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A Guide for First-Time Commercial Property Developers: What Not to Do

By: Brandon Howl

In Toronto today, there is a massive demand for commercial properties, but there is a lack of supply. As the city develops a plethora of residential properties, investors are not as keen as establishing commercial units, whether it's in Leaside, Cabbagetown or the Financial District.

This means that, for the commercial property developer, there is potential for profit.

At the same time, developing commercial real estate is a difficult investment to make. Not only does it require an immense sum of financial investment, you also have to deal with a City Hall consumed by red tape and arrogance unseen in the rest of the Great White North. You have to come to grips with zoning laws, taxes and other matters pertaining to the local authorities.

Indeed, developing commercial property can generate lucrative revenues and profits. The hard part is leaping over the vast number of hurdles that the city installs. Nonetheless, you can do it.

Here are five things that first-time commercial property developers must not do:

Rushing in Without a Business Plan

Let's face it: entering into any type of investment is fun and exciting and your vision for profits clouds your mind. All of us can get sucked into the plight of investing in the hope of more loonies.

However, rushing into an investment without a plan in hand can be detrimental to your success.

Therefore, it is essential you establish a thorough business plan, one that is filled with goals, projections, concepts, financial involvement and many other aspects that can ensure you are entering into commercial property development with a clear objective. If you need help preparing a business plan, visit The U.S. Small Business Administration website for additional details.

Buying in the Wrong Neighbourhood

You see a part of Toronto that is underdeveloped, and this gives you the idea of attempting to invest in a commercial property in this neighbourhood. You're betting that this Toronto area will be hip in the years to come and businesses will converge without any sort of reservation.

Unfortunately, buying in the wrong neighbourhood can send your investment plummeting. It would be great to discover a potential area that can eventually be the go-to place for workers and residents. When it turns out it'll continue to be a dud then you've lost much of your investment.

Here is one tip: according to one study a couple of years ago, if Starbucks opens a location in the area then there is a great chance that this area of Toronto will be an up-and-coming part.

Never Abandon Quality for a Buck

When you're in real estate, you have to concentrate on quality over loonies. In other words, you must refrain from abandoning quality in the pursuit of a buck; otherwise you'll eventually lose money, and potentially face lawsuits down the line if there is something wrong with your unit.

Avoiding the Basic Metrics

When you are investing in commercial real estate, there are two primary metrics that you must hone in on: the rental yield and the return on investment (ROI).

The former is calculated by measuring annual rental income against the value of the property. The latter is how much profit you will make with your initial investment.

Overdesigning & Cramming Too Many Units

Although you never want to sacrifice quality, you should never overdo the design. This means that you should refrain from making your floors out of gold, making your countertops out of granite and making your doors out of platinum. This overdesign is just a waste of money.

In addition, and this is common especially in today's market, you must not cram too many units in your commercial development. Size is something that most companies value, and if they are the size of a shoebox then the startups, SMBs or corporation will just look elsewhere.

Here are two tips: do not overdesign and do not cram too many units.

The paucity of supply and the surging demand for commercial units in Toronto are presenting an incredible investment opportunity for entrepreneurs and those go getters searching for yield.

Despite the enthusiasm you may have right now, you should never be overzealous. You have to take one step at a time, perform your due diligence and be conservative in your estimates. When you go overboard, become greedy and neglect the basics, you'll lose a lot of your money. For more information about the commercial real estate market, it may be worthwhile to invest your time in consulting with an expert.