The 3 Most Dangerous Mistakes in Commercial Real Estate
Most beginners lose thousands on their first commercial real estate deal — and it happens faster than you think. But here’s the truth: it’s not because they’re inexperienced or reckless. It’s because there are hidden traps in commercial real estate that no one talks about… until it’s too late.
In this video, I’ll show you the three silent killers that ruin first-time investors — and more importantly, how you can dodge them. If you’re coming from the residential side, these traps are even easier to fall into… and much more expensive to recover from.
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Key Takeaways:
Avoid Overpaying
Value in commercial real estate is based on income (NOI), not comparable sales
Always verify the actual trailing 12-month financials
Know the market's cap rate
Never buy on potential alone, pay for current earnings
Understand True Operating Expenses
Don't trust the broker's pro forma
Carefully check:
Actual property taxes
Deferred maintenance costs
Management expenses
Necessary reserves
Match Financing to Your Business Plan
Ensure loan terms align with property stabilization timeline
Avoid short-term debt for long-term investments
Don't over-leverage
Build sufficient reserves for unexpected challenges
Due Diligence is Critical
Verify every number independently
Understand the property's current performance
Plan for realistic timelines and potential setbacks
About Your Host:
Tyler Cauble, Founder & President of The Cauble Group, is a commercial real estate broker and investor based in East Nashville. He’s the best selling author of Open for Business: The Insider’s Guide to Leasing Commercial Real Estate and has focused his career on serving commercial real estate investors.
Episode Transcript:
Tyler Cauble 0:00
Most beginners lose 1000s on their very first commercial deal, and it happens fast, but it's not because they're dumb. The wrong property will eat you alive and no one warns you about it. So in this video, I'll show you the three beginner traps that quietly destroy first time investors and exactly how to dodge every single one. I'm Tyler Cobble, founder and CEO of cre central.com and after years of investing in commercial real estate myself and working with new investors, I've seen the same beginner mistakes over and over again. The good news every single one of them is avoidable. So if you want to skip the rookie losses and build a portfolio that actually pays you. Make sure to hit subscribe, because this channel is all about helping investors like you win in commercial real estate.
Tyler Cauble 0:53
Trap number one is the killer of most first deals overpaying because you're just using the wrong metrics. If you come from residential you've been trained to think in terms of cops. What does the house down the street sell for? But in commercial real estate, cops are almost irrelevant. In a sense, value isn't based on what the building looks like or what the neighbor paid, or does it have the same amount of bedrooms. Value is based on income. Specifically, value equals net operating income divided by the cap rate. Now here's why that matters. I've seen beginners walk into a property that looks great on paper. The broker says it's a deal. They compare it to another property across town, and they think they're stealing it. But then they close and the income doesn't support the price day one, they're underwater. One investor I met bought a strip center for $2 million because it felt cheap compared to a newer one nearby. But when you pulled the trailing 12 month financials, the net operating income supported a value closer to one and a half million dollars. That's a half million dollar mistake. $500,000 out the window before they even collected a single rent check. So here's the truth. If you use the wrong measuring stick, you'll always pay the wrong price. So how do you avoid it? I have three rules. Start with the NOI. Don't trust the broker's pro forma demand, the actual trailing 12 or T 12 financials and a rent roll. Know your market cap rate a 7% cap in one market might be an eight and a half percent cap in another, and never buy on potential alone. Ever. You pay for what a property is earning today, not for what the broker says it could earn you tomorrow. All right, let's say you're looking at a small retail strip center that's listed for $2 million the broker hands you a pro forma showing a projected net operating income of $160,000 at first glance, it looks pretty good, right? It's an 8% cap rate deal, and that's pretty solid. But here's how you avoid that rookie mistake. Rule number one, start with the NOI verify. Don't trust their pro forma. So instead of using the brokers pro forma, ask for the T 12 financials and the rent roll. Once you review the actuals, maybe you find that last year's noi wasn't actually $160,000 it was $120,000 that's a $40,000 gap right out the gate. Rule number two, know your market cap rate. So check the cap rates for similar retail centers in this specific market, you discover that