In any business, one of the best ways to avoid failure is to avoid the things that cause failure. This can be done by identifying the things that cause failure, and avoiding them at all cost!
It is normal to not know everything when getting into a new business, as it takes extensive practice and experience to learn what mistakes to avoid. It is very helpful to have a mentor or someone to identify these mistakes that you should never make.
Here I have identified 5 very serious mistakes that could land you in deep commercial real estate trouble! I have learned by experience, and, unfortunately, not every experience was a good one. If you can avoid learning the hard way, then take this advice, so you do not have to experience the hardships of making any of the following mistakes.
Top Mistake #1: Quitting Your Day Job
It is true that commercial real estate is a solid, tried and true business that can be instrumental in creating the lifestyle of which you have always dreamed. However, when you are just starting out, it can take one to two years to see a profit from your investment (unless, of course, you specialize in quick turning property).
The commercial real estate deals that are going to make you set for the rest of your life involve long term commitments, unlike that of residential, single family houses.
The key is to not stop your monthly cash flow while beginning to invest in commercial real estate. The bills still need to be paid until you have a few commercial real estate deals under your belt, and you can afford, without peril, your everyday living expenses for you and your family.
There will come a time, hopefully sooner than later, that you will not have to work another day in your life, unless, of course, you want to. However, until that day comes, make sure you are making enough money, either through a job, other business, or the much more short term commitment of residential real estate.
Top Mistake #2: Not Hiring an Attorney
Having legal help is one of the most important aspects of commercial real estate investments. Things will go wrong, no matter how careful and astute you are. Legal matters can evolve in places you never think they would, and they can be very costly. In fact, a poorly written contract, an overlooked item, or a difficult buyer/seller, can take you for all that you’ve got.
We have a saying around our office, which is “Hire the best attorney you can’t afford.” A good commercial real estate attorney can keep your business, investments and personal assets safe from any problems that might arise. Whether you use paid legal, or have an attorney that you work with closely all the time, get a good, and yes, expensive attorney to get the job done right the first time. This is an area in which you must not compromise.
Top Mistake #3: Performing Tasks You are Not Qualified to Do
Commercial real estate investors just starting out and those who are seasoned must never do the work of a professional to whom you can pay small amounts of money when compared to the amount of money that can be made on a single deal. It is very tempting to save every dollar possible and do the work of an appraiser, accountant, attorney, property manager and other such real estate professionals.
Leave these items to the professionals, and focus on what you do best: locate deals, put them under contract, and reap the return on your investment. Leave these otherwise mundane tasks to the professionals that make your life much easier. You must position yourself properly in this business, and doing the work of 20 people is not the right approach. You are an investor. Act like a commercial real estate investor, and perform the duties of a commercial real estate investor. The small amount of money you pay to the other professionals to ensure that your business operates properly is well worth it.
Top Mistake #4: Personally Guaranteeing Large Loans
Non-recourse is the only way to go in commercial real estate, unless, of course, you have millions of dollars to lose by personally guaranteeing large loans. Even if you have millions of dollars to personally guarantee large loans, I don’t think you really want to risk losing it to a deal gone bad.
Luckily for us, both public and private lenders understand that personally guaranteeing a $3,000,000.00 loan is a very risky event. That is why the property itself is usually what guarantees the loan. The property is what has the equity and value, not necessarily the person who owns it. If you do personally guarantee a loan, and the deal goes bad, you could literally lose everything! A simple rule: don’t personally guarantee a loan you can’t cover if something goes wrong because things will go wrong. Almost every lender will negotiate non-recourse with a valuable property. With private lenders it may be a little more difficult. If that is the case, avoid the risk, and find another lender who will work with you.
Top Mistake #5: Falling for Sales Pitches
It is very tempting to listen and hang onto every word a broker, agent, or even an owner speaks about their property in the hottest location, with a super motivated seller, and a great upside potential. Really, none of these reasons are worth any value until they are verified.
Always perform a thorough investigation and verify all claims made by the broker, agent or owner. Never move into a deal too quickly without doing the research! You will be sorry because something will go wrong.