14 Sep CREPN 109 – 5 Mistakes to Avoid When Investing in Commercial Real Estate with Doug Marshall
Posted at 07:00h in Podcast
Commercial Real Estate Investing involves many opportunities to make mistakes. Here are 5 mistakes to avoid. [x_audio_embed][/x_audio_embed]
Mistake #1 – Analysis by Paralysis – Getting bogged down in the minutia.This type of investor believes that the more information they get on the property, the better will be their purchasing decision. Unfortunately, in most instances, that’s not the case. As the saying goes these investors, “Can’t see the forest for the trees.” They are too involved in the details of the purchase that they forget the big picture. Savvy real estate investors don’t get caught up in the minutia. They generally focus on a small subset of issues to get comfortable with, and this determines whether or not they’ll make an offer on a property. Not only does the detailed oriented approach complicate the buying decision, it also lengthens the time necessary to come to a decision. Many times, another buyer comes along while Mr. Analysis-by-Paralysis continues slogging through the details and “steals” the property away from him. In reality, the seller is tired of all the nitpicky questions the original buyer has bombarded him with. He is relieved someone else is swooping in to save him from the first buyer.
Mistake #2 – Doing only a cursory due diligence on the property.The opposite of the first mistake is the investor who does only a cursory due diligence on the property. This usually takes two forms: the first mistake is not reviewing the historical operating statements and current rent roll carefully. It’s not uncommon that a property’s Profit and Loss Statement is not transparent to the average reader. Lots of important information can be hidden in the property’s operating statements. They need to be teased out by asking the seller good, penetrating questions. For example:
- If it’s not obvious ask the seller what the vacancy rate has been over the last three years? Surprisingly, there are many operating statements that don’t show vacancy.
- Why did a particular operating expense increase/decrease dramatically last year compared to previous years?
- Are their one-time expenses in the operating statement that should be removed from the projected operating budget?
Mistake #3 – Not having a consensus among the investors about their investing strategy for the property.If you are buying a property with a group of investors make sure that those who are in the investor group have the same goals and exit strategy as you do. It’s not uncommon to find out after it’s too late that individuals in the investor group have different motivations for owning the property than you do.
- Some may want to fix and flip. Others may want to hold the property long term.
- Some may want to have maximum leverage. Others may want to have modest leverage in order to maximize cash flow.
- Some may want to refinance at the earliest possible opportunity to take cash out. Others may want to pay down the loan over time.