly, but not fully exploring all the title issues can be far more expensive. Always ask, “Am I Getting A Good Title?” Attorneys specializing in real estate law are important elements in the decision to invest in a property or move on to another opportunity. Clouds on the title not only limit the ability to market a property but can be incredibly difficult to correct after the fact.

Also, ask the attorney, “Are There Different Types of Deeds?” In fact, there are different methods of conveying title, and the levels of protection for the buyer vary depending on the type of deed provided.

  1. Ignoring Any Existing Leases, Covenants, and Other Restrictions.

In addition to the property’s title, investors must be aware of the terms of any existing leases, covenants, and other restrictions that may interfere with key variables of a pro forma. Having long-term leases in place may be a plus when the goal is to generate an income stream without making any significant changes to a property, but they can quickly create issues if the goal is to renovate or alter the use of a property.

  1. Doing the Math

“Back of the envelope” does not tell the entire story, and comprehensive pro formas are overly complex and fraught with trade jargon. Too many investors enter into contracts without fully grasping the financial issues and risks involved with an investment. It’s easy to overlook potential tax consequences, for example, when adding a property to an existing portfolio, or to fully comprehend how the fundaments of supply and demand are tied to capital and real estate markets. Comprehensive, systematic due diligence is vital before investing as well as to track the efficacy of all the properties held.

  1. Exercise Caution With Partnerships

Partnerships are often required to make an investment viable and feasible for many investors. Who the partners are and how that partnership is structured can make the difference between a successful project and one that’s stressful for everyone involved. Culture, fit, experience, and commitment are key to success.

  1. Inspecting the Property

Never purchase property without having it properly inspected including research into past uses and potential liabilities. Expenses skyrocket when unforeseen issues are exposed during a renovation or reconstruction.

  1. Biting Off More than You Can Chew

Even though a potential investment may appear lucrative, it’s important to acknowledge the fact that everyone has financial limits, and staying within those limits will help to avoid potential issues. Time is a friend of real estate investments but that time can be considerable, and having the staying power to realize returns may be generational.

  1. Getting Rid of Under-Performing Properties

No one likes to admit they made a mistake, but it happens. When a specific project isn’t generating the returns necessary, consider divesting it rather than hoping things will turn around in the future.

        10. Ignoring Professional Advice

Working with professional advisers is always recommended. However, investors  sometimes trust their own instincts over professional advice. Be wary of “patient heal thyself” syndrome.. Second guessing the advice of attorneys, accountants, and real estate investment experts is not a good idea.

Beacon Projects Group provides professional real estate development, design, permitting, and construction management consulting expertise to investors. . We’re experts in planning, financing, permitting, and managing  development projects throughout New England. Our team represents clients throughout all phases of development and enhances efficiencies while saving money during every project.

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