SS181: Don’t Make These Rookie Mistakes When Investing in Multifamily Real Estate

  • June 3, 2024
  • Rokon Ahmed
  • Strategy Saturday
  • Comments Off on SS181: Don’t Make These Rookie Mistakes When Investing in Multifamily Real Estate
SS181: Don't Make These Rookie Mistakes When Investing in Multifamily Real Estate

There are several common mistakes new investors make when investing in real estate. In this episode, Charles discusses these mistakes and how to avoid them.

Watch The Episode Here:

Listen To The Podcast Here:

Talking Points:

If done correctly, multifamily real estate investments can provide consistent cash flow and long-term appreciation.

Here are the top rookie mistakes when investing in multifamily real estate, some from my own personal experience and some from my guests on the show.

  1. Neglecting Proper Due Diligence. Real estate investors must investigate all aspects of the property, including its financials, physical condition, and current tenant base. Does it make sense? Is it accurate? Can you confirm the rent shown to be paid has been actually collected? Are all of the expenses included, or are they leaving some out? Have you hired a property inspector? Did you hire other contractors, like a roofer or plumber, to inspect the property?
  2. Underestimating Expenses and Vacancy. When you are analyzing a property, review what the current owner states for expenses but verify that to be true. Request their utility bills, insurance bills, vendor contracts, etc. I will also plug in the numbers that I feel are more accurate for my situation. If the current owner pays $50 a week to mow their lawn, but they have 10 properties in the neighborhood, I am probably not paying $50 to have my lawn mowed if it is my only property. The current owner is not lying, but they are in a different situation. Also, if they had their property insurance for 10 years, with a high deductible, and never had a claim, they would most likely pay much less than I am with a new policy.
    1. The second part is vacancy. When I see the underwriting assumptions for new investors, I zero in on vacancies and make ready assumptions. Vacancy is very expensive. Not only are you not paying rent, but you need to prepare the unit for rent (make ready); you have to market it/rent it and wait for the tenant to move in to start getting paid again. There is a rule of thumb that multifamily properties have a 5% vacancy rate, but that is for larger complexes that have been stabilized. The smaller the complex, the higher the vacancy number. For more on vacancy and make-ready costs see episode SS151.
  3. Ignoring The Property’s Location. Real estate is hyper-local. Yes, the market may be growing, and they are building A-class properties 3 miles away, but what is happening in this property’s actual neighborhood? Is the property walkable to different businesses or public amenities? Is it close to public transportation, schools, and employment centers? Are the neighboring properties in disrepair? Does it look like the neighborhood is improving or declining? Drive by at 10 PM and see if your opinion changes.
  4. Insufficient Cash Reserves. If you purchase a property and work is required, you need this money in reserve before you purchase it, along with several months of property expenses. Don’t be the delusional investor who believes they can make major repairs from cash flow. Maybe you can save for a new roof that is required in 10 years from cash flow, but don’t hope that a leaking water heater and a furnace on the brink of failure will be paid for by cash flow. Those items need to be replaced immediately after you purchase the property.
  5. Betting on Appreciation. When I purchase properties, I strategically choose markets, areas, and properties that are likely to appreciate in value. However, I do not try to predict the future or make unfounded assumptions about something completely out of my control, and I suggest you don’t, either. When I talk about forced appreciation, that involves us doing repairs to a property, increasing rents, increasing the net operating income, and thus increasing the value. It is completely different from the investor who “purchases and prays.”
  6. In good market conditions, it is easy to fall into the trap of overleveraging. Lenders want to lend you as much as their credit committees will approve. Make sure to fully understand the loan terms and your monthly payment amount, including whether or when your loan’s interest rate will adjust. Overleveraging looks great when your tenants are paying, and rents are increasing, but when the market slows down, rent is paid late, and major repairs need to be performed, this is when overleveraging can sink you.
    1. In stagnant and down markets, lenders will be more conservative, which will help you avoid getting in too much trouble.
    2. It is funny, though; the safest loans are made at the bottom of the market, but that is when most lenders are usually the most conservative.
  7. Ignoring Thorough Tenant Screening. Tenant screening is a major requirement for being a successful multifamily investor. Thoroughly vetting potential tenants reduces the chance of late payments, eviction costs, and property damage. Always conduct in-depth background and credit checks. Verify the tenant’s employment and income while confirming that they are who they say they are. Tenant fraud is a growing issue across the United States.
  8. Neglecting Property Management. I am a huge proponent of first-time landlords managing their own properties. It allows investors to learn all aspects of the business from the inside; however, if you cannot devote the time required to manage the property correctly, make sure you hire a professional property management firm that knows your area and property class. Knowing this before you purchase your property is better so you can accurately account for their management fees in your underwriting.

Transcript:

Charles:
I once met an investor who lost a fortune because of a simple oversight in their first multifamily deal. Let’S make sure that’s not you.

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing don’t make these rookie mistakes when investing in multi-family real estate.

New Speaker:
If done correctly, multi-family real estate investments can provide consistent cash flow and long-term appreciation. Here are the top rookie mistakes when investing in multi-family real estate. Some from my own personal experience and some from some of the guests on my show. Number one is neglecting property due diligence. Real estate investors must investigate all aspects of the property, including its financials, physical condition, and current tenant base. Does it make sense? Is it accurate? Can you confirm the rent shown to be paid as being actually collected? Are all the expenses included or are they leaving some out?

