A short list of ways to lose money when investing in commercial real estate.
This week we are re-running a popular post from years back, but the advice still holds true.
I’m often asked “what are the best market conditions in which to buy investment real estate?” As the market finally begins to show signs of improvement, MacRo Ltd. is getting that question more often these days.
My simple answer is that any market will work. A savvy investor is capable of finding a good deal in any market. It’s really more about having clear and realistic goals, the appropriate capital resources, a strong management plan, as well as a patient yet diligent approach to achieve the goal — a good business plan.
The old saying is that “all it takes is one willing buyer and one willing seller to agree on the terms.” As important as the buyer’s motivation is to find the right property, it is just as important that the motivations of the seller are in alignment with the buyer’s. This is not to say that a seller is always “motivated” by positive forces, as it often happens that the investment plan that he or she had for the property have gone very much awry … and that is the focus of this article.
As exciting as it may be to buy an investment property, even the most experienced investors make mistakes. Here are a few ways to screw up:
Naivety — All too often and especially with new investors, an enthusiastic buyer will dive into the purchase of a property without doing his homework. It is important to get to know the local real estate market in the area the investor has placed his focus. For example, if the focus is in neighborhood retail centers, the buyer must know the neighborhood, including the surrounding zoning and governmental master plans for a wide radius. Learn if there are other centers in operation or planned in more strategic locations. Consider the leasing market by looking at lease and vacancy rates. In addition it is critical to understand the personal and financial commitments necessary to maintain the property in optimal condition.
Pride — While any investor should have pride in ownership, there is another kind of pride that often will cause a deal to go bad. If market conditions have changed to a point that your initial plan (if you had one in the first place) has been thrown off course and the recourses aren’t there to keep it on track, then maybe it is time to put the ego on the shelf and make the tough decision to cut your losses. Good business people know how to make such choices, while others can delay with concern that friends may see that things didn’t do so well. Believe it or not I’ve encountered many who have blindly hung for reasons like this without having the where with all to keep it together, only to painfully discover that things only got worse for their pocket books over time.
Greed — Some investors want a property to be a home run, even if it is not capable of such. Trying to soak an income property for every dollar of cash flow that can be squeezed out of it may work for a while. But all too often the end result will be that aspects of the investment will be sacrificed — be it maintenance or tenant quality. Over time these sacrifices will cause deterioration and a negative impact on cash flow and/or value.
Neglect – I have encountered many a landlord who acquires a property, blindly engages management, moves on to other things and then expects success by remote control. Well, sometimes that will work, but in such cases that’s more about luck. My experience is that there must be someone who keeps conscientious eye on all aspects of the investment, be it a well-chosen property manager or the landlord himself. I can offer up more examples in this case than any other, and over time the investment value really suffers due to poor maintenance, bad tenants, and high vacancies to name a few.
Emotion — One of my favorites. I’m sure at this point you can see that these all tend to be inter-related in one way of another, and typically if an investor suffers from one, it is not unusual for him to have the Full-Monty of these personal traits in full gear. But emotion is sort of the foundation of all of these traits. When investment decisions are made based upon emotion in contrast to that of a well thought out business decision, there is a high probability that something will not go well down the line.
So, whether you are a well-heeled experienced investor or new to the game, every economic climate offers opportunities. However, without a strong business plan that has flexibility built into it to address all responsibilities of caring for your investment, you could fall prey to one of these five nasty traits and surely lose money in real estate.
The author: Rocky Mackintosh, President, MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland. He also writes for TheTentacle.com.