5 Common CRE Investment Mistakes to Avoid
Volatile, unpredictable and sullen … perhaps this is how your parents described you as a teenager, but these words should never be used to describe an investor post-transaction. So, here are a few of the obvious – but curiously common – mistakes that investors need to avoid prior to transacting:
1. Focusing Only on Return
While it is quite tempting to envision basking in the warm glow of a consistent yield, when predicting return, pray only in the Church of “Here and Now.” Stimulate your inner toddler and babble a relentless stream of questions to yourself … “Why do HVAC systems mysteriously time their death to the first anniversary after acquisition? Why do tenants walk from their lease and move to Zimbabwe? Why is mold shy and like to hide behind the wall you are moving for a new tenant?” Can you guess which is more common, panicked calls to investors asking for capital or “Gee … we did better than anticipated?” Dare to do due diligence! Fall in love with your spouse – avoid falling for your projected return.
2. Thinking Tenants Are Really Spreadsheets
If you’re comfortable buying a used car from an eBay seller with 2,000 listings that consistently misspell the same word, then you probably will be satisfied to only look at the rent rolls and leases of your future tenants. Understand a tenant’s history, personality, business model and vision before getting involved. Do you see this as a business model that will survive? Remember the wave of great cupcake concepts? Your tenants are your income, so get in their faces (nicely) and meet your new partners! For if you don’t, you may see their faces at night on your bedroom ceiling.
3. Overlooking a Cash Plan
There’s always something. Any number of situations may lead an investor to find themselves in the need of quick cash. The first step is having a plan for securing capital in place before an expense arises. You can always return it to your investors if you find yourself in months of blue sky. Know from whence your funds will come and be ready with cash to triage problems with short notice.
4. Being a 1031 Rambo
Isn’t it interesting that the 1031 program that’s used with lusty machismo by almost every buyer as a means to avoid a capital gains reckoning with Uncle Sam was instituted by Uncle Sam? Why will sellers overpay for their 1031 exchange property rather than pay the IRS for capital gains? My mom said, “Don’t cut off your nose to spite your face.” Don’t be cheap: call your accountant and find the exact number (your nose) that you’ll overpay for your property rather than pay the IRS (your face).
5. Solely Trusting the Offering Memorandum
When considering an investment, remember that an OM is just marketing materials. It’s a way to get you to make an offer based solely on the strength of a document that has, in reality, the permanence of the memo you forgot on your fridge. Dig into every lease, pay for an environmental history, inspect the physical property as if it was your next partner in holy matrimony. Walk it, shop it, dine at it and understand its history and role in the local community, infrastructure and economy.