6 Myths about Commercial Real Estate
Don’t believe everything you read. Truer words were never spoken, especially now that there’s the Internet. Google “commercial real estate” and more than 4.5 billion entries will pop up. Needless to say, not all of them convey accurate information. In fact, there are quite a few myths and misconceptions that—if taken seriously—could prevent a new investor from entering the market or even cause someone with experience to make a mistake. No matter which kind of investor you are, knowing the truth is essential to success. Here, we debunk six of the most common myths about commercial real estate.
Myth #1: Investing in Commercial Real Estate is Only for the Wealthy
Not necessarily. To approve funding, banks don’t just consider your balance sheet. They are also interested in the potential profits of a deal. If yours looks like a moneymaker, then you’re more likely to get financing. In addition to banks, there are also private moneylenders that might be willing to do business with you if the numbers look promising. Don’t let the myth that you need loads of cash stop you from getting started in CRE investing.
Myth #2: Taking Care of Commercial Property is Time Consuming
Just like your home, commercial property needs regular maintenance and occasional renovation. In addition, if you own a rental property, you’ll need to collect that rent from tenants and address their concerns, too. This does take time, but it doesn’t have to be yours. Profits from commercial real estate are typically higher than residential, allowing you to hire a property management service. A company with experience managing the kind of property you own will likely have a list of qualified vendors, and they may be able to negotiate lower rates or discounts.
Myth #3: All Available Properties Are Advertised Publicly
Hardly! The vast majority of commercial investment properties are not advertised or listed on sites such as LoopNet. These deals are completed in private. They are shown and then leased or sold without ever making it to the Web. How? Brokers have contacts among investors and property owners, so they often find out about deals that are not public. Also, good brokers prospect properties they think owners might be interested in selling. In this way, they are like matchmakers, bringing together buyers and sellers. For buyers, there are advantages to a private transaction, including a lack of competition that could drive up the price and the freedom to negotiate a selling price.
Myth #4: Commercial Real Estate Brokers are Expensive
Actually, not working with a CRE broker could be much more costly in the long run. As mentioned above, a broker can present properties that an investor might not otherwise know about, a service that is certainly worth paying. Secondly, brokers discern the subtleties of the current market and, therefore, know what to look for so you get the best deal possible. Finally, an experienced broker can save you money—and possibly aggravation, too—during negotiations.
Myth #5: A Broker Isn’t Necessary If You’re Only Renting
That may be true when it comes to residential, but definitely not in the case of commercial real estate. A landlord’s listing agent is allegiant to only one person—the landlord. Furthermore, the landlord signs the check that pays a broker’s commission. And although the landlord pays, you can bet the fee comes out of your rent money. But if you have a tenant representative on your side, that same fee is split. So you can pay for the listing agent to negotiate against you, or you can spend the same amount and have someone represent your best interests.
And don’t forget to hire a broker for a lease renewal, too. A good one will show you other spaces and get proposals from those landlords. Then, even if you are perfectly happy renewing, your existing landlord will know that you’ve researched the competition and could relocate if a fair price is not negotiated.
Myth #6: Commercial Real Estate Investment is Too Risky
Any type of investment involves a certain amount of risk, and commercial real estate is no different. Naturally, the higher the risk, the greater the potential for profit. However, not all commercial properties are high risk. For example, triple net lease properties are fairly low risk. These may have somewhat lower returns than other commercial real estate, but they are less susceptible to the market’s ups and downs.
To know where you are on the spectrum of risk, analyze your current goals. Do you want to build wealth as quickly as possible? If so, then you may be comfortable with a riskier investment. Are you more interested in a steady stream of income that might someday replace your full-time work or support your retirement years? In that case, look for low-risk deals.
Finally, what is not a myth are the benefits derived from working with an experienced and knowledgeable broker. Just as you have devoted time and effort to your career, they have done the same in real estate. You’ll likely save time, money and a whole lot of frustration and anxiety when you choose to work with a CRE professional—and that’s a fact.