04 Apr Putting your Money at Risk on Your Next Commercial Real Estate Deal: A Cautionary Tale
Estimated Read Time: 5 Minutes
In the complex world of commercial real estate, the line between making a profitable investment and incurring a significant loss due to an inadvertent mistake can be surprisingly thin.
In the complex world of commercial real estate, the line between making a profitable investment and incurring a significant loss due to an inadvertent mistake can be surprisingly thin. While there are countless guides on how to succeed and make a profitable investment, understanding how to fail can provide equally valuable insights. Want to know the formula for failure? Here are just a few ways to lose money or fall into some common traps on your next commercial real estate deal.
1. Skip the Due Diligence
Nothing speeds up a commercial real estate deal like skipping the due diligence phase. Who needs to spend weeks or months analyzing property documents, assessing environmental risks, or evaluating tenant leases, right? Skipping due diligence is an approach that promises the (not so thrilling) possibility of encountering hidden liabilities that can turn your investment into a bottomless money pit.
Moral: Get support with your due diligence from an experienced agent who knows the process of vetting a property inside and out. He/she will give you guidance on the questions you need to ask and information it is so important to obtain. You’ll make critical discoveries that inform your decision-making process.
2. Ignore Market Trends For a Profitable Investment
You’ll lose money if you stay blissfully unaware of market conditions and trends. Investing in a declining market or choosing a property type that’s oversaturated can ensure your investment remains vacant or underperforms.
Moral: You don’t have to be the foremost authority on market trends. That’s why you work with an agent. Your agent will have access via their brokerage to the latest and greatest trends and can help equip you with the information to make good decisions.
3. Overleverage Your Investment
Why use your own money when you can borrow as much as possible? Overleveraging your investment can magnify losses, especially if the market takes a downturn. The thrill of juggling high loan payments with low rental income is a pathway to financial excitement… but not the kind of excitement you are looking for.
Moral: You need someone in your corner who can support you in finding the right deal without compromising your financial stance. This means you’ll want to work with an agent who has your best interests at heart to acquire a profitable investment.
4. Choose the Wrong Partners
Partnerships in commercial real estate can leverage skills and resources, but choosing partners who lack expertise, financial stability, good communication skills, or ethical standards can introduce a world of chaos into your next commercial real estate deal. Misaligned goals and poor communication can derail any project.
Moral: You want to hit it off with your commercial real estate partner. Don’t settle for anything less. A strong positive relationship can make an incredible difference in your experience and your outcomes.
5. Dismiss Legal and Zoning Regulations
Dive into your project without considering pesky details like zoning laws or building codes. The fines, forced alterations, or demolition orders you’ll receive are guaranteed to deplete your funds and add a layer of unanticipated complexity to the investment process, right? Sometimes individuals purchase property only to discover that they cannot use the property for their intended purpose.
Moral: Again, you don’t have to be an expert, but you want an expert in your pocket. Make sure you are working with a team that knows where to find the answers for building codes and zoning to help give you an edge in your decision making.
6. Invest Based on Emotion
Emotional attachments can cloud judgment, leading to overpaying for a property or investing in locations without growth potential.
Moral: We don’t want to dismiss the importance of feeling good about your commercial real estate deal, but it is also important to make sure you are making the right choices. Work with a partner who can help guide you through the process, so your gut and your financial advisor are both happy.
7. Ignore Exit Strategies
Venture into your next deal without any thought of how you’ll eventually exit. Without a clear plan for selling or leasing the property, you may find yourself stuck with an underperforming asset that drains your resources over time.
Moral: Begin with the end in mind. Ask your commercial real estate partner about the path ahead and get the advice you need to think about the big picture.
8. Forget To Acquire Professional Advice
Why hire experts when you can go it alone? Avoiding the counsel of experienced real estate advisors, attorneys, accountants, financial planner or brokers can lead you to overlook critical aspects of the deal, ensuring that your journey is fraught with perfectly avoidable pitfalls.
Moral: Paying for a professional might look unappealing at the outset, but when you look at the pitfalls of navigating a commercial real estate deal without the right guidance, you stand to lose a lot of money. Get the right support. You’ll thank yourself for it later.
9. Misinterpret the Cap Rate For a Profitable Investment
Placing too much weight on a capitalization rate as an investment is a mistake. Would you plan a weekend cookout based on the weather you are experiencing on a Wednesday? Misunderstanding or misapplying the capitalization rate (cap rate) can lead to poor investment decisions. Misreading this crucial figure can lead to investments that are far less profitable than anticipated – and it might rain on your fun!
Moral: Listed cap rate can be misleading (at best) or even completely inaccurate. Work with an experienced agent who knows how to deliver the right numbers to give you the “real feel” of your cap rate.
10. Neglect Property Management
Once you’ve acquired your property, the next step to losing money is to neglect its management. Poor maintenance, ignoring tenant requests, planning for capital expenditures and failing to collect rent on time are great strategies for diminishing your property’s value and appeal.
Moral: Neglect is one of the fastest paths to declining property values. When you invest in a property, be sure to create a plan for property management to maintain or even maximize your investment.
In Closing
This guide, of course, highlights practices you should avoid to putting your hard earned money at risk of loss. Navigating commercial real estate deals requires diligence, expertise, and a strategic approach. Let our team serve as your expert support in your next commercial real estate deal to help you make a profitable investment.