While investing in real estate may seem like a simple proposition, there’s more to it than location, location, location. An ideal spot may pique your interest, but impulse buying to beat competing buyers could end up being the wrong decision.
“Those who I have seen make the biggest mistakes made those mistakes because they weren’t fully educated on real estate investing,” says Alec Pacella, senior vice president at NAI Daus.
Smart Business spoke with Pacella about the common mistakes first-time buyers and even experienced ones make with real estate investments.
What is a good approach to gain information on real estate investing?
Education has to come from a couple of different approaches. An investor has to be educated on investment fundamentals and investment measures. What makes a good investment a good investment? It’s understanding the nomenclature of a real estate investor; terms like cap (capitalization) rate or internal rate of return. What do those really mean?
But the other part necessary to understand is the soft part — the market. When an investor buys an office building, the investor needs to know the office market, what makes it tick, what are the employment drivers, what does the competition look like? Are there any pending changes that are going to change the landscape?
While books or classes may be good sources to master the nomenclature, where does an investor gain soft-type knowledge?
The soft part is always changing. Reviewing what has been happening the last year or 10 years ago is a start, but not necessarily a good indicator of what may happen in the future.
That is where brokers come in. If they are good brokers, they add value because they can tell what is going on in the marketplace. They can tell you the trends, the details of the last five deals, the kind of square footage and where the tenant came from.
Buyers have to talk to other sources, though a lot of buyers overlook this. The investor could talk to a broker, a tenant, a building owner or city council representative. City council members often have a good finger on the pulse in their ward or district.
What other pitfalls are there to avoid?
People often don’t realize that while they may visit the property once or twice, it’s wise to visit a property at off hours — Saturday night at 7, a Sunday morning or a weeknight evening — because it is amazing how different the situation may be.
Maybe there is a warehouse next door with trucks coming and going all night long or a gas station next door that is lit up like a Christmas tree.
With an office building, it may not be as critical, but what if it were an apartment complex next to something that appears quiet during the day, but chaotic at night?
What additional tips are valuable when scouting out a real estate investment?
It’s critical to interview existing tenants. A would-be buyer should find out what they have to say about the property — tenants can provide great insight.
Is there a common mistake that people make with financing decisions?
The situation now with financing is that people tend to live in the past. Ten years ago, an investor could get a loan easily at pretty good terms. Then it changed radically the other way. Lenders just weren’t lending. The lending climate is certainly getting better but buyers and investors just need to be aware that it is different now.
For first-time borrowers, lenders tend to be cautious, and borrowers should supply information such as three years of historical tax returns and global tax returns on any other real estate owned. It could take six to eight weeks for final approval.
It’s also important to think about what an end strategy is going to be. Obviously, everyone thinks about the beginning. But think about the end as well. How many years should the property be held? Or will it be kept in the family? ●
Insights Real Estate is brought to you by NAI Daus
