I’ve been a commercial real estate broker for more than 40 years, and over the years I’ve learned pretty much all there is to know about it.
But the experience I have now comes hard-won, and looking back, there are several lessons I wish I knew then that I know now.
It’s always better to have a mentor when you’re starting out. But just in case you don’t, or want to make sure you don’t fall prey to the same mistakes, here are 10 of the most important things you should know about commercial real estate before you buy your first property.
Overestimating Cash Flow
Some investors imagine that when they purchase a property, they’ll be able to live a life of wealth and leisure. First, they look at how much cash flow the property is expected to bring in. Then, they build a whole castle of dreams about what that money will get them.
The reality is that while you might collect your check month in and month out for the first six, seven, or eight months… stuff is bound to happen.
Things like tenants being late on their rent. Or a sudden – super expensive – repair that needs to be fixed immediately. Or you have to pay a lawyer to fight the crazy neighbor that insists on using your tenants’ parking spots.
The point is, something always comes up. And rather than assuming everything will go well, your best bet is to put aside a certain amount of money for a rainy day. And, nothing hurts more than having to take money out of your own pocket in order to pay a bill for an asset that is supposed to be making you money.
I’ve seen commercial real estate investors handle the cash reserve problem differently. Some maintain little to no cash reserves, preferring to put any cash they earn from the property back into the purchase of other properties.
Others keep anyway from 3-6 months of mortgage payments in cash reserves or choose a specific amount per property. And then there are some that use a mix of cash and credit, or sometimes, stocks or bonds. The idea is that even though they may end up selling a stock when they’re not ready, at least the money is making more than it would in a bank account.
Always Keep Your Profits In A Separate Account
Oh, and here’s a tip: make sure not to put the money you earn from your investments in the same account as your personal account. Always open up a separate account; not only does it make the IRS happier, but it helps you keep track of how much your properties are really earning.
Whichever method you choose, don’t forget to make a comprehensive list of expenses. Obviously, you’ll include repairs and maintenance, but don’t forget to include capital expenditures, vacancies, and management fees if applicable. The key is to do your best to accurately predict how much expenses will pull from your profits. Because if you don’t, you will lose money.
There’s No Such Thing As A Perfect Deal
It’s not uncommon for new investors to spend all of their time searching for the perfect deal.
Instead of hopping on a deal that is pretty good and that fits their investment goals (and their pockets), they spend inordinate amounts of time weighing out the pros and cons of every possible permutation.
Let me tell you a secret: there is no such thing as a perfect deal.
There is no perfect commercial real estate property, no perfect market, no perfect financing situation. And while it’s true you may avoid some bad deals; you’ll also prevent yourself from getting a foothold on some perfectly acceptable ones as well.
Now, remember, this isn’t to say that you should stop doing your due diligence. Or that you should just take the first deal that comes along. But it does mean that once you’ve run the numbers, and asked others who are more experienced than you for their advice, then the next thing to do is to take that first step and pull the trigger on your first deal.
Yes… you will make mistakes.
Some of them will be pretty bad, and some not so bad.
The not so bad ones you’ll probably forget; the really bad ones you won’t – but at least you’ll learn from them. And you’ll be in good company because one thing that you and an experienced investor have in common is that both of you make mistakes – and you’ll both continue to so (although hopefully, that will decrease with time).
Stick With The Basics Of Commercial Real Estate
It’s tempting for new investors to look for some new system or method to help them succeed at investing in a commercial real estate. Nor can anyone really predict with 100% accuracy how the market will go.
The fact is that if you want to succeed in a commercial real estate, you need to make sure you know the fundamentals of investing in CRE property, inside and outside. And the best way to do that is to spend your time finding good deals and managing them well.