Both beginners and seasoned commercial real estate investors are prone to making various mistakes that can prove to be quite costly.
If you are just getting started with commercial real estate investing, now is the time to learn about the most common mistakes made by beginners so you can avoid making them. How you go about choosing a property to invest in requires understanding market conditions and keeping within your financial plan. Knowing how to perform due diligence including carefully checking your calculations and not overleveraging are equally important. Finally, never get into an investment without an exit strategy in place, in fact more than one.
You must always consider the worst case scenario when selecting property, because that can often become the reality. Without careful attention to these aspects, or having the talent to hire those with expertise to help, you could find yourself in a situation with no way to maneuver your way out of. You’ll only become a seasoned commercial real estate investor if you can avoid these traps and live to make the ones that even experienced ones can make.
Experienced But Not Bullet Proof
After you’ve had a few successes under your belt in which you used well-honed market knowledge, exemplary due diligence skills, careful financial calculations, and a good plan in place, you may think you are ready to tackle the next commercial real estate investment. You might be wrong, especially if you make the kind of subtle mistakes that can undermine the profitability of your past and future investments.
One of the mistakes that many investors make is not recognizing that the real estate market is dynamic. There is no promise that what worked in your investment strategy yesterday will work today. You must continue to keep a watchful eye on the real estate market and continually surround yourself with good partners.
Another mistake is not keeping as close of an eye on the current property portfolio while you reach for something that just might be biting off more than you can chew. It is tempting to keep using leveraging to grow your portfolio, but be careful you are not building a house of cards on a sandy beach.
Building a Solid Foundation
Thinking further about that sandy beach, don’t forget that just as building a home on sand is a foolish step, so is investing in commercial real estate without first building a strong foundation. If you have a “make it up as you go” mentality and more of get rich quick goal than an interest in serious planning and long-term profits, you are attempting to build on quicksand. That rarely works, actually make that never, despite what the late night infomercials tell you.
Part of building a solid foundation means putting together a team of professionals. If you try to go it alone, you’ll quickly find that at least a couple of the hats needed don’t fit very well. Are you prepared to locate properties, appraise them, inspect them, manage them, repair them and so forth? Do you have all those talents or will you be making the tragic mistake of winging it? Just one mistake along the way could land you with a lemon of a property that is a money pit or worse. Unless you plan to take years educating and training yourself in all the nuances of commercial real estate investing, you are far better off staying out of those shark infested waters.
Commercial Real Estate Investing Without the Foundation
You’re probably wondering what to do now if you read that last sentence and said to yourself, “But the market is prime! I don’t have years to learn!” If you don’t have the time, or the interest in building that foundation to avoid real estate investment failure, you are not out of the running. The solution that will keep you from avoiding the lethal mistakes of commercial real estate investing is turning to a commercial real estate fund rather than go it alone.
You will still need to have some knowledge about the industry, but rather than a working knowledge of all the components, instead you’ll just have to learn how to choose a quality, well-managed commercial real estate fund. You get the one major thing a strong foundation real estate investing plan needs, a superb team of experts, only they are not just working for you. They are working for a group of investors just like you and thus have the ability to go after the types of properties that you’d likely never be able to consider on your own.
If your working knowledge pales in comparison, or you don’t have a very high risk tolerance, your best bet is turning to real estate professionals. A commercial real estate fund managed by a team of professionals each with their own unique talent gives you a much safer way to include real estate in your investment portfolio.
As they convert profits and income flows into additional properties and investments, your investment in the fund grows until you are ready to sell it. Being able to sell your interest in a fund makes this perfect for those that might need ready cash down the road as well. You won’t have to wait on a building to sell to have the cash in hand that you need for an emergency, for example.
Just as it is safer and easier to manage a portfolio with mutual funds instead of individual stocks, it is equally safer and easier to invest in commercial real estate with a fund than search for individual properties on your own. There is no better way to avoid the mistakes of commercial real estate investing.
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