SS223: 5 Myths About Multifamily Investing That Hurt Beginners

SS223: 5 Myths About Multifamily Investing That Hurt Beginners

Multifamily investing is a great way of generating income and building wealth, but there are some common myths and misconceptions. In this episode, Charles breaks down some of the most common myths.

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Talking Points:

  • After listening to some real estate podcasts and YouTube episodes, you will be quickly inundated with all the benefits of multifamily investing and why you should become an investor. Still, since investing in my first multifamily property in 2006, I have realized many misconceptions about what multifamily investing really consists of. I have chosen 5 myths that many investors and gurus still consider true.
    • 1. It Is Passive. It is not a passive investment if you are actively purchasing a multifamily property. Yes, the revenue is recurring, and you can hire a property management company but, that will only make your investment semi-passive, removing you from the day-to-day (also known as asset management), which for me and many other investors is fine but, if you think you are going to buy a property, a hire a property management company and never have any more interaction with the property, nothing could be further from the truth. If you build an extensive enough portfolio, you could hire an asset manager, but we asset manage all of our properties, and I suggest all investors do the same. When there is a call with our property manager, someone from my team or myself is on that call, and we will share the recording with all other partners and team members.
    • 2. Cashflow from Day 1. I have never purchased a multifamily property and collected cash flow on day one, which I put into my pocket. As value-add multifamily investors, there are stages that most properties go through, from what I call the initial stabilization stage through the renovation process to being a stabilized property. This could take months or it could take years, depending on the size of the project. Even the most renovated properties I purchased still took months to finalize and get on track, another reason you need proper reserves when buying real estate.
    • 3. Consistent Cashflow. The consistency of cash flow greatly depends on many factors, including the property class, the tenant base, the condition of the property, etc. A solid 20-unit B-class property in a B-class neighborhood will have more consistent cash flow than a 10-unit C-class property in a C-class neighborhood. Properties with more units have more income streams. Better-quality areas and properties typically attract more financially sound tenants, making collections more consistent; however, when you own multifamily properties, you own a business with ups and downs, not an annuity—another reason for having a reserve fund.
    • 4. You Can Do It with No Money. If you are buying multifamily properties, not just wholesaling them, you need money; not that it all has to be yours, but you need money. Even if you purchase a property with no money down, you still need to make repairs and upgrades while having and maintaining a reserve fund. If you feel you can pay for those from cash flow, that is one of the biggest mistakes a multifamily investor could make. Check out episode SS167 called Zero Down Doesn’t Mean Zero Dollars, where I break this down in more detail.
    • 4B. If You Find a Deal, the Money Will Come. Yes, if you have been investing in the asset class and market for decades with a solid track record and a list of investors who trust you, this is a myth for a new investor speaking to strangers about a deal. This is exactly why my first passive investors for my syndication deals were business partners from past business dealings outside of real estate. They knew me and trusted me for years before seeing the deal.
    • 5. It’s Impossible to Find Good Deals. I had this mentality for years until I realized that everything is difficult. Today’s economy is highly competitive, especially in real estate, and many other people are trying to do the same thing you are doing. This is why the sooner you start focusing your property search on specific neighborhoods, property sizes, etc., the more successful you will be. When you say, you only invest in 10–30-unit properties in these neighborhoods instead of just saying, I invest in the whole city, it will make you an expert in these areas, and brokers and your investors will take you more seriously. The second part is understanding that you most likely need to search through 50-100+ properties to find one deal. Coming to terms with these two points made my real estate investing much more realistic since I now truly understood the time it would take to find deals that worked.
  • This episode is not meant to discourage new multifamily investors but to adjust their expectations of the realities of apartment investing. Becoming a successful multifamily investor takes years, but it can be extremely rewarding, as it is a great way to generate income and wealth.
  • If you want to learn about common Rookie Multifamily Investing Mistakes, please check out episode SS181.

