Your goal as a real estate investor is to assemble a healthy portfolio that allows you to make money without having to spend too much money. So when an opportunity arises that seems to offer just that, it's natural to want to jump on it. But that old saying "you get what you pay for" applies to commercial real estate, too, so if a deal seems like it's too good to be true, chances are, it is. Here are a few red flags to steer clear of.
1. A building with a heavily discounted price
Sometimes, the combination of timing and luck allow you to snag a commercial property at well below market value. But if you're presented with the opportunity to buy a building at what reads like a significant discount, it's probably because there's some sort of underlying problem -- either with the structure itself or the land it sits on.
A property with major repair issues lurking, for example, may be something its owners are eager to unload, but in buying it, you could take on significant expenses that eat away at your bottom line. Furthermore, if you're presented with a below-market property, it could be the land it's on poses a health hazard.
2. Land that's well below market value
Just as a below-market property should set alarms off in your head, so too should you be wary when buying land that's priced almost too reasonably. If you're given the opportunity to buy land at a discount, it may be protected from an environmental standpoint, thereby limiting its use. Or, the land itself is factory-adjacent, making it less appealing. (Just because you can't see a factory half a mile down the road doesn't mean you won't smell that factory sometimes.) Do your research when the numbers seem remarkably low.
3. An opportunity in an up-and-coming neighborhood
Buying in an up-and-coming neighborhood will often work out well for real estate investors and developers. But when you go this route, you run the risk the area will be slow to come to life. Also, zoning laws may get in the way of the establishment of new businesses, thereby devaluing your investment over time.
If you're going to buy in a transitional area, research that neighborhood thoroughly. Find out how its schools are ranked and what its sources of municipal revenue look like. Also, talk to other investors and developers to see where they are -- if they're being roadblocked, chances are, you will, too.
The Millionacres bottom line
Every so often, you may find that a truly incredible real estate opportunity falls in your lap. But before you get too excited, do your due diligence. A deal that reads as too good to be true is probably either a scam or a giant mistake waiting to happen.