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Top Priorities For Due Diligence: A Guide For Commercial Real Estate Investors
Last Updated on: September 20th, 2024
Commercial real estate can be a high-value investment opportunity for savvy investors. But it also entails immense risk. Therefore, investors should go the extra mile with due diligence. It involves investigating every aspect of a property and the market to assess hidden risks or unexpected surprises that could cause financial losses.
But do you really know what red flags you should look for in an investment property? Unfortunately, investors often miss out on due diligence processes and overlook important details, leading to costly mistakes. However, knowing your priorities puts you in a better place. Here are the factors to assess during the due diligence process.
Check Property Price
An overpriced property is a red flag you must not ignore. In a competitive market, you may want to overpay for a property in the hopes of getting a good deal. However, overpaying can significantly impact the return on investment.
You may also have a tough time obtaining financing. According to a report by CBRE, overpaying for a property can lead to lower returns, increased risk, and extended holding periods.
Look At The Property Condition
Poor property condition is another factor that should be on your due diligence checklist. A building with structural issues or maintenance requirements can be a significant liability for commercial real estate investors.
Besides spending money on repairs, you may have a daunting time finding tenants. Selling such properties down the line is equally challenging as you may not find buyers.
Address Environmental Concerns
Another due diligence factor to consider is environmental concerns. For example, soil or groundwater contamination can lead to expensive cleanup costs. The Environmental Protection Agency (EPA) estimates that cleanup costs for such properties can range from $75,000 to over $1 million.
Moreover, it can even make a property unsuitable for development or leasing. Checking Wetlands Mapper before investing in a property is a good idea. Also, buy only from reputable developers to ensure environmental compliance.
Consider Tenant Turnover
High tenant turnover or vacancies are a reason to worry for a real estate investor looking for commercial properties. A high turnover rate indicates issues with property management. Similarly, high vacancies highlight problems with its location or amenities.
You must surely skip such investments because they may fail to yield the expected ROI in the long run.
Investigate Legal Or Regulatory Issues
It is essential to investigate legal or regulatory issues related to a property before sealing a deal. But investors often fail to pay attention to them if a deal looks great.
A report by the American Bar Association states that the average cost of a commercial litigation case is $150,000 to $250,000, with some cases even costing over $1 million. So you will definitely want to avoid anything that gets you into legal trouble.
Remember that commercial real estate due diligence is a critical component of successful investment. Skipping these elements means you may ruin your investment portfolio. Follow these due diligence factors to mitigate risk and ensure a higher return on investment in the long run.
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