Beginning investors are bound to make mistakes in any investment, including commercial real estate. Investing in commercial real estate can be a very worthwhile investment, but it will take experience.
Even after gaining experience it can be easy to make mistakes. After all, experience is not usually gained until after a mistake is made.
The media depicts many sad stories about investors who made bad investing decisions. However, there are many success stories that are not told.
These stories of failure are also valuable to other real estate investors as an opportunity to learn what not to do before they make that mistake. Most of these stories are directly founded on the investor not being fully informed on various parts of the market.
There are three main mistakes that beginning real estate investors make. The first and second is that they ignore the local market conditions and obtaining a proper knowledge of the market.
Two things that a commercial real estate investor must know thoroughly about are the market and the property itself. However, if an investor could only know about one, the market is by far the most important.
Contrary to what most beginning investors think is that a bad property in a good market can make a lot more money than a fantastic property in a bad market. In addition, markets vary widely across the United States.
What may be considered a fantastic property in one area could be considered an undesirable property in another area. The same goes for sales techniques.
Becoming aware of current demographic trends and population growth, income, and employment in the market will provide insight about which properties are considered to be a great opportunity. This will also provide insight to the property demand or oversupply, which could lead to your success or failure.
Never invest in a market that is failing while hoping for a turnaround. Start in a market that is one the rise for better success.
While obtaining knowledge of the market is more vital, a proper knowledge of the properties is also critical. Be sure to review both the tangible parts such as the buildings and environment as well as the intangible such as the title and land-use regulations.
As the purchaser you may be tempted to rely on their real estate broker to know all of the ins and outs of the law. However, this will not help you make a wise decision about whether or not the property will bring you profit.
This knowledge of the law will increase your personal financial success immensely. Handling finances correctly is very important in starting out successfully, and this involves a detailed knowledge of the law.
In the process of gaining as much knowledge talk with professionals and authorities to learn more and to make sure that your initial evaluations are correct. This is another great mistake of beginning real estate investors.
This mistake is that they gather the information and do the math thinking that they will be able to come out on top. However, somewhere along the way they messed up their calculations.
As we grow through elementary, middle, and high school we are required to learn math. Most of the time this class is suffered through and complained about, but this is exactly what we need those math classes for.
Another mistake is that beginning investors base their calculations on numbers that they will have to make in the future to break even instead of the current net income. The current numbers are established facts, whereas what you think you can make in the future is not a firm foundation.
Be sure to double or triple check your math and then do it again. Cross reference your calculations with a professional to make sure you have taken everything into consideration.
The calculations can always come out on top by making assumptions about the increase of revenue once you take over. However, raising rent and cutting corners is not as easily done as thought.
Often a plan will work on paper, but not in real life because these assumptions have been made. As you do your research and careful calculations you will successful avoid the top three errors of beginning commercial real estate investors.