When it comes to commercial real estate investing there’s an endless list of possibilities of what could go wrong. Of course, you want to be on the winning side of things, so we have made a list of the top 10 mistakes to watch out for.
Before we share it, I’d like to give credit to one of my mentors, Scott Meyers, with the Self Storage Academy. He puts on incredible meetings to learn about storage, if this is an asset class that you are interested in learning more about. Check it out here: http://www.selfstorageinvesting.com/
And now, on to the list:
1. Improper Valuation
This means not knowing the market of the particular asset class well enough.
For example, let’s say you have identified two different markets, one in New Jersey and the other in Mississippi, where you’re going to invest in a self-storage facility. Regardless of how similar, or even identical the two properties appear, you can’t assign them an equal value. By default, their values will be different because of rent prices, property taxes, operational expenses, labor costs, and so on.
In short, if you were to come to New Jersey and buy something based on your Mississippi valuations, something’s not gonna add up! You’re either going to wind up not getting the asset because you’re offering too little — or you will end up paying too much.
2. Not Doing A Feasibility Study
By default, you’re almost always going to have to do a feasibility study with commercial real estate, unless you’re doing entirely equity investing. This is because savvy investors will want to see a third-party feasibility study done by someone who has no monetary interest whatsoever. Banks and other institutional lenders especially will insist on it.
If you’re doing debt financing, you’re going to need a feasibility study, bottom line. Even if you’re doing equity financing, you’re going to want that third party opinion — especially if you’re looking at hundreds of thousands or millions of dollars put into the project.
3. Bad Deal Structure
What do I mean by that? It could be the debt, the operations, etc., but let’s focus on the capital structure (how you’re financing it).
Perhaps you’ve promised too large a return to your investors, or you promised returns too soon. Are you going to be able to guarantee an 18% return from day one? Probably not.
You’re going to get yourself into trouble in almost every case, if your deal is structured poorly or you’re overpromising.
4. Not Doing Your Due Diligence
Let’s say you’ve made an offer, now you have 60 days to do your due diligence. What could that include?
For starters, maybe you find out there was an old gas station built nearby and the current owner didn’t know that. So now you’re gonna have to deal with that, so maybe an environmental studies look is in your best interest. If you’re getting any kind of outside lending, it certainly will!
Other factors to consider are traffic, city planning, city regulations, etc. We have a project going on right now that has a checklist of due diligence items over nine pages long. Nine pages!! We’re leaving no stone uncovered, and that doesn’t even begin to tell the whole story.
The point is, if you don’t check into and research everything for each investment, you can get into some hot water.
5. No Market Analysis
That should be done in a feasibility study, but you should also be doing your own.
Personally, I never rely 100% on the feasibility studies we have requested. I mean, those guys are human, too! They make mistakes just like anybody else.
When you’re bringing other people’s money into the deal, it’s too important to leave it up to just one person’s opinion.
6. No Inspections Done
First step, you’ll want environmental and geo-tech surveys done to make sure the soils are properly positioned for construction or add-ons.
These kind of inspections need to be done to ensure your investment is protected.
7. Inexperienced Operations Management
In our case, we only want to deal with professional management firms that have a proven track record of accomplishing the kinds of things we’re after.
We interview them, ask for references, and ensure those operations are handled by individuals who know what they’re doing, and do it well.
This point is: you want the BEST third party management. The kind that knows how to market to get renters. And more importantly, the ones that know how to market to smart phone and social media users.
8. Breach of Contracts
Contract negotiations have pitfalls. You could even have a contract breach during the due diligence period.
Let’s take the example of a self-storage facility.
Say you have a client renting unit 202 of your facility. During an auction, things get mixed up and somehow their unit gets tossed into the mix, and sold along with all their stored possessions.
In that case, you could face some very serious penalties. I’ve even heard of similar penalties exceeding $100k, regardless of the value of the actual possessions!
9. Not Accounting for Future Tax Increases
This is true especially for commercial properties.
Another example with self-storage facilities: let’s say it was built 10 years ago and appraised at $1 Million. Of course we cannot get away from inflation, so you now buy it for $2 Million. You might have just doubled your property taxes.
What does this mean? You are hugely cutting into your bottom line profitability. You MUST factor this in with each investment.
10. Not Using Professionals
What do I mean here? The proper legal and CPA help.
It is crucial to hire attorneys and accountants well-versed in real estate issues.
More Mistakes You Don’t Want to Make with Real Estate Investing
- Procrastinating … you could lose a great deal on a property
- Aim, aim, aim and never firing
- Not starting the business plan sooner
- Choosing a friend as a partner!!!
- Trusting the broker’s numbers
- Trying to do too much (not delegating things enough to people who are ACTUALLY good at them!)
- Not disclosing problems to your investors RIGHT AWAY: they won’t trust you for more investments if you don’t communicate everything
We hope this top 10 list is your pocket-sized cheat sheet for any real estate investments in your future. Even though we are all meant to learn from mistakes, it is nice to learn from someone else’s mistakes!
So that is why you want to get involved in networking. There is so much to learn from others. On that note, you can count on someone being on your side (like Smart Asset Opportunities) to guide you through these adventures.
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