First-time commercial real estate investors face a steep learning curve. The first mistake many make is assuming they can do everything by themselves—that because they’re smart, driven, and willing to put in long hours to turn their dreams into reality, and they don’t need qualified experts or seasoned mentors to help them acquire or manage properties.
Admitting you can’t go it alone is an important step, but it’s far from the end of the line. These five additional pitfalls commonly afflict first-time commercial real estate investors; you’d do well to steer clear.
1. Tolerating Problem Tenants
The most effective way to avoid dealing with problem tenants is to implement a thorough, scalable screening process for every prospective tenant. But even the strongest tenant-vetting protocols aren’t infallible. The longer your CRE operation persists, the more likely you are to encounter a troublesome guest.
Once a tenant falls behind on rent or becomes an intolerable nuisance (or danger) to your property and its other occupants, you need to act decisively. Getting rid of bad commercial tenants requires considerable resolve (including a refusal to negotiate once you’ve settled on eviction) and competent legal counsel. The sooner you act, the less you stand to lose.
2. Failing To Properly Classify Target Properties
Not all commercial real estate is created alike. As Peter Conti and Peter Harris explain, there are several broad types of commercial real estate: hospitality, retail, office, industrial, multifamily residential, and more. Each property type can be further subdivided into subtypes and classes. Successful first-time CRE investors typically focus on one or two subtypes in one or two specific geographical markets, rather than invest in properties they’re not intimately familiar with.
3. Skimping on Proper Market Research
Speaking of markets: “Every market is different” might be a facile maxim, but that doesn’t make it any less true. Before you seriously pursue any deal in a market you’re not intimately familiar with, you need to thoroughly research the area and evaluate the health of the local real estate market.
It’s not enough to look at metro-level statistics and trends—you need to drill down to city- and neighborhood-level data. Just because one pocket of town is doing great doesn’t mean the whole city is booming, or that the challenged area in which you’re thinking of making your investment is ready to turn a corner.
4. Poor Contract Management
Every commercial real estate deal requires a firm legal foundation. The purchase agreement must anticipate and allow for a bevy of important contingencies—availability of financing, appraisal, inspection, hazardous materials—and must explicitly spell out recourse and redress for each issue.
Then, once you’ve taken possession of a property, you need a competent hand to draft and manage your leases. Commercial leases are considerably more complicated than residential leases. Contracts that fail to properly anticipate key contingencies or future operational challenges may threaten your investment over the long term.
5. Refusing to Admit a Mistake
Everyone makes mistakes. It’s human nature.
Some mistakes can be fixed. Others are irreparable. But all are liable to grow worse with time. The longer you resist acknowledging that you’ve made a mistake and taking action to rectify it, the worse the consequences are likely to be.
Admitting that a commercial real estate investment isn’t working out as anticipated takes class and grace. Minimizing the investment’s financial impact isn’t a straightforward matter either; it invariably means selling the property or your stake in a holding company. That’s why it’s so important to pay close attention to your investments’ performance and hew to a “slow to invest, quick to divest” approach.
Have you fallen victim to any of these real estate investing pitfalls? Let us know in the comments box below.