Interest in buying commercial real estate is growing. Pa given Nikoliers consulting agency, in the first half of 2023, the volume of investment in commercial real estate in Russia became a record for the last five years and amounted to $3,149 million, or 242 billion rubles. What risks and pitfalls can you face along the way?
The main risks when buying commercial real estate
1. Tenant risks
One of the key issues facing investors is the difficulty of finding a reliable tenant. The possibility of losing income due to the inability to rent the premises or the care of the current tenant is a very real threat to your business.
How to simplify the search for a tenant and reduce risks?
- Analyze for which business niches your premises are suitable: are there any direct competitors nearby, which CA inhabits your area. Post this information in ads on Tsiyan, “Avito” and other aggregators.
- Study the requirements of large retail chains: if the area of the premises is from 200 square meters. m, there are entrance, loading and unloading areas – you have a chance to get a reliable and solvent tenant. Make a newsletter with the offer of your object: most likely, the answer will have to wait a long time, but the result is worth it.
- Check the counterparty for solvency and experience in business: if the premises are rented by a “newbie”, there is a high probability that the deal will not work out and in a couple of months you will again be faced with the question of finding a tenant.
- Some companies prefer a guaranteed tenant: under the terms of the contract, if the tenant leaves, the company offers free help in finding a new one. Buying commercial real estate that is already rented out looks especially attractive to novice investors: this type of investment can be considered relatively passive, as it does not require the need for direct management actions on the part of the investor and reduces the risks associated with independent search for a tenant.
2. Unscrupulous sellers
It is important to remember that in real estate there is a risk of encountering unscrupulous sellers who offer properties with serious problems. All commercial premises should be carefully checked in order not to run into fraudsters.
What to pay attention to:
- check the legal entity or IP (now many banks offer similar services): whether there are no open court cases, whether the counterparty is entering bankruptcy proceedings;
- ensure that the owner actually has 100% title to the property he is selling;
- check the object for encumbrances: there is often a situation when the real estate object is encumbered – it can be a pledge for a loan or mortgage in a bank or a seizure of the property (in case of non-payment of fines, utility payments by the owners, division of property during a divorce or hereditary procedures). Such circumstances may slow down the transaction or make it impossible. In order to check the object for encumbrance, you can use the portal Rosreester.
3. Technical risks
Commercial real estate requires maintenance and repair. Possible technical problems, such as damage to the roof, problems with opal or electrical supply, may require a significant financial investment.
When it comes to the purchase of commercial real estate in a new building, situations are not uncommon when the real area of the object does not correspond to the declared one and there are multiple defects, for example: problems with glazing, uneven walls and other mistakes made by the developer at the construction stage.
In such a case, the buyer has the right to turn to an independent expert commission and, based on its conclusion, demand that the developer eliminate defects.
If the property is not purchased in a new building with a long period of operation, it is necessary to pay attention to the degree of wear and tear: even subtle defects, for example, mold on the walls, can lead to the need for large investments in repairs in the future. Look for companies that take all the risk and carry out major renovations of buildings before selling.
4. Other violations
Pay special attention to real estate objects that have been transferred from residential to non-residential. Such a procedure is quite complicated and is very often carried out with serious violations. For example, if the owner did not properly conduct the legally required general meeting of owners in an apartment building, the transaction can be contested by the residents already after the purchase or, even worse, after the renovation and opening of the business.
How to avoid risks when buying commercial real estate
If you decide to invest your funds in the purchase of commercial properties, follow the following algorithm that will help you minimize your risks.
- Research the real estate market in your chosen area. Assess demand, supply and current prices. Take into account development trends in the area and real estate price forecasts.
- Make sure the title deeds are in order and there are no legal encumbrances. Check the seller’s package of documents confirming ownership of commercial real estate and the correctness of their registration. And it is also important to clarify whether the object is considered to have debts related to the operation or ownership of the purchased object. For example, debts for electricity or heating. If necessary, consult with a lawyer or real estate professional.
- Conduct an inspection of the object from a technical point of view. Assess the condition of the roof, heating systems, electricity and other important aspects. If necessary, conduct an independent examination.
- Assess the property’s profitability potential. Calculate the return on investment, taking into account current rental rates and possible maintenance costs.
- Consider possible unexpected costs associated with maintenance and repair of the property. Reserving finances allows you to avoid financial difficulties.
- Prepare a property management strategy. Develop a plan for servicing and attracting tenants.
Investing in commercial real estate is not only a way to increase income, but also a responsible decision that requires an individual approach and careful research.