8 Pitfalls of Retail Real Estate Investment

8 Pitfalls of Retail Real Estate Investment

Even though the retail real estate landscape is rapidly changing, the simple truth is that the market is incredibly active and bidding is as competitive as ever.

When this happens, investors – especially those new to the game – tend to haphazardly buy assets and/or overpay.

Consulting multiple industry experts, National Real Estate Investor recently published a slideshow detailing some of the most common pitfalls real estate investors should watch out for.

Eight of the most common mistakes real estate investors make are:

  1. Performing Incomplete Diligence 
    Due to time or other constraints, real estate investors tend to cut the diligence process short and/or they don’t perform an adequate level of due diligence when evaluating existing collateral and vertical components.
  2. Assuming a Recently Constructed Building Has No Problems 
    With as fast as the market is moving, builders rush to complete projects or hire unqualified workers. This often leads to construction deficiencies.
  3. Going Outside Their Comfort Zone Without Proper Advisement 
    Successful real estate investment almost never occurs by happenstance. Successful real estate investment requires knowledge and experience regarding particular geographic markets and property types.
  4. Not Calculating Rent Sustainability  
    The importance of calculating a property’s rent sustainability is often overlooked by buyers. However, this factor is particularly important for properties that are located in states where tax reassessments on sales are the governing method of tax payment. NNN fees can increase by more than $0.75 per sq. ft. just due to taxes. It’s not uncommon for this price increase to become too much for tenants to maintain as the added cost equates to thousands of additional operating expense dollars per month that weren’t accounted for.
  5. Focusing on Short-Term Noise VS. Long-Term Signals 
    Getting caught up in short-term “noise” such as daily fluctuations in the stock market can be seriously detrimental. Real estate investors need to focus on the underlying factors that actually drive commercial real estate returns – factors like employment growth, property fundamentals and capital flows into commercial real estate.
  6. Not Building in Proper Deal Contingencies 

    This may be related to contingencies that address things such as capital needs, lease expirations and possible operational challenges.

  7. Chasing "Bad" Deals, At All Costs 
    It’s not uncommon for investors to get so married to one particular deal that they continue to chase it even though the numbers don’t work.
  8. Stretching for Yield at the Wrong Point in the Cycle 
    This occurs when investor sentiment and investor actions aren’t aligned with each other. For example, investors may believe that the economic recovery is nearly complete and that pricing has peaked, but then buy risky assets in small markets that are likely to suffer in another economic downturn.

When it comes to retail real estate investment, not getting expert advice is ultimately a substantial business and investment risk.

Just as you would see a medical or legal professional who specializes in a particular field, the same logic applies when it comes to real estate.

Talk to us today about how we can help you not only avoid the real estate investment mistakes discussed above, but also the countless others.