As the real estate market continues to attract investors with promises of returns, it's crucial to be aware of the potential land mines that can derail your whole thesis.
Here are some key insights to steer clear of common pitfalls:
1.) Market Research: Have nailed this point many times but need a thorough understanding of local market dynamics.
Location is everything. The wrong one can crush you.
Potential landmines to avoid:
-Declining markets over long periods of time (population, economic output)
-Markets that are levered to a single industry
-Areas without supply/zoning constraints
-High crime
-Flood zones
-Low density (subjective to the market)
2.) Due Diligence: Hidden defects, legal disputes, potential for liability issues, type of tenant base- all potential disruptors.
Potential landmines to avoid:
-Un-permitted work (if you file a permit down the line, it’ll open a can of worms with city officials)
-Property violations (some can be solved easily, others not so much)
-Environmental issues
-Legal disputes
-Rent restricted overlays
-Shared boundaries (source cases of encroachment)
-Structural issues or outdated MEP may be an issue for some
-Shared utility meters (units aren’t legal or costs are paid by ownership)
-Low ceiling heights (that you can't raise)
-Lack of certificate of occupancy (especially if leased)
-No utility records (we once looked at a complex that received electricity from a temp pole)
3.) Cash Flow Projection: Missing on rental rates and overhead costs is another quick way to disrupt business plans.
Potential landmines to avoid:
-Underwriting rents based on active listings (need to find the price at which leases get signed, days on market, condition)
-Forecasting rent growth
-Not securing hard insurance quotes
-Not underwriting increases to operational expenses (your taxes won’t be the same forever)
-Missing small stuff: who handles landscaping, snow removal, garbage, common areas? What are the costs and how often do they occur?
-Not keeping reserves and cap ex budgets
4.) Property Management: A bad manager can let one bad egg in and thus, drive everybody out.
Potential landmines to avoid:
-Not matching the size of the management firm to your portfolio
-Choosing a property management company on the premise of a relationship vs. merit
-Not receiving referrals from the property management firm
-Gaps in communication- red flag
5.) Legal/Accounting Compliance: Real estate investments are subject to countless laws and regulations, ranging from tenant laws to zoning ordinances.
Potential landmines to avoid:
-Not working with attorneys (title, entity formation, document preparation, zoning verification, evictions, SEC filings, permits)
-Not following rules that govern your strategy (you can’t advertise offerings under certain SEC regulations)
-Failing to review legal documents that may require periodic changes.
-Not working with a CPA
-Failing to maintain meticulous records around capital accounts, profit & loss, progress reports, etc
Comentários