Starting out in real estate investing, many start small. By small, I mean residential properties. In distressed real estate, this means flipping houses. I don’t discourage that, and I always say if the deal is right then go for it! However, there are some general guidelines that I wish I knew going into real estate and risks I could have avoided…
Commercial real estate is worth the calculated risk.
To clarify my point, when evaluating properties, consider smaller commercial properties to flip or manage. Think small retail storefronts, restaurants, or studios (think PeerSpace). These types of properties are smaller but will more often than not give you a leg up with profit. If you’re investing in residential real estate, you risk having rentals that sit empty or houses that won’t sell.
Who’s to say that won’t happen with commercial real estate? Well, I don’t have a crystal ball, which is why calculated risk and due diligence are a must when evaluating if a deal is worth it. In my personal experience of only flipping houses early in my career, I faced detrimental losses after the market collapsed. Demand for commercial real estate is different than residential, and arguably, the odds are more in your favor when you sit down and do the homework.
In short, the reality is that it is a lot more work to make the same amount of return in residential real estate than in commercial real estate. Making 10% on a $250,000 house is significantly less than making 10% on a $10,000,000 apartment complex and it’s about the same amount of work.
Contractors are king. Invest wisely.
Believe it or not, sometimes owners will take losses and contractors make profits. It all depends on how you build the deal. This is why having insight into construction or someone on your team that has insight into construction is essential. Contractors want to make as much money as possible, but you also need to have the insight to see if someone is presenting you with a plan that is filled with overcharging and underperforming.
Again, doing your homework is key. Find other property owners, ask about contractors, who in the area is reputable? Don’t accept the first offer that comes your way, exercise every option before signing the dotted line.
Don’t make goals, make systems.
Goals are great for one-time success. Systems are great for consistent success throughout multiple deals.
I believe fully that my ultimate failure with the crash came from making a vague goal of becoming a millionaire without any real regard for how I got there. It always begs the question, “Well, now that I did that, what’s next?” Systems operate completely differently. It’s multiple steps that continue on. You don’t have a stopping point, instead, you constantly have something else to consider. It offers you more purpose and consistent wins.
Your only goal should be building systems that keep on giving. Take the mistakes as they come, and know that they’re showing holes in the system, a blessing in the long run.
Want to learn more about how to avoid unnecessary risk in a distressed market? Catch my interview on Lifetime Cash Flow with Rod Khleif here.
If you’re also interested in learning from more of my mistakes, I wrote my book, Catching Knives: A Guide to Investing in Distressed Commercial Real Estate during the pandemic to help investors prepare and grow during difficult markets. You can order your copy here: https://www.catchknives.com/
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