Unless the market gives you a lot of margin for error in making investments (meaning you can buy at such an attractive price and return that you have room to make mistakes and still do well), I believe investors need to be careful on due diligence and the assumption they make in the underwriting process. First comes a thorough understanding of the particular target asset, its relative position in the market, knowing how best to reposition or lease the asset. It really needs a complete business plan following the purchase with research and testing of each assumption and conclusion going into the business plan, which may take working with certain consultants, market studies and the like. In addition, there is basic due diligence: making sure the asset is in compliance with local zoning laws and ordinances, reviewing each commercial lease to confirm underwriting for rents and escalations and to make sure there are no unusual provisions that could cause a problem down the road (unusual options to renew, expand or terminate the lease), engineering to assess deferred maintenance and needed capital expenditures, environmental reports to ensure no large expenses will be required to comply with environmental laws, careful review of any issues relating to title, and more. A major miscalculation can turn a pretty good deal into a bad one if you miss something important, but this does require that you incur certain expenses in order to do these things in advance.
