Properties fail because of one major reason – the inability to produce a cash flow. Inaccurate information or the lack of it can cause money to be spent that you don’t have. Here are some common mistakes you should avoid as a commercial property investor.
1) Mistake #1 – Poor property due diligence assessment
Use experts. Due diligence covers many aspects of a property such as its condition, structural issues, environmental issues and building systems. It should also cover things like appraisal, title, surveys, and zoning laws. Those elements may seem pretty basic but other, often overlooked elements include tax law, contract law, and accounting practices. Poor accounting practices may mean that the numbers you’re using to calculate your deal are estimates at best causing you to struggle to make the property work month after month. Without an accurate picture of what you’re dealing with, you’re doomed to failure from the get go.
2) Mistake #2 – Being unaware of local market conditions
Market conditions can make or break an investment. A declining market may make a good property a bad idea and knowing what part of the market cycle your property is in will help you find a plan to ensure your property remains a lucrative deal. If conditions change or something unexpected comes up, don’t be afraid to walk away.
Other components of market conditions you should be aware of are demand and supply for your property type, rental rates, occupancy levels in the area, job growth and population increase. Don’t take chances by assuming information you don’t know. You may end up finding yourself chasing a potential magic number that will never materialize.
3) Mistake #3 – Bad debt
Debt eats up cash flow that could be used as a safety net. Without that extra cushion, your property has little protection against repairs or occupancy dips. I use a calculation called the debt coverage ratio which is the ratio between the net operating income and debt service. My target ratio result is 1.25 or higher because it ensures that I have enough cash flow to cover both the debt and the operating expenses.
4) Mistake #4 – Poor property management
Poor property management ultimately leads to losing money! Tenants leave primarily because maintenance issues aren’t addressed. Not only should you react quickly to these kinds of problems, you also have to become proactive.
Other important property management elements include collections and occupancy. Manage the manager. Your property management company should stay on top of making sure that all tenants are paying the rent each month. They should also work to fill up the property with tenants and make sure that the property remains full. If they’re off target, don’t be afraid to address your concerns with them.
5) Mistake #5 – No exit strategy
Know how to get your money out of an investment. If your plan doesn’t proceed as you thought it would, do you have a plan to get your money out? Not only should you have a plan; you should have multiple strategies that you could use in different situations. As circumstances and investment goals change, you’ll want to have different options available in case things don’t go the way you wanted them to.
Mistakes can be costly. Learn from the mistakes others have made before you and ensure your deal is a success.