The following Q&A was completed as part of our conversational Commercial Real Estate FAQ Interview Series, we hope you find it helpful:
For investors, two of the costliest mistakes one can make are overestimations in your assumptions, or a lack of budgeting as it pertains to getting a property up and running. An assumption may be made regarding appropriate rent increases over time that don’t quite pan out to be profitable in reality as they may have been in graphs or calculations. Overshooting with your expectations can dramatically change the nature of the reality as it pertains to your investment success. In terms of budgeting, it’s always best to be under budget in getting your units up and running than it is to be over-budget when all is said and done.
Richard Wilson: What about out of all the properties that you have seen in multifamily and commercial real estate, what are some common mistakes in the valuation process? And that could be a mistake that could be costly to an investor, or perhaps the valuation was a little bit low, and it’s and opportunity for an investor because someone made a mistake in valuing, you know, what the property truly was worth. What are some of the mistakes you see there?
Peter Von Der Ahe: I’d say when you talk about the value ad properties, the two biggest mistakes that I see most commonly made are people overestimate what they can achieve in rents after they do their value ad work. So, we’ve all seen financial models, and the fact of the matter is that if you make a small increase in your assumptions in your one or two, and you carry them out 10 years, a small increase can make a really big difference 10 years later. And if you overshot your expectations, or your assumptions, early on it can really change the nature of things. So, you want to just make sure your assumptions that you’re making in terms of a value add are backed up, that you really know what you’re what you’re talking about. If you’re talking about being able to raise the rents that you can prove, generally through some type of comp, or at the property themselves, that you’re actually able to achieve that rent.
The other is typically you underestimate the cost that it takes to get the units or the property up to that level. So, it’s budgeting and assumptions.
Richard: Sure, that’s great. Yeah, I know a lot of people, they always have these amazing predictions and graphs of how things are going to go, right? It’s never a prediction that it’s going to be bumpy in my experience.