Investing in commercial real estate can be one of the most lucrative decisions an investor can make. However, there are many ways in which you can lose money and there are some all-too-common investment mistakes that even seasoned pros make. Whether you have one property in your portfolio, or one hundred, you always need to make sure that you avoid these common mistakes. Here is LCI Realty’s list:
Focusing Too Much On Gross Income
This one comes first because it’s one of the worst investment mistakes you could make. Seasoned investors might be able to spot what’s wrong but far too many new investors focus on the gross income, rather than the net income after expenses. New investors aren’t entirely to blame, as many brokers and agencies will advertise a property getting certain returns based on projections, rather than actual returns. Smart commercial investors will way current projections and actual numbers against their expenses to make sure the property is worth it. Even a profitable property in the current year may set investors back heavily with property taxes or unexpected maintenance, so make sure you aren’t chasing the gross income on a property you’re thinking of buying.
A Lack of Due Diligence Before Investing
Building off of the first common investment mistake in this blog, it’s all too common for new investors to neglect the due diligence they need to do on a specific property. If a broker or an agency is only providing projected gross income, it’s likely that there are hidden factors in operating statements that investors need to look out for. One thing that investors need to be certain of is the vacancy rate and how that’s affected the operations. Due diligence also requires investors to visit the property and physically inspect all the vital systems to make sure that they are in good working order.
Not Understanding Your Location
An almost stand alone aspect of due diligence you need to do before investing is to examine and understand the property you want to purchase and not just as a potential investor. One of the most common investment mistakes is to simply see numbers and a building, without going to deeper in analysis. If there is an intended use for the building you wish to purchase, the property must have the proper amenities for that use and meet the right zoning requirements. Consider the location and what’s near to the property. Are there services that can sufficiently provide for the needs of tenants or employees? You also need to consider the cultural and historical influence on and around a property. The makeup of a neighborhood can be seriously harmed by a business that reflects different values and certain areas may not have the appeal to the target demographic you hope to attract. All of these aspects are never going to be evident from the numbers, so it’s up to the investors to understand their location well.
Not Planning Ahead For Emergencies
Sometimes operating at a thin margin can be a good gamble. People constantly point to Amazon operating at a loss for its first decade, but that is not the average result of operating without an emergency fund. One of the most common investment mistakes you can make is to operate without preparing for an emergency. The name of the game in commercial real estate investment is cash flow, which is why tenancy can fluctuate and a property can remain profitable, but this flow can get interrupted and investors need to be prepared for that. You may have cash flow model mapped out, but if you lose your largest tenant and need to make improvements in order to market that tenant vacancy, it could get very costly. If you have no emergency fund to take care of these problems quickly, the property could sit vacant for longer than the cash flow model can handle and you could lose a ton of money.
Forgoing Professional Help
It’s understandable that some investors want to operate on their own or they might have a system that works for them, but one of the most costly investment mistakes is to choose not to hire the right professionals for the job. If you have a good team involved with the property from start to finish, your investment can actually become more lucrative. Having a good attorney, a quality financial manager and a good property manager can be the key to supreme cash flow.
For all your property management needs in the Valley of the Sun, contact LCI Realty. Our team can take the complexity of the management process and make it easy for you. Mixing innovation with an experienced understanding of industry standards, our representatives will change your investment picture entirely. Contact LCI Realty today.