Those of us involved in commercial real estate investing have all experienced one thing in common – we’ve all made mistakes along the way. 5 of the most common mistakes that beginning investors make are:
1. Performing poor due diligence. Not paying close attention to the property condition or cutting corners while inspecting the property is a license for disaster. Take the following steps:
• Order inspections on structural components and building systems
• Examine title, zoning, survey, land use and environmental issues
• Get estimates from professionals on any anticipated repairs or improvements
Here’s a complete breakdown of the Due Diligence Process.
2. Having insufficient market knowledge. Research the local market. Become familiar with the demographics including population, income, and employment to get a sense for future trends.
Make sure that the property you are considering is in a market that is continuing to grow rather than declining. And remember the importance of Location.
Don’t just trust your initial reaction to a property or your own instincts about the market. Make sure that all the research supports the requirements for a profitable acquisition.
3. Forgetting to run your property like a business. Make sure that you keep your tenants satisfied just as you would aim to keep any business customer satisfied.
• Maintain a good property appearance and a pleasant environment for your tenants and their clients/customers.
• Ensure that the budget is being adhered to – that your rents are being collected and that your actual expenses are conforming to the budget.
• Be aware of your competition and make sure that your property stays competitive in the market.
Being passive with your investments can be dangerous. Don’t think that commercial real estate investors can buy an investment and then assume a hands-off position and just watch the checks roll in.
4. Failing to have an exit strategy – or not sticking to it. The time to plan an exit strategy is prior to the purchase of the property, not several years down the road or when an exit becomes necessary due to outside circumstances.
Plan multiple exit strategies based on best and worst case outcome scenarios so that you won’t have to accept a disposition that could cost you thousands of dollars of profit.
Your exit strategy should include:
• your projected profit on the project
• anticipated improvement, repair and operating costs during the hold period
• length of hold period required to realize the return you desire
Analyze your proposed exit strategy to make sure it maximizes the return you can expect on the property.
As the successful commercial real estate investors will tell you, one of the most costly mistakes made is not sticking to the exit strategy when the time comes for disposition. Remember that the exit strategy was prepared based on making the highest profit in the least amount of time. Finalize your strategy according to your plan and you should achieve your financial goal.
5. Having too much debt. Over leveraging by putting too much debt on the property can be lethal. Leveraged deals need to be backed up by sufficient capital or cash reserves.
Every property should be evaluated to understand the break-even ratio.
Break-even ratio = operating expenses plus the debt service divided by the gross potential income
Typically, anything greater than 80% is an accident waiting to happen.
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