5 biggest mistakes first time commercial real estate investors make
Commercial real estate investing is an excellent way to earn passive income and build your
wealth, but it's certainly not without its challenges, especially if you’re a first-time
investor.
Here are 5 of the biggest mistakes I’ve seen that first-time commercial real estate
investors often make:
1.
Not Performing Proper Due Diligence
Before you invest in a commercial property, you have to conduct thorough research and
do your due diligence on the asset.
That means evaluating the property's physical condition, the health of your local real estate
market, the property's potential for generating income or increasing that revenue, and so
much more.
In fact, my commercial real estate due diligence checklist, which you can download for free
at www.tylercauble.com/resources, has over 50 points of inspection on it - each of which
is crucial to determining whether your investment will work or not.
Failing to properly conduct your due diligence can lead to some pretty costly mistakes, which
will make you regret acquiring that asset later on.
2.
Not Properly Accounting for Your Property’s True Costs
Commercial properties are complex and can come with a wide range of expenses, including
property taxes, insurance, maintenance, and repairs - just to start.
I see far too many first-time investors underestimate how much these items will end up costing them,
which will almost certainly lead to financial strain and possibly a negative cash flow situation.
And I know you’re not in this to lose money!
You’ll want to properly underwrite your investment prior to taking your next steps
and, if you’re like me, it’s nearly impossible to keep track of all of those numbers in your
head.
So, put together your own spreadsheet or get yourself one of my underwriting models, which
I’ll link to in the description below.
Remember - any deal is only as good as you underwrite it to be.
3.
Not clearly defining your investment strategy
Before buying a piece of commercial real estate, you’ve got to have a clear investment strategy
in place.
This means writing out your investment goals (we put this in our offering memorandums,
which is basically like a business plan for commercial property investments), understanding
the amount of risk you may be undertaking, and fully understanding your local real estate
market.
Time and time again I see new investors say, “well, the zoning allows us to do just about
anything here, so we have the flexibility to do whatever we want!”
And, while it’s good to have that flexibility, you can get analysis paralysis and never do
anything with the property.
You could renovate and flip, perform a commercial BRRRR, redevelop the site, land bank it, owner
occupy the space - there are many different ways to go about the process.
So, pick your strategy, which you can find more about here, and stick to it.
Without a clear investment plan, you just won’t be able to make informed investment
decisions.
4.
Not having enough cash reserves
This one basically comes back to properly underwriting your project and ensuring you
have enough cash on-hand as you take it on.
Commercial real estate investing requires a significant amount of cash not only upfront,
but also as you’re undergoing any renovations or vacancies on the property.
These costs can include your down payment, closing costs, negative carry, and reserves
for any unexpected expenses.
These are all items that you really don’t need to be worrying about while you’re working
to make your investment successful and, if you have to have a cash call from your investors,
it’ll only upset them and plant the seed that you may not know what you’re doing.
Not having enough cash in reserve can lead to some serious financial strain, so be sure
to over-raise from your investors or bring enough to the table to keep your project stabilized
in the beginning.
5.
Not having a professional team in place
Your team is everything, especially when it comes to commercial real estate projects.
Investing in commercial properties can be rather complex and really requires you to
have a team of professionals to navigate the process.
These members can include: * a real estate attorney
* a property manager * a commercial real estate broker
* a contractor * an engineer
* and so much more
It’s nearly impossible for you to become a professional at every level of commercial
real estate investment and you’d probably rather not create multiple full-time jobs
for yourself, anyway.
It’s just not the best use of your time when you can leverage others’ expertise
to not only make your projects better, but to also spend more time finding that next
deal.
Not having a professional team in place can lead to some expensive mistakes and difficulty
managing your investment.
There you have it - the 5 biggest mistakes I see first-time commercial real estate investors
make.
Keeping these in mind as you start your investment journey can increase your chances of success.
Keep in mind, too, that investing in commercial real estate is a long-term game, so it's important
to take the time to properly do your due diligence, have a clear investment strategy, and have
a professional team in place to guide you through the process.
If you want to dive further into underwriting commercial real estate investments, check
out this video here: