Top 5 Mistakes of Beginning Commercial Real Estate Property (2)

2. Real Estate is a numbers game.

This is not rocket science, but real estate is a numbers game. Value
is dependent on net operating income�gross revenue minus operating
expenses.

That's why it is so important to get the real operating numbers, not a
projection of potential gross income and estimated expenses.

Confirm and verify every element of income and expense. Value the
property based only on present income, not projected income you have
to produce.

Your profit is dependent on net income. Net income is the net
operating income minus debt service. If you've overestimated revenue,
underestimated expense, or have too much debt service, your profit
will suffer or turn into a loss.

Understand that risk increases with every assumption made. Do not
assume you can save expenses by cutting corners or that you can raise
rents the day after you take possession.

Anyone who has ever prepared a projection of operations has realized
that by tweaking the assumptions, the bottom line can be manipulated
into whatever will make the deal work.

The problem comes when it's time to make the numbers happen. It's real
cash then�your cash�and when the rents don't go up or the expenses
don't come down as much as the projection called for, you take the
hit.

You might tweak the numbers to make it work on paper, but paper won't
pay the bills, and hope is not a plan.