Transcript:

Charles:
If you think multifamily investing is completely passive, you’re in for a rude awakening. I’ve been investing in multifamily real estate since 2006, and I continuously see myths online and social media, and today I’m setting the record straight. Welcome to Strategy Saturday. I’m Charles Carillo, and today we’re breaking down five dangerous myths that are hurting multifamily investors. And understanding these myths will save you time, money, and frustration no matter if you’re just getting started or you already own some properties. So let’s break it all down, starting with the biggest misconception of them all. So after listening to some real estate podcasts and YouTube episodes, you will be quickly inundated with all the benefits of multi-family investing and why you two should become an investor. Still, since investing my first multifamily property, I’ve realized many misconceptions about what multifamily investing really consists of, and I’ve chosen these five myths that many investors and gurus still consider to be true.

Charles:
Number one is that it is passive. Now, it is not a passive investment. If you’re actively purchasing multifamily properties, yes, the revenue is recurring and you can hire a property management company, but that will only make your investment semi-passive, removing you from the day-to-day, also known as asset management, which for me and other investors is fine. But if you think you’re going to buy a property, hire a property management company, and then have no more interaction with a property, nothing could be further from the truth. If you build an extensive enough portfolio, you can hire asset manager, but we asset manage all of our properties, and I suggest all of our investors do the same. When there is a call with our property manager, someone from our team or myself is on that call, and we will share the recording with all the other partners and team members so everybody is in the loop immediately as something happens or that we have any type of updates.

Charles:
Number two is cashflow from day one. Now, I’ve never purchased a multi-family property and collected cashflow from day one, which I put into my pocket as a multi-family value-ad investor. There are stages that most properties go through from what I call the initial stabilization stage through the renovation process to being a stabilized property. And this could take months or could take years depending on the size of the property. Even the most renovated properties I’ve purchased still took months to finalize and get on track. Another reason you need a property reserves when you’re buying real estate. Number three is consistent cash flow. Now, the consistency of cashflow greatly depends on many factors including the property class, the tenant base, the condition of the property, et cetera. A solid 20 unit B class property in a B class neighborhood will have more consistent cashflow than a 10 unit C class property.

Charles:
In a C class neighborhood, properties with more units have more income streams, better quality areas, and properties typically attract more financially. Sound tenants, also known as credit tenants, what we call them, making collections more consistent. However, when you own multifamily properties, you own a business with ups and downs. It’s not an annuity. Another reason for having a reserve fund number four is you can do it with no money. Now, if you’re buying multi-family properties, not just wholesaling them, you need money. Not that it all has to be yours, but you need money even if you just purchase it with no money down. You still need to make repairs, upgrades while while having and maintaining a reserve fund. Now, if you feel you can pay for those repairs and upgrades from cashflow, that is one of the biggest mistakes a multifamily investor could ever make. Check out episode SS 1 67, that’s SS 1 67 called a zero down doesn’t mean $0, where I break this down in more detail and four B.

Charles:
Part of this is that if you find a deal, the money will come. Yes. If you’ve been investing in the asset class and market for decades with a solid track record and a list of investors who trust you, this is a myth for new investors speaking to strangers about a deal. This is exactly why my first passive investors for my syndication deals were business partners from past business dealings outside real estate. They knew me and trusted me for years before seeing the deal and ultimately investing number five. And the last point is that it’s impossible to find good deals. Now, I had this mentality for years until I realized that everything is difficult. Today’s economy is highly competitive, especially in real estate, and many other people are trying to do the same thing you are doing. This is why the sooner you start focusing your property search on specific neighborhoods, property size, et cetera, the more successful you will be when you say you only invest in 10 to 30 unit properties in these neighborhoods.

Charles:
Instead of just saying, I invest in the whole city, they’ll make you an expert in these areas and brokers and your investors will take you more seriously. The second part is understanding that you most likely need to search through 50 to a hundred plus properties to find one deal. Now, coming into terms with these two points made my real estate investing much more realistic since now I truly understood the time it would take to find deals that actually worked out. This episode is not meant to discourage new multifamily investors, but to adjust their expectations of the realities of apartment investing. Becoming a successful multifamily investor takes years, but it can be extremely rewarding, as is a great way to generate income and generate wealth. And if you want to learn more about common rookie multifamily investing mistakes, please check out episode SS181. I hope you enjoyed.

Links Mentioned In The Episode:

  • SS167: Zero Down Doesn’t Mean Zero Dollars
  • SS181: Don’t Make These Rookie Mistakes When Investing in Multifamily Real Estate

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