The real estate world can move fast and isn’t uncommon for investors to react and make quick, and sometimes rash decisions. The best way to avoid making mistakes is to be knowledgeable and have a keen understanding of the subject matter.
Here are the top five mistakes that investors make when investing in commercial real estate.
1. Inadequate Due Diligence
Whether the due diligence is on the property itself or in understanding the local market, it is imperative that a potential investor is overly-thorough in their research.
When conducting due diligence on real estate it is important to check the property condition and systems, environmental matters, and structural building components. In addition, be sure to review contract and tax laws, insurance, finance, and accounting, too. Don’t forget to properly assess the local market of the investment property. When checking the local market look at local demographics and trends, population growth, income, employment, traffic, and occupancy levels.
2. Not Underwriting the Current Property Tenants
High potential returns on an investment property are always appealing to investors, but that alone isn’t sufficient to secure a good deal.
Investors must underwrite the tenants that are currently at the location. Examine the financial well being of the current tenants by reviewing their financial statements. This will help gain a better understanding of the tenants’ overall business.
For the real estate professionals who may not have the time, there are companies that collect this specific information and data as a service.
3. Not Being Over-leveraged
It is common for real estate investors to borrow money in order to engage in real estate transactions. But beware, there is such a thing as borrowing too much money.
This is where having a proper deal structure and investment strategy becomes key. By doing proper due diligence and underwriting, deciding on the adequate amount of money to have in reserves becomes easier.
The money in reserve will help protect the investor in the unfortunate circumstance a large tenant moves out or goes bankrupt.
4. No Exit Strategy
Having a strong plan, including a way to exit the investment deal is a sign of a savvy real estate investor. The exit strategy should include an idea of how long it will take, how much money will be made or lost, and how to access the profits.
5. Failing to Hire the Right Real Estate Professionals
Hiring a team of local real estate experts such as commercial real estate brokers, accountants, and attorneys can go a long way to ensure a more safe and rewarding investment.
These are only a handful of mistakes and situations that many investors are faced with everyday. In the fast moving real estate world, it is easy to make quick and sometimes wrong decisions. These five mistakes can be avoided.
During the next lucrative real estate investment, be sure to hire the right professionals, have an exit strategy, do not become over-leveraged, underwrite the property tenants, and conduct due diligence.