8 Most Common Mistakes Real Estate Investors Make
Performing Incomplete Diligence
This involves buyers essentially cutting the process short due to time or other constraints, according to Occhiogrossi. Other mistakes related to this part of the investment process include performing “inadequate level of due diligence to evaluate existing collateral” and “waiving rights to perform due diligence of vertical components, particularly in portfolio situations.”
“This is ultimately a business risk and investment risk decision,” Occhiogrossi notes.
Assuming a Recently Constructed Building Has No Problems
This is especially true when the market gets revved up and builders rush to complete developments or hire less than qualified workers, often leading to construction defects. Buyer beware.
Going Outside Their Comfort Zone without Proper Advisement
Successful real estate investment rarely happens by accident; it’s about knowledge and experience, both with a particular geographic market and a specific property type. Investors who decide to buy in an unfamiliar market or try their hand at retail when in the past they’ve stuck only with multifamily buildings, without getting some advice from a consultant, may be doing so at their own risk.
Not Calculating Rent Sustainability
“Buyers often overlook the importance of calculating a property’s rent sustainability or the tenants’ ability to maintain rent payment post-closing,” notes Nicholas Coo. “This is particularly important for those properties located in states where tax reassessments on sales are the governing method of tax payment. It is not uncommon to see NNN fees jump by more than $0.75 per sq. ft. due to taxes alone. In some cases, this sticker shock can prove to be too much for tenants to maintain as it equates to thousands of operating expense dollars per month, increased literally overnight.”
Focusing on Short-Term Noise vs. Long Term Signals
Focusing on short-term “noise,” whether it be the daily speculations surrounding Fed policy or daily gyrations in the stock market, as opposed to the underlying factors that actually drive commercial real estate returns such as employment growth, capital flows into commercial real estate and property fundamentals is another common mistake, according to Chris Macke.
Not Building in Proper Deal Contingencies
This may be related to contingencies to address capital needs, lease expirations, possible operational challenges etc., explains Occhiogrossi.
Chasing “Bad” Deals, At All Costs
If the numbers just don’t work, walk away. “Sometimes investors get so married to a deal they will continue to pursue it, knowing it is a true gamble,” Occhiogrossi notes.
Stretching for Yield at the Wrong Point in the Cycle
This happens when “investor sentiment and actions are not aligned,” notes Macke. “On the one hand they ask if the economic recovery is near its end and if pricing has peaked, but then they buy assets in smaller markets that will take longer to recover after the next downturn. One cannot serve two masters and trying to do so results in serving neither well.”
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