Charles:
Have you hired a property inspector? Did you hire other contractors like a roofer or plumber to inspect the property as well? Number two is underestimating expenses and vacancy. So when you’re analyzing a property review that the current owner states for expenses, but verify that to be true. Request their utility bills, insurance bills, a vendor contract, et cetera. I will also plug in numbers that I feel are more accurate for my situation. For example, if the current owner pays $50 a week to mow their lawn, but they have 10 properties in the neighborhood, I am probably not paying $50 to have my lawn mowed if it’s only one property that I own. Now the current owner is not lying, but they are in a different situation. Also, if they had their property insurance for 10 years with a high deductible and never had a claim, they would most likely pay much less than I am with a new policy.

Charles:
The second part is vacancy. When I see the underwriting assumptions for new investors, I zero in on vacancies and make ready assumptions. Vacancy is very expensive. Not only are you not getting paid rent, but you need to prepare the unit for rent, make ready, and you have to market it, rent it, and wait for the next tenant to move in to start getting paid again. There’s a rule of thumb that multi-family properties have a 5% vacancy rate, but this is for larger complexes that have been stabilized. The smaller the complex, the higher the vacancy number. For more information on vacancy and make ready costs, check out my episode. SS 1 51 where I really do a deep dive. Three is ignoring the properties location. So real estate is hyperlocal. Yes, the market may be growing and they’re building a class properties three miles away. But what is happening in the properties actual neighborhood?

Charles:
Is the property walkable to different businesses or public amenities? Is it close to public transportation? Schools and employment centers are the neighboring properties in disrepair? Does it look like the neighborhood is improving or declining? Drive by it at 10:00 PM and see if your opinion changes. Four, insufficient cash reserves if you purchase a property and work is required. You need this money in reserve before you purchase it, along with several months on property expenses. Don’t be delusional. An investor who believes they can make major repairs from cashflow, maybe you can save for a new roof that’s required in 10 years from cashflow. But don’t hope that a leaking water hinderer and a furnace that’s on the brink of failure will be paid for by cashflow that you’re getting in the first one or three months. Those items need to be replaced immediately after you purchase the property.

Charles:
Five is bending on appreciation. When I purchase properties, I strategically choose markets, areas, and properties that are likely to appreciate in value. However, I do not try to predict the future or make unfounded assumptions about something completely outta my control, and I suggest you don’t either. When I talk about forced appreciation, that involves us doing repairs to a property, increasing rents increasing the net operating income, and thus increasing the value is completely different from an investor who just purchases and prays. Six is over leveraging in good marketing conditions, it is easy to fall in the trap of over leveraging. Lenders wanna lend you as much money as their credit committees will approve. So make sure to fully understand the loan terms and your monthly payment amount, including whether or when your loan interest rate will adjust over. Leveraging looks great when your tenants are paying and rents are increasing, but when the market slows down, rent is paid late and major repairs need to be performed.

Charles:
This is where over-leveraging can sync you. In stagnant and down markets, lenders will be more conservative, which will help you avoid getting into too much trouble. It is funny though, the safest loans are made at the bottom of the market, but that is when most lenders are usually the most conservative. Seven, ignoring thorough tenant screening. Now, tenant screening is a major requirement for being a successful multi-family investor. Thoroughly vending potential tenants reduces the chance of late payments, eviction costs and property damage. Always conduct in-depth background in credit checks, verify the tenant’s employment and income welcome confirming that they are who they say they are. Tenant fraud is growing issue across the United States. EAT is neglecting property management. I’m a huge proponent of first time landlords managing their own properties. It allows investors to learn all aspects of the business from the inside. However, if you cannot devote the time required to manage their property correctly, make sure you hire a professional property management firm that knows your area and knows your property class.

Charles:
Knowing this before you purchase your property is better, so you can accurately account for their management fees in your underwriting, so they may assist you with reviewing the property and your assumptions. So I hope you enjoyed. Please remember to rate, review, subscribe, submit comments and potential show topics@globalinvestorspodcast.com. If you’re interested in actively investing in real estate, please check out our courses and mentoring programs@syndicationsuperstars.com. That is syndication superstars.com. Look forward to two more episodes next week. See you then.

Charles:
Have you always wanted to invest in real estate, but didn’t have the time, didn’t know where to find the deals, couldn’t get the funding and didn’t want tenants calling you. Since 2006, I’ve been buying income producing properties and great locations that provide us with consistent passive income. While we wait for appreciation in the future and take advantage of tax laws while we’re waiting and unlike your financial advisor, we invest alongside our investors in every property we purchase. Check out to investwithharborside.com. If you like the idea of investing real estate, if you like the idea of passive income partner with us at investwithharborside.com, that’s investwithharborside.com.

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar, LLC, exclusively.

Links Mentioned In The Episode:

Are You a Fan? Subscribe, Rate, Review & Share – Click Here To Learn How

What question do you always wish I would ask but I never do?

Connect with the Global Investors Show, Charles Carillo and Harborside Partners:

Scroll to top