Here’s a trick question: What’s the hardest real estate deal to close? Simple answer: your very first one as an investor. If you think about it, it makes sense—inexperienced real estate investors don’t yet have the requisite experience and knowledge to avoid the most common pitfalls and mistakes that tend to come back and haunt new property owners.
On the bright side, the multifamily residential market is remarkably strong. Vacancy rates have plummeted as of late due in large part to the exponential growth of the baby boomer generation. Many of these individuals are opting to sell their homes and rent instead, choosing to pass on the work and costs associated with maintaining their single-family homes. Millennials are also contributing to the surge in multifamily demand, as the generation prioritizes flexibility and mobility overstaying put in one geographic area—making apartment rentals the perfect option for their lifestyle. Another positive factor in the multifamily sector is that rents are up, mainly down to the fact that intuitive property managers and landlords are taking advantage of the increased tenant demand for cutting-edge technology that can justify the additional payments.
All these reasons make it the perfect time to invest in multifamily properties, but there are some potential missteps first-time investors can get caught up in that can have negative financial impacts. With that being said, simply waiting around until you feel like you know every single detail of the investment industry isn’t an option. So here’s five mistakes to avoid when making a multifamily investment.
Deciding to invest in multifamily residence is a big step, but the long-term return on investment makes it one worth taking. Just don’t try to do it all on your own the first time. Rookie investors often think that if they do all the work, they’ll get a bigger payoff at the end of the day. Unfortunately, that’s simply not the case. Investing in multifamily properties requires some degree of teamwork. As a first-time investor, you probably don’t have an extensive knowledge or sufficient time to complete all the steps a transaction entails on your own. Evaluating, negotiating and eventually managing the property all require specialized skillsets that come with experience. Another concern is having enough funds or borrowing power to acquire a property by yourself. A simple and straightforward way to avoid this common pitfall is to seek out a trustworthy lender with a track record of successful investments. These individuals know how to locate good properties and vet the numbers to make sure the deal makes sense and talk banks into loaning you the money you need. They can also help educate you throughout the process. They earn fees and take a cut of the equity, but this expense is well worth it to tap into their experience.
Newbie investors often can’t control their emotions when they get presented with what appears to be a great deal. They subsequently cut corners during due diligence in a rush to get started on what they believe will be a lucrative venture. Don’t fall into this trap. Take the time to thoroughly analyze the deal, crunch the numbers and make an informed decision. A cautious approach is often better than being overly aggressive, and you may find you have to turn away a number of promising deals because they just don’t make economical or logistical sense for your real estate portfolio. Partnering with an experienced hard money lender who can help guide you throughout this process is also a great option.
Hypothesizing on how much and when a property’s value will increase is a risky game that could land you in financial trouble. Experienced investors know that the most reliable approach is to purchase under-valued property, hold on to it for a while, and sell it years down the road after the market value has appreciated. The tricky part is that no one can accurately predict the rate a given property will appreciate at. When the market is active and values are rising, you may be able to get away with attempting to buy and sell immediately. We’re not saying you shouldn’t take appreciation into account when deciding on an investment, but you should adopt a conservative approach and anticipate selling the property in a down market that could be a long way off—so budget accordingly with the comfort of knowing that one day in the future the market will fluctuate in your favor and you’ll enjoy a great payday.
Accurate Expenditure Projections
While hard money lenders can help you in determining the costs and expenses related to your multifamily investment, you should still take the time to personally verify if these projections are accurate. The mistake a lot of new investors make is that they overlook the amount of money they will have to pay for rental expenses from the very first day they take ownership. When the market is slow, tenants may start demanding upgraded units and amenities. That means your budget may increase in order to keep up with market standards and attract a steady flow of new tenants. To avoid this financial trap, be sure to analyze the property and compare it to similar properties that are being offered in your market. Then determine what upgrades, if any, are necessary to make your property competitive on the market.
Selecting the Wrong Market
The majority of first-time investors believe that investing in a local property is a safer play because they have more first-hand knowledge of the area. This is a big mistake. Just remember the classic real estate saying: “Location, location, location!” You could be losing out on tons of profit because the ideal investment location could be hundreds or thousands of miles away. Don’t let the distance scare you. As long as you analyze the cap rate, area job growth, employment stats and other variables, you have all the information you need to know to make an investment decision.
The financial experts at Express Capital Financing can individually tailor a multi-family loan to suit your unique set of needs in a fraction of the time that it takes to obtain conventional financing. Contact us today to learn more about how we can assist you in achieving your real estate investing goals.