stabilized properties are trading for around seven and a half percent. So let's do the math. $120,000 divided by point 075, gives you 1.6 million. That means that this property is really worth closer to 1.6 not the $2 million list price. Rule number three, never buy on potential alone. Now the broker might argue, well, once you lease the two vacant suites that we have, the NOI could jump back up to 160k and maybe it could. But here's the key, you don't pay for potential. You pay for performance. Today, this deal is a $1.6 million asset, if you can negotiate closer to that price and then add value by leasing it up, you will be the one who benefits from the upside, not the seller. If the seller could benefit from that upside, why aren't they? This is exactly how you could protect yourself, by verifying income, knowing what the true cap rate is, and refusing to pay for tomorrow's promises, you'll avoid overpaying by hundreds of 1000s of dollars. Have you ever looked at a deal that seemed like it was probably a bargain until the numbers told a different story? Drop yes in the comments and tell me the story. I want to hear it. Trap number two is sneaky, underestimating operating expenses. Here's the problem, most beginners trust a broker's pro forma instead of the property's reality. I think you're probably gonna catch on to a trend here. Don't trust other people's numbers. On paper, the numbers look clean, low expenses, high margins, easy cash flow. But when you actually take it over, those projected expenses bloat and suddenly what looked like a great deal is bleeding you dry. I'll give you a real world example. I knew a guy that bought a. Mall office building where the pro forma showed a 25% expense ratio looked amazing, right, especially since most offices in the area are around about 35% here in Nashville. But once the county reassessed the property taxes, after the sale, insurance premiums jumped and they hired professional management, the real expense ratio came closer to 45% that swing destroyed their projected cash flow and forced them to cover shortfalls out of their own pockets. The big culprits that you need to watch for property taxes, they almost always reset at the new purchase price, depending on where you're located. If you're not underwriting with the new tax bill, you're probably already in trouble deferred maintenance, like roofs and parking lots and HVAC systems, even elevators. If it hasn't been replaced in decades, you're probably going to have to replace it management and reserves as well. Many pro formas minimize or just skip these, but they're real costs that you're not going to be able to just avoid. So let's take that same retail strip center as an example. The broker's pro forma shows an expense ratio of just 25% which looks amazing on $160,000 of projected noi, that would mean only about $53,000 in expenses. Now here's how a beginner avoids getting totally blindsided. Step number one, verify your property taxes on the pro forma property taxes are listed at $18,000 but when you call the county assessor, they tell you that that will reset after the purchase based on the $2 million price, which means that your new tax bill will be $30,000 not $18,000 already a $12,000 surprise. And I don't usually like surprises. Step two check deferred maintenance. The roof is 20 years old and the parking lot hasn't been resurfaced in a decade. You call contractors and get estimates, $80,000 for the roof, $40,000 for the lot, even if you budget for these as reserves over the next 10 years, that's another $12,000 per year that you need to account for, unless you want to bring it all in up front step number three include management and the reserves. The pro forma, conveniently left out professional management. Feel like that happens every time. At 5% of gross rents, that's another $10,000 annually, plus good investors always build in their reserves. So let's do another $8,000 a year. So we added up taxes, $12,000 reserves for roof and parking lot. Another $12,000 management, $10,000 General reserves, $8,000 that's $42,000 in extra expenses that the broker somehow conveniently didn't mean to show you. Now your 25% expense ratio is suddenly closer to 40% and your true noi drops from $160,000 to around $118,000 that one shift, just from properly underwriting your expenses, changes this deal completely from looking like a home run to being worth hundreds of 1000s of dollars less than the asking price. And this is why we always say brokers sell the dream. Your job is to underwrite the reality trap number three is a silent killer financing that doesn't match your business plan. People don't think about this necessarily. They just kind of try and go with the first loan that they get. Now, back in 2019 I became a partner in an office building deal where this mistake almost sank the property my partners had bought the building in 2017 but the loan they signed had relatively aggressive terms. They had to hit certain lease of criteria within a certain time frame, or the lender could call the loan. Here's the