8 Dos and Don’ts for Commercial Real Estate Investors
8 Dos and Don’ts for Commercial Real Estate Investors
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Here are some ways to avoid many of the common mistakes that new commercial real estate (CRE) investors tend to make:
- Don’t fall for the “get rich quick” infomercial hype. While there are definitely profits to be made in the CRE market, it requires knowledge and a determination to search out that knowledge to do so. Investing in real estate is a long-term strategy, not an over-night get-rich-quick scheme.
- Do develop a plan for your CRE portfolio. Avoid purchasing properties just because they seem like a good deal. Instead decide what kind of properties you want to invest in and what strategy you want to take for your portfolio and then search out properties that fit with that strategy.
- Don’t try to go it alone. Especially if you’re just starting out, it’s good to have a network of professionals who can provide support, especially in areas that you might not have direct experience with yet. This includes CRE brokers, appraisers, closing attorneys, lenders, contractors, and property management teams. Establishing a relationship with a local hard money or private capital lender can be especially helpful because not only do these lenders care more about the relationship they have with their borrowers, they also usually have years of experience analyzing real estate projects, so if they are hesitant to approve a loan for your project, you might want to think twice about it.
- Do take time for due diligence. Research is one of the keys to CRE investing success. The last thing you want is to encounter a costly surprise after you’ve purchased a property. Title insurance can be helpful with this as it will help assure that there aren’t any existing liens or other issues with the title of the property. It is also easier (and faster) to get your loan (be it conventional or private) approved if you’ve already gathered all of the financial documentation that your lender will need to review beforehand.
- Don’t overpay for properties.
- Do allocate your cash flow. Budget sufficient funds for expenses such as monthly loan payments, taxes, insurance, and advertising/marketing costs. This helps insure that your property remains an asset rather than a burden and is even more important if you are planning any sort of rehab or improvement projects on the property.
- Don’t close your mind to other opportunities. Just because a rental property was previously put to one use (e.g., as a medical office suite) doesn’t mean that it can’t be repurposed for a different type of tenant. This is especially true with rentals to marijuana tenants, who often seek out unconventional locations to avoid the skyrocketing rents for the typical warehouse spaces.
- Do plan for the worst-case scenario. Miscalculations and underestimations cost you real money in the CRE industry, so be conservative in your planning, especially when you’re new to CRE investing: give yourself more time and more funds to complete renovations or improvements and develop back-up exit strategies for your short-term loans in case the first one falls through.