The 3 Most Common Mistakes Every Rookie Investor Makes
“A wise person should have money in their head, but not in their heart.” — Jonathan Swift
Investing in Commercial Real Estate can be one of the most satisfying and personally fulfilling endeavors you can undertake in your career. Everywhere, there are opportunities to make great deals, and furthermore your hard work and foresight in structuring the deal can have tremendously lucrative effects. The wealth a single deal can potentially generate can have not only life-changing, but generation-changing outcomes.
Because of the exciting opportunities in this incredible industry, many new investors tend to rush into Commercial Real Estate. Unfortunately, if their first deal ends up going poorly, this often leaves good people distrustful and negative, when indeed they already have all the tools to become extremely successful investors. Instead of giving up after an unsuccessful deal, I urge my fellow investors to learn everything they can from each mistake, so that they can refine their approach and increase their odds for success on their next deal.
Here are three common mistakes to avoid when entering into the dynamic Commercial Real Estate industry.
1. Trying too hard on your first deal
If you have read my ebook 7 THINGS YOU NEED TO KNOW BEFORE YOU INVEST IN COMMERCIAL PROPERTIES, then you will be familiar with the most efficient methods for finding Commercial Real Estate investment opportunities that meet your personal investing criteria.
Also, by using some of the letter templates available at COMMERCIALACADEMY.COM, even rookie investors find that it is easy to get in touch with sellers and start negotiating the terms of a deal. Emotions run high during any deal, but when it comes to an investor’s first deal, emotions can lead to even greater risk-taking. I’ve seen it happen way too many times.
For many of us, it’s like buying your first house. The real estate agent gives you a walkthrough of a nice, open clean house and suddenly it becomes the “house of your dreams.” First time homebuyers often let their heart control their head. They are willing to overlook certain problems and obvious points that they could use in their favor during a negotiation. Six months later, when they have to replace the roof and the air conditioning, they suddenly realize the “house of their dreams” is actually more like a “money pit.”
Letting emotions cloud your judgment on a Commercial Real Estate deal could be even more costly. In the rush to become a first time owner, many new investors end up overpaying for the asset by negotiating their position very poorly.
A poorly structured deal could altogether eliminate future capital gains on a Commercial property. An investor chasing the “overnight millionaire” dream easily falls prey to a savvy negotiator.
And sometimes, your best deal is the one you walk away from.
2. Not having an investment strategy
Many first time investors either assume they know what they want, or they are content to own any kind of Commercial property. Maybe they envision themselves owning an apartment building, or a skyscraper, or a shopping mall. These are terrific goals, but unless they are part of a larger investment strategy, they will be difficult or impossible to achieve.
First time investors should consider what kinds of properties they want to own. And then they can filter these opportunities by the amount that they want to invest. The answers to two basic questions is a good start:
How much financing can you obtain? What kind of property are you interested in? (Multi-family/apartments, Industrial, retail, office, mobile parks, storage, etc.) The goal is to maximize your financial position. I have met extremely successful investors who focus only on professional spaces in the $150,000 purchase price range. I have also met extremely successful investors who focus only on $5 million industrial buildings.
Is the best deal for you a 24-unit apartment building? A small strip mall? A church building? No investor can answer these questions without a personal strategy.
There’s an old saying, “If one does not know the port to which he sails, no wind is favorable.” First time investors content to take any deal won’t be able to tell if it’s a deal that will help them achieve their goals.
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3. Not doing your due diligence
There is no such thing as a “one size fits all” Commercial Real Estate deal. Generally speaking, buying a residential property more or less follows the same process. Most residential mortgage companies are obliged by the same sets of financial regulations. Therefore, they usually appraise the asset and do most of the due diligence in advance before agreeing to become a lienholder on the title.
Deals are much more flexible in Commercial Real Estate. You will want to discover all the aspects and circumstances of the property before signing your name on the ownership papers. Why is the owner willing to sell the property? Are there any hidden legal liabilities? What contractual agreements does the current owner have with the tenants? What potential risks or damages are present in the asset itself?
These are just some of the many circumstances that affect the scope and negotiations of every Commercial Real Estate deal. (Want to see a full list? Check out COMMERCIALHUB, our proprietary software tool that helps you perform due diligence right from your home computer or your phone.
Many first time investors fall in love with a property, and the allure of all the future cash flows leads them to agree to unfavorable terms. Never assume anything. Be sure that everything is put into writing, and that your attorney reviews all your documents. Better to discover an issue now before closing, than when it is too late.