Are you looking at new investment opportunities aside from stocks and mutual funds? For many young professionals (yours truly included), have branched into rental properties, and are have a side hustle as a landlord. Unlike other types of investments, you also have more secure pricing and more stable returns. When all else fails, you can always sell the property and get back your money.

However, it’s not all sunshine in commercial real estate. Before you go off buying a piece of land, let’s dive into a few gotchas!

Due diligence is important

Whether you are renting your property to residential tenants or businesses, there is still a risk on your part because you can’t predict their behavior. There are a lot of stories of tenants who destroy property just before they leave. Fortunately, you have the law and insurance on your side to help you, but it would still be a hassle to take care of. This can be avoided if you do your due diligence properly.

Due diligence means checking all the documents of the rentee to verify their backgrounds, financial history, criminal history and their current finances. The last thing you want is to rent out your space to someone suspicious or unable to pay. There are times when tenants can be stubborn and refuse to leave. In this case, you can go to court and get a writ of possession enforcement assistance. With this, the law will help you to evict a person and get your property back.

Similarly, you also want to do your due diligence when buying the said commercial property. Verify past tax records and have the property checked. The latter is to guarantee that it actually meets certain zoning standards.

Someone can assume your mortgage

If you didn’t already have a property, you likely had to take a loan to buy it. Depending on the circumstances, other people can actually assume your loan, so you have to be careful and avoid the risk of losing your property!

When securing a loan, lenders would ask for collateral. This is basically their assurance that you will pay them. If you cannot complete payments, they can seize whatever properties or assets you have offered as collateral. Putting your mortgage or the title of your property as collateral means that they can foreclose it when you don’t meet the payments.

It doesn’t always mean that your lender can take away your property, though. If you provided a promissory note instead of the mortgage itself, then there is still the chance that the lender will release you of your obligations.

It’s wise to a) not borrow more than you feel confident in being able to consistently pay back and b) have a backup plan, an ’emergency fund’ to help you weather a few months of payments if things don’t work out as intended.

Backup funds is a must

Settling your finances is one of the most important things you need to do when investing in commercial real estate. Even if you intend to profit off it, you need to set aside some additional backup funds in case of an emergency. In your initial setup, there will be expenses that you need to pay whether or not you already have someone renting your property. When you have no prospects, you need to figure out a way to pay for it.

There are various contingencies that you need to do when doing commercial real estate. One of those is cost contingency. This is when you estimate the potential costs for a certain business or investment. There may be situations that you would need to terminate a contract prematurely, whether it is because they aren’t paying their dues or improper behavior. If it happens, you need to find a way to pay for the utilities they are supposed to cover.

Mrs. Money and I have done this with our rental property, and have a slush fund set aside for things like repairs, maintenance and vacancies.

Decide whether you want long-term or short-term returns

Before anything, you have to decide if you want this to be a long-term or short-term kind of investment. That means you have to consider whether this property is something that you can see yourself selling right away or waiting a few years for it to appreciate. Depending on your answer, there are different things that you need to consider.

For instance, short-term real estate investment is best made in established areas that already have predicted growth in them. You take the time to fix it up a bit; then, you sell it once the value has gone up. In contrast, long-term real estate means renting out your space for future gains. It can also mean buying a property in an area that is still being developed to increase its value in the future.

Summary

With this knowledge, you can make sure that your investment in real estate will be worth it. Take the necessary steps to be prepared for this investment!

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