Buying and managing investment property — be it houses, multifamily units or commercial real estate — is hard work. Owners must choose between paying to outsource and handling everything themselves. The latter can range from finding financing and performing maintenance to resolving emergencies and legal problems. All these tasks extract a price in terms of time, aggravation and mistakes for owners who lack expertise in all of these areas.
Complicating matters further, finding properties with potential is a big challenge facing investors today. High property prices in top markets are driving investors into secondary markets and new types of properties, notes National Real Estate Investor. But these are assets that require deep industry knowledge and experience and challenges I faced as an active individual real estate investor that inspired me to co-found Origin Investments to help individual investors address these obstacles.
Many of our investing clients have gone the direct route, only to realize how complex and difficult it is to succeed in real estate. For example, one doctor pooled his resources with four other Chicago physicians to build a real estate portfolio. Initially, they hired a realtor to help them find, manage and renovate their assets. But once they transitioned from single-family homes to multifamily buildings, they found it harder to find and manage properties. For years, a client in California bought multifamily buildings and commercial real estate in several cities and only realized he needed the kind of deeper market knowledge that comes with “boots on the ground" when one of his major investments — a retail property — went south.
How To Avoid Four Do-It-Yourself Commercial Real Estate Investing Blunders
Here are the four biggest issues commercial real estate investors face when they buy and manage properties on their own, and how you can avoid making these mistakes.
1. Buying with blinders on: One client says he was often offered overpriced properties that more seasoned buyers had rejected. To ensure you make an informed decision about a property’s investment potential, look at its replacement costs, rental rates and projected growth. Consider what other properties in the area will compete with it, including new construction. Will any competing properties prevent you from receiving the level of rent you’ll need to be profitable? Is there is enough growth in the area to sustain or increase occupancy rates? Answering these questions can be difficult, so real estate investors often ally themselves with professional asset managers who have the insight, deep market knowledge and experience to find properties and accurately evaluate their potential.
2. Losing time and money: Our Chicago doctor found it hard to keep up with the administrative details — approving maintenance costs, balancing budgets, problem-solving — and find the best professionals to manage and source properties. The constant burden of oversight can be a big challenge and distraction. Investors must decide if it’s worth it for them to hire property managers to handle these tasks. For instance, managing the process of finding tenants, leasing, collecting rents and handling evictions requires legal knowledge; the prospect of losing money to delinquent renters or empty units often makes it worthwhile to seek the skills and expertise of a property management company. But if they do hire a property management company, it’s critical to pick the right one. Investors must look at the firm’s team, track record, fee structure and the other assets they manage, as well as determine if their investment’s business plan will warrant the profits they lose to the management costs.
Avoid These Four Common Commercial Real Estate Investing Mistakes curated from Forbes - Real Estate
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