Getting started in real estate investing can be intimidating, especially if you are thinking about multi-family properties. With so much money on the table, you will want to make sure that you don’t make any mistakes and end up with a bad investment. Below we will share with you some of the most common mistakes that occur in multifamily investing and we will give you some tips to help you avoid these mistakes.
More often than not, you will need a mortgage unless you are a sitting on substantial capital that can fund the mortgage payments and maintenance that are required to operate a multi-family property. One of the first people that you will need to seek out is a partner who has some experience in the field and that has done a deal or two. Yet, partnerships that go awry are at the core of things that go wrong when you are investing in multi-family properties. This is a result of the lack of proper documentation within a company agreement or an operating agreement laid out between you and your partner. First and foremost, your partner should be chosen intentionally and not just because you are friends. You will want to make sure that you have complementary skills and write up well thought-out, proper documentation in the case that you run into problems stating how you will resolve problems. Picking your partner is part of the process that you should be picky about.
If you decide to begin this endeavor alone, but you don’t have any experience, we recommend doing some research and hiring a good, competent, professional management company and real estate broker. Hire a management team that is currently managing properties similar to the property that you are interested in. From there, you should ask your management team for referrals for a good mortgage broker. You can leverage the experience of your management team to your broker in order to increase your credibility. Going forward, you can then leverage the credibility of both your management team and your broker. These two entities make up two of the three legs of the barstool while the third is a lawyer. These three entities must be in place before you will be taken seriously in the multi-family property investment world.
Networking is key in real estate investment because often times it’s not about what you know until you know who to know. In order to get started networking, we suggest attending educational platforms and mentoring clubs in your state that can easily be found via google. However, before you attend these networking events, it’s essential that you have a basic knowledge of the industry and that you know the jargon used.
Often times, people have the misconception that as soon as they start putting money into an investment property they will get that money plus more back. If this is your expectation then you are in for a rude awakening because during the first year of investment not only are you not going to make any money but your cash flow will be severely stunted. However, many first time multi-family property investors question whether or not to spend their money on certain things. First off, you have to put money down to get into any deal in order to assert your credibility. Second off, do NOT skimp out on inspection costs such as getting the sewers, gutters, roofs, and parking lots checked. Although these inspections can add up, it is much cheaper than having to replace the roof on your own after the deal has been closed. Additionally, another mistake that a lot of first time investors make is forgoing walking the units of the multi-family living property. It is crucial to walk through every single unit because even the units that are occupied can be in poor condition. You need to know everything about the property that you are planning to buy, to ensure that it will be a good investment.
There is talk about a bubble being created in the multi-family space that could lead to a crash. However, there are four things that will lead to trouble when the market crashes and if you avoid them then you will still do well if a market crashes. First off, buying in a high crime area with low socioeconomic individuals will most likely lead to trouble when a recession hits. Therefore, we recommend on focusing in areas with lower crime rates and higher incomes. Furthermore, suburbs typically do better than the urban core so we recommend focusing on suburban multi-family properties. Second off, you must avoid going in to a deal undercapitalized and you must perform a physical inspection to set aside proper funding for deferred maintenance. If you fail to have the proper funds during a market crash then you will not be able to maintain the building. Thirdly, having improper management during a market crash will lead you without guidance and possibly not management at all. Lastly, if you have a low maturity rate at the time, your values will temporarily go down and you might have to refinance or sell at a bad time which will cause more problems. If you can avoid these four errors, then you will be able to mitigate a lot of the risk in the case of a market crash.