problem. Leasing took longer than expected, as it almost always does, especially when you don't hire the cobble group, and they couldn't meet those requirements. Suddenly they were facing penalties, risk of default, and a lender kind of breathing down their neck. It wasn't really that pleasant. That's when they that's when they brought me in to help turn the property around. That is the danger of financing that doesn't fit your game plan or your approach. On day one, the deal looked fine, but when the reality hit the debt structure magnified every challenge. Right? There are three common financing traps that most beginners will fall into short term debt on a longer term play, you run out of time before the property even stabilizes. Your debt doesn't actually match up with how long your plan is over, leveraging right? Taking out the max loan to value may feel good up front and it may make your cash on cash returns look great, but that leaves no buffer when cash flow depths and ignoring reserves. We talked about this earlier, but covering the purchase is easy, but if you don't raise enough for improvements and setbacks, which always happen, I promise you'll be writing personal checks. So the fix is to match your debt to your strategy. If it's a long term hold, don't gamble with short term financing. If you need time to lease up, make sure your loan gives you that runway, and always build reserves into the deal, because something will go wrong. I promise you that. Let's get back to our strip center. Example. The lender offers you a three year loan at 75% LTV with some pretty aggressive terms. On paper, it looks fine. Lower Payments you can qualify. I and you're thinking, if I can just lease those two vacant suites, I'll be golden. But here's the problem, leasing always takes longer than you think, especially since most of y'all can't hire the cobble group because we only work in Nashville for leasing. I'm sorry if the suites don't fill in time, your noi will stay flat when the loan matures. You're stuck trying to refinance, and if interest rates have climbed or occupancy is still lagging, you're gonna be in a lot of trouble. Let's just do the math. At 70% occupancy, your actual NOI is around $118,000
Tyler Cauble 10:32
after the true expenses that we discovered earlier. At a seven and a half percent cap rate, the stabilized value should be closer to $1.6 million not the $2 million that we paid right? The bank didn't do as extensive due diligence as you should have, and lent you 75% of 2 million, which is 1.5 that means the day that you close your loan balance is almost higher than what the property is really worth. You're upside down, and you don't even know it yet. Now, fast forward three years, the market softens, leasing drags, and you've only bumped occupancy to 80% your noi has gone up, sure, but not enough to justify a big refinance, and you're staring down a balloon payment. Because, remember, we only signed a three year term, and you don't have any good options. That's the financing trap. You took short term debt that didn't match the reality of the business plan that you put together. So here's how you actually go about avoiding that match the loan to your strategy. If the deal needs time to lease up, choose a loan that will give you enough runway. Go speak to 17 different lenders, avoid over leveraging. Just because a bank offers you 75% doesn't mean that you should take it. That I have plenty of deals where I've only taken 50% and raise your reserves. Have cash on hand for leasing costs and tenant improvements and downtime. Don't let the financing dictate your business plan. Build the plan first and then pick the debt that actually supports your strategy. The truth is, the wrong loan structure can turn a great deal into a total nightmare pretty fast. So let's recap the three traps that quietly destroy first time commercial investors are overpaying because you're using the wrong metrics. Again, comps instead of NOI and cap rate, underestimating expenses because you trusted the broker. Don't Trust The broker instead of verifying the actual numbers yourself and mismatched financing that doesn't actually line up with your true business plan, which will leave you exposed when things take longer than expected. The good news is, if you avoid those three mistakes, you're already ahead of most beginners and some intermediate people that have somehow managed to buy several buildings. I've seen it all. You'll walk into deals with clarity and avoid the rookie mistakes and the losses that can honestly set you back for years. If you found this helpful, please hit that like button and subscribe. This channel is all about helping you go from a residential mindset to building a commercial portfolio the right way. If you want to go deeper, I've put together a free deal analysis toolkit to help you analyze and run the numbers on your first deal with confidence. You can grab that in the description below when you're done here, check out this video next, where I'll show you the best commercial properties for beginners.