Day 7: Top 5 Mistakes of Beginning Commercial Real Estate Investors (Part II)
Borrowing too much money in this business is fatal. Highly leveraged deals do happen, but unless it's backed up by a solid plan with sufficient capital, it can be disastrous.
Using 100% financing for entry level deals is like believing gravity doesn't exist as you jump off a building. You can argue all you want, but you're going to hit the ground the only question is how hard.
The proper use of leverage is a function of deal structure and investment strategy. Every investment property should be evaluated in light of the break-even ratio.
The break-even ratio is equal to the Operating Expenses plus the Debt Service, divided by the Gross Potential Income. [(OpEx + DS)/GPI = BE]. When break-even exceeds 80%, the structure depends on perfection, and that's dangerous territory.
5. Failure to have multiple exit strategies
An investment plan incorporates all of the due diligence findings and outlines all the possible outcomes of the investment, best case to worst case.
Ask yourself why you think you can do a better job running this property than the seller did. If you can't answer that with specifics, you won't do better, and probably not as well.
Your plan should answer the questions of how the property will be managed; what improvements are needed and their cost; how much money might be made (or lost); how long it will take; how to get out if things go wrong; and how to access the profits when it goes right.
The answers will reveal a realistic plan to maximize value in the shortest possible time with the least possible downside. I rarely have less than three exit strategies, and usually a half dozen or more. I've learned that if I don't have a plan to get my money out of a deal, I will soon be out of money.
If you still remember Renesial Leong whom I talked about in my email 2 days ago, she does commercial workshop too. If you are about to experience in investing commercial property, my golden advice to you is to prepare yourself with a good homework and knowledge. The easiest and the fastest way is to join Renesial Leong's commercial property workshop. To know more, simply email to me to declare your interest. I will provide you the more detail for the workshop after that. Last but not least, I am deeply appreciated for reading all my emails and willing to go through with this intensive e-Course. Please do not stop your learning here. Keep yourself educated with knowledge to minimize your risk and maximizing your profit. Good luck and all the best in your property investment journey!