Top 5 Mistakes of Beginning Commercial Real Estate Investors

1. Ignoring local market conditions
There are two levels of due diligence required to evaluate a real estate investment--the market and the property. And of the two, local market conditions trump everything else.

A great property in a bad market can be a big loser. A poor property in a great market can be a gold mine. How do you know the difference?

Every market is different, and a deal technique or property type that is profitable in one market it does not mean the same holds true anywhere else.

Analyzing the demographic trends of population growth, income, and employment in the local market will tell you where opportunity lies, or not. It will also show which property types are in demand, or oversupply. Those conditions will make or break your investment.

Investing in an area with declining demographic trends is destined for trouble. So learn your market. Then listen as it tells you how, when, and where to invest.

2. Inadequate property due diligence
The second level of due diligence is the property condition, including physical items such as building systems, environmental matters and structural components. Just as important are the intangible items, such as title, survey, and zoning and land-use regulations.

Knowledge of contract law, insurance, finance, accounting, and tax law is also critical to doing things right at the beginning to insure success at the end.

If you've never done it before, this is not a DIY project. The money you think you'll save by doing it yourself can cost twice as much to fix, and may jeopardize the entire investment.

Red Adair, the famous oil and gas field firefighter, said, "If you think it's expensive to hire a professional to do the job, wait until you hire an amateur."

Admit what you don't know. Approach the property like an open book test. If you don't know the answer to a question, find an expert who does know to give it to you.

Get accurate estimates from professionals of what it will cost to fix what is wrong. The time spent inspecting the components is minimal and can save thousands of dollars in unexpected repairs.

3. Botching the math
This is not rocket science, but real estate is a numbers game. Value is dependent on net operating income?gross revenue minus operating expenses.

That's why it is so important to get the real operating numbers, not a projection of potential gross income and estimated expenses.

Confirm and verify every element of income and expense. Value the property based only on present income, not projected income you have to produce.

Your profit is dependent on net income. Net income is the net operating income minus debt service. If you've overestimated revenue, underestimated expense, or have too much debt service, your profit will suffer or turn into a loss.

Understand that risk increases with every assumption made. Do not assume you can save expenses by cutting corners or that you can raise rents the day after you take possession.

Anyone who has ever prepared a projection of operations has realized that by tweaking the assumptions, the bottom line can be manipulated into whatever will make the deal work.

The problem comes when it's time to make the numbers happen. It's real cash then?your cash?and when the rents don't go up or the expenses don't come down as much as the projection called for, you take the hit.

You might tweak the numbers to make it work on paper, but paper won't pay the bills, and hope is not a plan.

4. Over-leverage
Borrowing too much money in this business is fatal. Highly leveraged deals do happen, but unless it's backed up by a solid plan with sufficient capital, it can be disastrous.

Using 100% financing for entry level deals is like believing gravity doesn't exist as you jump off a building. You can argue all you want, but you're going to hit the ground?the only question is how hard.

The proper use of leverage is a function of deal structure and investment strategy. Every investment property should be evaluated in light of the break-even ratio.

The break-even ratio is equal to the Operating Expenses plus the Debt Service, divided by the Gross Potential Income. [(OpEx + DS)/ GPI = BE]. When break-even exceeds 80%, the structure depends on perfection, and that's dangerous territory.

5. Failure to have multiple exit strategies
An investment plan incorporates all of the due diligence findings and outlines all the possible outcomes of the investment, best case to worst case.

Ask yourself why you think you can do a better job running this property than the seller did. If you can't answer that with specifics, you won't do better, and probably not as well.

Your plan should answer the questions of how the property will be managed; what improvements are needed and their cost; how much money might be made (or lost); how long it will take; how to get out if things go wrong; and how to access the profits when it goes right.

The answers will reveal a realistic plan to maximize value in the shortest possible time with the least possible downside. I rarely have less than three exit strategies, and usually a half dozen or more. I've learned that if I don't have a plan to get my money out of a deal, I will soon be out of money.




we discussed 5 of the 10 most common mistakes investors make in commercial real estate.

They could be summed up as:

Lack of market knowledge

Lousy due diligence

Bad math

Over-leverage

No plan

These are fatal errors. An investor who chronically makes these mistakes will not long be an investor.

