7 things to ask yourself before you decide to invest in real estate:
1. What do I know about the market in which I plan on investing?
2. How much capital should I risk?
3. What is my exit strategy?
4. Do I want a partner or will I go it alone?
5. Will I manage and lease or do I hire someone for these functions?
6. What will it look like if I succeed?
7. How will I analyze my ultimate decision to buy, sell or hold?
Whew those actually scared me, and this is what I do for a living!
Knowing your market:
Know your cash flow:
Fortunately for all RE investors, the banks have realized you actually have to have money to invest in real estate!! Furthermore, your global cash flow has to be sufficient to cover unexpected losses. If however, you are a high net worth individual, most small banks will still let you grab a loser just to get another loan!! Go into the investment understanding the worst case scenario and budget for that. If you have more than one property, figure the perfect storm.
How do I get out of this thing!?
Well you bought your building. You can now take your wife and kids by; tell your buddies on the links about your great money machine…and then, something happens and you need your equity. Does your Operating Agreement give you an easy out? Are your partners capable of taking you out? What if the market just is not good when you want to sell? How have you been aggressively depreciating the building….i.e. will you be hit with recapture taxes that prevent you from selling….or will your capital gains create a problem with your sudden need for capital? Let’s not mince words here. Other than the rare exception on the “flips,” everyone likes to talk about, this is a long term capital growth strategy and your money is trapped, put away, buried deep, only for use many years in the future.
Do I need a partner?
Everyone is different. Some just don’t play well with others, and some can’t exist without a team. I personally choose partners in this order of importance: 1. Do they have a valuable skill? Contractors, Attorneys, Bankers, Accountants, Business Owners, all have special skills which can help you with your project 2. Are they conservative? Do they live their life in a way which creates reserves? If they don’t have spare time; rainy day money stashed away, and, or vast networks of other resources created by a lifetime of fulfilling commitments, they can’t and WILL NOT help you when the bullets start flying!
Who is going to Manage and Lease this property?
Now this is one of my favorite subjects assuming I am writing to the investor, not the operator.People have this notion that if they do the management and leasing it is Free!! Well, if you are in that camp, then what you are telling me is that you can’t make more than a 10% margin on your day job… I am sorry to say that is not a good margin! Sure there are some slack managers and leasing agents, but good ones are worth their weight in gold. Don’t ever do a proforma without figuring in at least 10% for management and leasing fees!
What does success look like?
Well you have made it this far, but have you taken time to really analyze what you are seeking? Do you want long term cash flow? Do you want to buy low and sell high? Do you want to remodel and flip? Is this just part of a complex tax strategy? Unless you understand your vision of success, your team will not know how to serve you. Figure this out first!
Buy, Sell, Hold?
So some business associate presents you with a “can’t miss deal.” How do you analyze it? What tools do you have to gauge its true value? Are you going to be the guy to evaluate every lease? Are you going to jump on the roof; inspect the HVAC; check the foundation; run the proforma, talk to the neighboring business owners? Have you considered your taxes? What about the liability?
It never ceases to amaze me. The doctor decides he needs a real estate investment. He lives in the town, he knows this place; it looks like a nice building, it has a tenant, he has the money. Everything seems perfect and so he buys……… I will let Paul Harvey tell the REST OF THE STORY!
As a full service brokerage, management, advisory, consulting company, I have been hit square in the jaw with so many of these issues I should have run to Florida and become a bar tender years ago. Like fishing however the real estate waters are always changing. For someone like me who thrives on a change and a challenge it is just too much fun to stop! If you are thinking about investing you do need a professional. Go over this list with them, and you will know if they can help you. Good luck and God Bless you and your ventures!
Jerome Moore is President/Owner of Coldwell Banker Commercial – Moore Company Realty and a member of the ACRE Leadership Council.
Article originally published in Alabama Center for Real Estate on July 24, 2012.Tags: commercial real estate, real estate investing