If you take investment seriously, increasing your Return On Investment is front and center in every transaction.
But while many investors assume that translates to value-add strategies, buying low and selling high, or doing major renovations, the truth is increasing your profits is a process that starts even before you acquire the property.
Although no investment will ever be totally risk-free, there are several steps you can take to minimize your risk in your next transaction.
Stick To Your Investment Goals
It may be tempting to bend your own rules when you get excited about a particular property. Sometimes this happens when the numbers seem to be particularly good; other times it’s the prestige of the property that lures you in.
Regardless, you created an investment plan for a reason. If office properties are off your strategic plan for the moment because you previously decided your portfolio couldn’t handle the risk – then stick to it. Don’t let your emotions get in the way of cold (hard) numbers.
The only exception to this would be if you’ve decided on a particular strategy, but recent factors – such as the sale of a property, a drastic change in market conditions, or a change in zoning laws – might make you choose a different investment strategy.
In that case, you’ll want to carefully examine not only the property itself, but you should ask yourself how the property type, in general, will affect your portfolio. Will it tie up a large amount of money for a lengthy period of time? Will you need to dedicate more hours to manage the property?
If after careful analysis, and perhaps a second opinion, you decide to take on the property anyway, make sure you’ve set down a clear exit plan in case things head south.
Buy A Property With Profit Potential
It may be frustrating to sift through dozens of properties in order to find one that looks halfway decent. The truth is you have to kiss a lot of frogs until you find a property that really shines.
Instead of despairing, commit to seeing a certain number of properties per week. If one out of 100 properties has the potential to be a good deal, then if you see a few properties a month, it won’t take long until you find something that appeals to you.
Once you do find one that you’re interested in, making sure to run the numbers to make sure it’s really as good as it looks. This is where due diligence comes in.
Doing a walk-through of the property and not skimping on inspections is a start. They allow you to see overall if the property is worth the price, or if you’ll be stuck with an expensive dud.
Unless you love high risk, don’t even step close to a deal that promises to bleed money from the beginning, instead offer to do a master lease instead.
Do Your Due Diligence
At the risk of belabouring the point, it can’t be stressed too often how important due diligence is. While you can’t predict every problem that might occur, due diligence ensures you won’t be taken by surprise with regards to the condition of the house, marketplace, ability to place tenants, and more.
Unlike residential properties where you might be able to recover from a few wrong assumptions, a mistake in the commercial real estate field can literally leave you bankrupt.
Choose The Right Financing
The type of financing you choose to purchase a commercial real estate property is also an important factor in minimizing risk.
The amount of the down payment, whether you get a standard mortgage or use a hard money lender, all have an immediate impact on your bottom line. For example, engaging a hard money lender could help you get the money you need to close a deal quickly. However since these loans come due within five years of the sale, you need to have a plan in place to refinance the loan well before it comes due.
Know Your Boundaries
Surprisingly, encroachments are one of the most common problems faced by commercial real estate investors.
Usually, this happens inadvertently, but regardless of the motivation, can cause difficulties not just for you as the owner, but it can affect the property’s future value.
You can easily avoid this by hiring a licensed surveyor, who will give you a survey before closing and will put stakes in the ground to mark the boundary, thus encouraging neighbors to stay on their side of the property line.
Take Advantage Of Your Team’s Expertise
A team is essential for investors. Whether you’re paying small multi-families or building slick office towers, a team of experienced, knowledgeable professionals is invaluable.
It should be obvious to most investors that insurance is necessary. The problem is that some investors delay getting insurance, leaving their property vulnerable.
For example, I’ve seen investors do everything they need to complete the closing, but then leave the property uninsured merely because they haven’t gotten around to it yet.
This could be devastating, particularly in the case of fire, natural disaster, or a tenant getting hurt. Purchase property insurance and liability insurance, but make sure you don’t pay more than necessary.
This is a mistake common to less experienced investors. Before you agree to a price, determine what the price per square foot is, and then check comparable properties in the area.
A quick search online for recent closings in the area and according to your property type takes just a few minutes; this can save you from years of reduced cash flow.
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