Every real estate investor, whether they are working in the residential or commercial markets, wants to minimize the risk of losing money on their investments. There are certain safeguards you can take to accomplish this goal but no investment can totally be made risk free. You want to avoid the obvious oversights. Here are some things every commercial real estate investor should do to help avoid costly mistakes.
Conduct your Due Diligence
Due diligence is the process you go through when verifying the financial documents of the property, performing a physical inspection, and checking out the legal aspects of the property such as the status of the title. Over ninety percent of all commercial real estate deals die during the due diligence process. Normally because some statement of fact about the property the seller made to the buyer turns out to be either untrue or exaggerated.
So failing to do your property due diligence can be very costly. You may end up buying a property that’s a money pit. However, when done correctly, due diligence can help you avoid certain risks.
This seems simple enough but overpaying is very common among new commercial real estate investors. If you are buying apartments, make sure you are aware of what price you are paying per unit. If you’re buying a shopping center, make sure you know how much you’re paying per square foot. In both cases see what the recent market closings value your property at and get good comparables.
Paying too much will lock up the property’s cash flow for a long time and prevent you from making future investments due to a lack of liquidity.
Be an expert or get one on your team
You or someone on your team must know your market inside and out. Not having this knowledge is setting yourself up for failure. Before you close on your first deal make sure you know the following:
- How competitive your rents are with other similar local properties.
- When and if there’s a “slow season” for rentals in your area so you can plan ahead.
- Whether there’s a rent control ordinance in your city which would inhibit you from raising rents as needed to cover expenses and increase your profit margin.
Have several exit strategies
Keep them flexible and don’t lock yourself in to only one way to remove yourself from this investment when the time is right. Market conditions change. Your personal circumstances can change rapidly as well. So don’t get wrapped up in executing just one exit strategy because when the time comes to implement it, it either may no longer apply or may no longer be available.
Where are you in the real estate cycle?
There are four parts to any real estate cycle. They are expansion, contraction, recession and recovery. Know where your particular city is in this cycle and you will know whether you should buy, sell, hold or dump your investments. Each part of the cycle demands that you pay detailed attention to your investment decisions. Understanding real estate cycles helps you take the correct actions with the best timing possible.
Risk proofing your commercial real estate investments requires taking the time to do your research, gather your facts, and then make educated decisions.
Daniel Doran is a 20+ year veteran in the real estate industry. He is a previous owner of a law firm, mortgage and title company. Daniel has also written several books on mortgage modification, short sales and real estate investing. He currently specializes in Commercial Finance and Real Estate Development and is a graduate of Manhattanville College and Brooklyn Law School. You can contact Dan at Buildings By Owner.