Investing in commercial real estate is a risky business. From potential lawsuits to a shrinking bottom line, commercial real estate investing is definitely not for the faint of heart.
Done well, it is a lucrative and satisfying business. Gone wrong and…. Well, let’s not go there. With our recommendations, you can avoid some of the most common mistakes commercial real estate rookies (and sometimes experienced) investors make.
Ignoring Local Market Conditions
Location, location, location… nothing fares truer in real estate. A savvy investor will evaluate two important factors in any real estate investment – the market and the property. Of the two, local market conditions trump everything else.
Since every market is different, never assume that a deal technique or property type that is profitable in one market will be similar somewhere else.
Analyzing the demographic trends of population growth, income, and employment in the local market will tell you where opportunity lies. It’s never a good idea to invest in an area with declining demographic trends. Doing your homework here can also guide you not only on the area but also on what type of property types are your best bet.
Inadequate Property Due Diligence
There is a long list of pre-construction issues you need to address before committing to any commercial real estate construction project.
From inspecting site conditions, familiarizing yourself with local regulations, to budgeting and legalities, there’s a lot of pre-work that needs to happen before you decide if the investment makes sense for you.
Don’t make the rookie mistake of thinking you can do this on your own. Hire an expert that will know how to cross his T’s and dot his I’s to protect you.
Making Financial Assumptions
Every investor dreams of hitting the commercial real estate jackpot, of skyrocketing value that no one predicted.
It’s nice to dream once in a while, but a smart investor knows that this is a numbers game. Real numbers that is – not assumptions. Idealizing net income or sub estimating operating numbers can be disastrous for your bottom line.
The same thing goes with over-leveraging. Borrowing too much or using 100% financing for an entry-level deal are good ways to dive head first into a concrete slab. Evaluate the break-even ratio and believe it. A break-even of 80% or more is dangerous territory.
Not Having Several Exit Strategies
Yes – several.
There are many risks involved in commercial real estate investing – plan for any possible scenario. Ideally, your plan will maximize value in the shortest time with the least downside. But in reality, anything can happen.
You can hope for the best, but do yourself a favor and plan for the worst. As part of your due diligence, make sure to document how you would get your money out if things went wrong.
As a commercial real estate investor, you need a team of experts looking out for your best interest. An owner’s representative will focus on what matters most to your total project success, and protect your investment. Let’s talk.