If you have been looking for a way to boost your self-directed IRA, investing in commercial real estate may have crossed your mind. Here are five tips you need to know before buying commercial real estate.
Find a Mentor
This first tip is crucial. Find someone who has already invested in commercial real estate and will see things a novice will not. Commercial real estate investing is not for the faint of heart. Real estate is a complicated industry, and it’s common for new investors to struggle. As Do Hard Money explains, “New investors don’t necessarily understand the importance of timelines or what various terms mean. They often improperly word contracts. And most of all- they don’t know how to recognize a great deal or how to walk away from a bad one.” The right mentor can help bridge the gaps in knowledge that you have as a new investor.
Mentors can give you wisdom and introduce you to resources that may not otherwise be available to you. If you need more help, take a personality or aptitude test that can help you see what you need to work on.
Due Diligence – It’s important!
Most people don’t buy their first home without first researching the area where the house is located. The same goes for commercial real estate. Some things to consider:
- Does the property have any pre-existing environmental issues? – You can invest in an environmental report before the purchase and potentially stave off a pricey lawsuit.
- Get a survey done to make sure the title is accurate and you have a complete picture of what you are investing in.
- Is the property zoned for the proper use? – You can obtain a zoning ordinance from the local zoning office. If the zoning record is complex or the commercial property is not zoned to meet your needs find a lawyer that understands local zoning laws and can help contact the local zoning board for approvals.
Speaking of lawyers — your lawyer is your friend. Talk to him or her about whether your assets are properly protected. This goes for your personal assets such as your home and any other properties or assets that you own or have a share in. Make sure they are separate and/or safe from potential lawsuits.
Consider Your Portfolio
According to Accuplan IRAs, few IRA custodians permit direct ownership of real estate or other non-traditional investments in an IRA, so investing in a self-directed IRA LLC is usually the only choice. Don’t just buy real estate to have it on your portfolio. Buy it to make an income and/or profit. Ask these questions:
- Is the property currently making a profit? – If not, what is needed to turn the loss into a profit?
- Is the current use for the property using its full potential?
- Is the value on this property trending up?
Keep Up on Repairs
Once your hard-earned money is invested in commercial real estate you need to take care of it. Make sure you have a plan in place to take care of repairs that will come up as well as general upkeep. Go over this before you make your investment so you have an idea of how involved this will be. There are certain maintenance requirements that can help you avoid costly repairs. For example, regular maintenance could help you avoid potential water damage from leaks, improve the efficiency of your HVAC system, and extend the life of your parking lot. Ultimately, keeping up on necessary repairs will allow you to save money and protect your investment.
There is always more room for commercial real estate. The current business climate is heavily populated with entrepreneurs, and they need a space to get started. If commercial real estate has peaked your interest in diversifying your self-directed IRA these five tips will get you started.