Go big or go home is a popular saying.  And for commercial real-estate investors, it is often a very true sentiment.  But done at the wrong time or with the wrong property, a go-big strategy can mean big losses for both the novice and seasoned investor.

Last week I talked about using equity in existing properties as a way to enhance a line of credit and reduce cash outlay when making a major purchase. This is a strategy we at Creative Choice Group have used in the past.  Why?  The approach offers flexibility and time for a new property to grow in value. And while a great way to leverage your assets, like any investment strategy there are some risks.

First, a line of credit is a loan.  Any loan you take out from a banking institution will come with an interest rate.  Today interest rates are very low, but they will continue to rise.  You want to make sure your property can increase in value at a faster rate than interest rates may rise.  If you think about the real estate crash a few years ago, some markets continue to recover.  Florida was one state hit extremely hard.  Many people went “too big” and lost their nest eggs and financial stability.

Second, you never want to borrow more than you can afford.  For the most part, the line of credit is allowing you to borrow up to 100% of the cost of your new investment property.  This means you are also borrowing the negative cash flow for the first years.  Doing the math is an important step for any financial decision in business.

Third, a line of credit is flexible. This sounds terrific.  However, one big mistake many investors make is using these funds for other purchases beyond the property.  I have personally seen this lack of discipline used to justify personal vacations, cars or other luxury items. Inappropriate fund allocation is a quick way to get deeper into debt.  You want to avoid getting into legal trouble or dealing with bankruptcy law suits.

Finally, a key strategy for real estate is location, location, location.  Remember, you want to select an investment grade property that has the opportunity to create positive capital growth.

In summary, commercial real-estate offers a tremendous opportunity to generate value and create high returns. But you need to make sure you protect your assets.  Don’t borrow more than you can afford, use your money wisely and choose your investments wisely.  Go big and stay home!