5 Myths of Real Estate Investing

Maybe you have money to spend and maybe you don’t, but you’re watching this video because you want to want to grow your wealth. Here are 5 of the most common myths of real estate investing, this is coming from someone who has sold and leased $50,000,000 of commercial real estate within the first 3 years of working in the business.
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1) I’m a qualified buyer, so real estate agents will show me deals.

As sad as it is, being a qualified buyer does not mean that a real estate agent will take you seriously. If an agent has a great opportunity, they are going to bring it to the buyers they know will close and will do multiple deals with. If you are getting started, identify the agents who specialize in the types of properties you want to buy and put them on your radar. There is a saying amongst commercial real estate agents, that “everyone is an investor.” It’s exceedingly easy to find an individual or family who would buy “cash flowing” or “value add” commercial real estate. If you have money and you are serious about getting into it, you will need to find a way to stick out to agents who are going to get you deals.

2) Cash flow is related to return on investment.

Cash flow is everything, who would disagree, right? But cash flow has nothing to do with how actually profitable your investment is. For example, let’s say you buy a building for one million dollars and you pay for it in cash. You have no mortgage, so you can keep all of your rental income. If you are collecting $20,000 a year in rent, you may keep $1,700 every month, but you are only making 2% on your investment, you may as well keep it in a bank for 1% and avoid the headache. Or, you could buy that same one million dollar building with a 20% down payment at a 5% interest rate on a 15 year amortization. Even with income of $80,000 per year, which is an 8% return, which is much better, you would not have any additional funds above your monthly mortgage and would not be able to save anything for capital expenditures. So first, understand what the return on your investment is, then make sure you have a cash cushion so that you can afford roof or parking lot repairs.

3) A low price is a good deal.

Cash flow is very important, and it’s true that you make your money when you buy, but don’t make the mistake of getting blinded by a cheap price for a building that is actually decent if the location is not one you would want vacated. In the event you have a tenant leave, you need to have some level of confidence you would be able to get another tenant in that space.

4) The tenant will never leave.

Picture this: a three hundred thousand square foot manufacturing building with a tenant who has been at that location for over 100 years with massive power, infrastructure that is nearly irreplaceable, and no other buildings like it within at least fifty miles. In fact, the property doesn’t really work for any other tenant without a significant amount of building improvements. The building was being offered and valued for sale with the current lease in place, and the investor interested in the deal thought, “These guys can’t leave, it would be nearly impossible for them to find something else, and not only that, they have invested many millions into the site. I know they have a lease coming up in five years, but I am still going to buy it because there is no way they are going to leave.” Guess what. They built their own building 15 miles away. And they left.

5) Don’t buy in a hot market.

It can be hard to justify spending money when you know that the market is at a high point. Everyone has heard the stories of the investors who get caught up in the frenzy of spending money during a boom and then losing their shirts when it’s time for the bust. Know the market, understand what we call “market fundamentals” and if you see a deal that would sell for a fair price, and has market leases in place or there is good reason to believe that you would get market leases, pull the trigger. There are good buys in every market, just know where you are in the cycle and drill down on historical sale comps and lease comps to determine if your deal is a good one.

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I’m David Skinner, and this is the CRE Coach, where together you and I are lifting the hood on Commercial Real Estate.