Commercial Real Estate Investing From A-Z Top 5 Mistakes to Avoid When Investing in Commercial Real Estate
In this episode we will learn what are some of the top 5 mistakes to avoid when investing in CRE.
You can read this episode here: http://montecarlorei.com/episode-22-top-5-mistakes-to-avoid-when-investing-in-commercial-real-estate/
1. Looking at Pro Forma Numbers
One of the things that you will start to see as you're searching for properties is that there are two sources of income in the financial statement. Number one is the actual revenue / actual net operating income of the property. Number two is the pro forma income / pro forma net operating income. And these numbers are different because one is the current number and existing financials and the other one is an imaginary number. It's an imaginary number based on what the real estate agent thinks the property could make after you buy it. Commercial real estate brokers don't have the same obligations around disclosures or telling the truth as residential real estate agents do, you have to be careful and take everything that they give you with a grain of salt on the pro forma numbers.
2. Always take a look at who your tenants are
Is this the right mix of tenants? If it's a retail building - when are their leases expiring? If the majority of the tenants have lease expiration dates coming up all around the same time in the next three years, that's not a good sign. Why? Because what if something happens to the economy or what if something happens to the local market and these tenants all decided to leave at the same time? Not only are you looking at the tenant mix and when their leases expire, you are also looking at how much these leases are currently at, are the leases above market price? Are the leases currently below market price?Is this the right mix of tenants? If it's a retail building - when are their leases expiring? If the majority of the tenants have lease expiration dates coming up all around the same time in the next three years, that's not a good sign. Why? Because what if something happens to the economy and these tenants all decided to leave at the same time?
3. Survey the property for environmental issues as well as the laws within that city
There are a lot of very difficult cities to do business with, San Francisco is a prime example. For example, if you want to convert an office to a Starbucks, you're going to have to go through a lot of approvals with the city. If you want to convert something to a residential building, it might take literally years to get that approved. A lot of people in the neighborhood will make a big deal out of it and they will make it very difficult for you to get approvals in a short period of time, so you really want to check what you can do with that property without having a lot of issues.
4. Get all reports and surveys done
Get a structural engineer to make sure that the building is solid and has no problems. Get a roof inspector to make sure that your property has a solid roof, and depending on the type of property, you might want to have a few other surveys done such as taking a look at the foundation, the windows, and HVAC units, if applicable.
5. Take a look at hidden costs and contracts that will have to be honored by you after the sale
Some properties may have contracts that are two, three years long for online advertising and those were part of the costs that you were planning on cutting after you took over the property. However, the contract doesn't end for at least another couple of years. You also may have to pay local taxes that the seller was responsible for paying, and there may also be some insurances that you may not need that the seller purchased and now you're responsible for paying.