The following Q&A was completed as part of our conversational Commercial Real Estate FAQ Interview Series, we hope you find it helpful.
One of the biggest and most common mistakes many make in real estate investment due diligence is not really taking a good look at the deal you’re investing into. In some instances, a deal might look great for the first couple of years, but commercial real estate investment is a long-term thing. Make sure to understand your deal, understand the asset, and understand the marketplace before making your commercial real estate investments.
Richard Wilson: Where do you see most investors messing up or missing the mark on real estate investment due diligence?
Ben Marks: Well, how much time do you have? I think I’ll tell you, I won’t go into individual areas, but I’ll tell you is I think the pattern of mistakes, again, usually falls into the category of either not understanding the asset, not understanding why they want to own it, buy it, invest in it, not understanding or misunderstanding the assumptions. As one anecdotal example there’s so many games being played with debt I saw one deal where it was, again, an above market return and it was based on an interest only debt service payment. And that’s all well and good but those things only last 1, 2, 3 years at the most, and then you’re stuck usually with a 10 year term that’s fully amortizing. And so what may have looked good in year 1, 2, 3, by the time you get to year 4 you on some deals are actually negative cash flowing. So I’d be real careful to not just look at the next year, but the next 2 years, or the next 3 years. Commercial real estate especially is a very, very, very long term endeavor, as you know, and really taking our minimum perspective is 10 years.
Ben: And so that’s how we tend to look at that aspect.