A recent Globe St.com article “The Seven Deadly Sins of CRE Investment” argues, “Buying a CRE asset above its value or at a low cap rate is rarely a route to a successful transaction.” I couldn’t agree more.
While situations exist where it is acceptable to pay up, such as the need to acquire a key piece in an assembly, I never advocate buying investment property without proper due diligence or market analysis.
Unfortunately, vigorous deal competition coupled with the need to invest idle capital, particularly funds with time limits, inevitably leads investors to commit some of these sins mentioned in the article. After all, what is one or two bad deals in a large portfolio if the other deals are good, right? I disagree.
Also, often individual investors invest foolishly because they are driven by the desire to avoid taxes on the gains resulting from a sale. So, they overpay to utilize the 1031 tax deferred exchange. Finally, many people that are entrusted with deploying capital, whether debt or equity, are fee-driven, so they really don’t have skin in the investment.