The common mistakes made by experienced investors are a bit more subtle, but are perhaps even more damaging because over time the costs are compounded until the entire portfolio is affected.

1. Failure to mind the balance sheet
There are four ways to make money in real estate: cash flow, appreciation, equity growth, and tax benefits. The operating statement shows just one of those--the cash flow. The balance sheet shows the other three.

Just as one adjusts rents and expenses to improve operating performance, the balance sheet should be managed to best utilize the assets. The key measure, contrary to popular belief, is not ROI (return on investment); it's ROE (return on equity). These decisions also affect the speed of wealth creation and tax efficiency.

That's three of the four or 75% of the sources of profit! If you don't understand your balance sheet, sit down with an accountant and get a lesson in the basics.

2. Bad deals and bad partners
It's a given that we are not going to be right every time. We're going to wind up with properties that don't perform as expected, or that the market direction moved against, or ones we just don't like. As Warren Buffet said, "the first rule of investing is to not lose." Learn to spot a losing position quickly and get out.

This is not to advocate abandoning an investment plan because of minor setbacks. Every project has them, and that's where perseverance is required. But a deal that goes sour on several fronts at once is a candidate for the "learning experience" pile. Don't fall in the trap of being "married" to a position. The support payments will swallow you whole.

The problem may not be the property, but the people. When problems arise in partnerships, especially those that started as friendships, things can get sticky and uncomfortable. Pain may be required, but misery is optional. If your partners are driving you crazy, or if you're all crazy, exercise a little civility and be willing to call it over.

If a good buy/sell arrangement was not included in your partnership agreement, make your own. One solution: You could write down a number that you will either pay for your partners' interest or accept for your interest in the assets.

That's the same way my mom made my brother and me divide the last pieces of our favorite pie; one cuts the slices and the other gets to choose his piece. It instantly ends any haggling or jockeying for position.

Close the deal quickly and move on. Life is too short.

3. Over-reaching
Swinging for the bleachers in high-risk, home-run-type deals that require more capital or expertise than you have is a sure recipe for disappointment, frustration, and can end in disaster. Before you start "thinking outside the box" make sure you know how things work inside the box.

It takes hard work and perseverance to achieve success in any field, and real estate is no different. In addition to property-specific plans, it's a good idea to also have a "big-picture" plan of your investments--where they need to take you, how, and when.

As you increase your knowledge and capacity, the big deals will come, and you'll know you're ready when you automatically focus on the pitfalls before the rewards.

4. "Dirt-rich, cash-poor"
This refers to the situation of having more land than cash to cover it and is a common outcome for an investor who accumulates a bunch of properties that have nothing in common but their owner.

If you have multiple properties and are using the gains from some to cover losses in others and losing the battle, it's time to get off the treadmill, despite the temptation to hang on.
Identify improvements that you can make immediately and do them. Dump losers and anything that has needs that can't be funded in the next year.

Be merciless. Look at it like cutting diseased branches off of a tree: Serious cases may require aggressive pruning to save the core.

Then focus your energy and resources on creating maximum value in the remaining properties that fit your big-picture investment goals.

5. Not using local market knowledge
We all read the national media and trade magazines and get a sense of what the "market" is doing. But in reality, all real estate is local. There is no national real estate market.

There isn't a ticker at the bottom of the screen on CNBC that tells me what my buildings are worth. Their value is determined by local market conditions, for example: rental rates, occupancy levels, competitive space supply, demographic trends, etc.

Our existing investments provide a window on performance and needs of that market that is a competitive edge over other investors. But it is only an edge if it's used.

By systematically collecting just a few local demographic statistics (job growth, population growth and income) and property performance fundamentals, we can get ahead of the curve. We see trends coming rather than trying to catch the last one; we create our own opportunities and reduce our vulnerability to competitive projects.

I hope you're not guilty of any of the above. If you're like me, you have some blind spots, and a spotlight is just what the doctor ordered.

Bonus advice: Accept responsibility for your actions
When you have a losing deal or are in a no-win situation, don't blame your tenant, your broker, your banker, or your dog. You are responsible for your own success or failure. If you make a bad decision, realize that all that is required is to make another decision.

Ant Work Nig Ltd.

Civil Engineeing,Architecture and Project Management.

Phone:08034240569
Email:antworkltd@gmail.com