Ways to Mitigate Risk in Commercial Real Estate Investments
Is commercial real estate risky? You bet it is, but risk is a facet of doing business — any business. You can't avoid it. But here's the good news: Risks can be managed to levels of great certainty. Being successful in commercial real estate nearly always means taking calculated risks.
You may have thought that risk-proofing was impossible, but you'd be surprised at what a little knowledge can do to your investment portfolio.
Do proper due diligence. Due diligence is the process you go through when verifying the financial documents of the property, performing a physical inspection, and checking out the legal pieces of the property, such as the title. Ninety percent of all deals die during due diligence. So, if you don't do a thorough job, the consequences can be costly. You may end up buying a property that's a money pit. However, when done properly, due diligence can actually help you make your sweet deal even sweeter.
Don't overpay. Overpaying is common among new investors. Don't be the investor in a deal where the agent sets a record price on selling a property! If you're buying apartments, make sure that you're aware of what price you're paying per unit. If you're buying a shopping center, make sure you know how much you're paying per square foot. In both cases, see what the recent market closings value your property at. Paying too much will lock up the property's cash flow for a long time.
Have expert market knowledge. Knowing your market like the back of your hand sets you up for success. Before you close on your deal, make sure you know the following:
How competitive your rents are with other similar local properties
When and if there's a "slow season" for rentals so you can plan ahead
Whether there's rent control in your city, which would inhibit you from raising rents as you thought you could
It's also a good idea to inquire on crime statistics on the property in question by calling the local police department.
Hold your goals loosely. You should keep your investment's exit strategy flexible at all times. In fact, have several exit strategies ready at any given time. Market conditions change. Your personal circumstances can change rapidly as well. So, don't get wrapped up in executing just one exit strategy, because it may no longer apply.
Know where you are in the real estate cycle. There are four parts to any real estate cycle: expansion, contraction, recession, and recovery. Each part of the cycle demands that you pay detailed attention to your investment decisions. Understanding real estate cycles helps you take the correct actions with the best timing. There's nothing like timing the market like a pro.