Are you planning on investing in your first multifamily property? If so, you’ve come to the right place!
Multi-family properties will continue to be on the very best investments for any investor to make in 2020 and beyond because they enable interest to generate consistent cash flow on a monthly basis while building wealth,
Even though multi-family properties make an excellent investment, there are a variety of things that you absolutely should not do when buying your first multifamily property.
In this article, we will break down the top things that you shouldn’t do when buying a multi-family property just so that you are better prepared when it comes to knowing what to look for, and what mistakes you should avoid for making while investing in multifamily.
#1 – Choosing Bad Financing When Investing In Multifamily
Unless you plan on paying cash for your first multi-family investment property, you most likely are going to be financing that deal. Sadly, many investors make the mistake every single year of choosing bad financing when it comes to investing in investment properties.
What exactly is bad financing? This term has a wide variety of definitions, the most common explanations of bad financing include choosing a mortgage loan with a high-interest rate, adjustable interest rate, high monthly payment, balloon payment, or personal recourse.
As a real estate investor, you absolutely have to make sure that a deal makes sense financially before you invest in it because, if the deal doesn’t make sense financially due to bad financing, you’re going to find yourself upside down on the deal very quickly.
Let’s say that the financing that you’re considering doesn’t make sense, the good news is that there are a wide variety of other options for you to choose from that will enable you to finance a deal including choosing a private money lender, hard money lender, crowdfunding, or working with a partner.
#2 – Investing In A Bad Location
If you’ve read real estate books, or maybe purchased residential real estate in the past, you most likely will have heard the term “ location, location, location” before. This term also applies to multifamily properties as well.
You absolutely should learn more about the location of a multi-family property before investing in it because, if the property doesn’t meet the criteria of a good location, you’re going to potentially have a difficult time renting that property and may find that you’re spending more money on a monthly basis than what that property is really worth.
What should your criteria be for the multifamily property that you plan on purchasing? Ideally, the property that you purchased should be close to the highway, have plenty of parking and be near shops, stores or restaurants that your tenants may use on a regular basis.
Besides being a convenient location, your property should also be in a safe neighborhood that’s also part of a good school district as well.
Establishing criteria for the multifamily property that you want to buy is important because it will save you the hassle of having regular vacancies every year and it’s also going to help you to establish consistent cash flow on a monthly basis.
#3 – Misjudging Rent Value
So far, we’ve offered you common mistakes that many investors make when purchasing multi-family properties but, one of the most common mistakes by far that we’ve seen investors make over the years is misjudging the rent value that they could expect to receive from a property after purchasing it.
Knowing the rent value is an important part of purchasing a multi-family property because this is what’s going to provide you with an idea of the income that you can expect to earn from the property on a monthly basis.
Thanks to the internet, you can easily research the potential rental value of a multi-family property before purchasing it by doing a comparative analysis of that property online and finding out what other similar properties in the same area may be renting for.
If you don’t have experience doing a comparable analysis yourself, it’s best to hire a professional to assist you with this process. Thankfully, there are a variety of people to choose from in any local area including Real Estate agents, property managers, and estimators.
As you move forward and invest in other multifamily properties in the future, you should consider taking a course on valuation from your local Association of Realtors. This will increase your understanding of evaluation and help you to be better prepared when you invest in future properties.
#4 – Underestimating Multifamily Repair Costs
During the process of purchasing a multi-family property, whether it’s the property that you’re currently looking at, or property in the future, another common mistake that you should avoid at all costs is underestimating repair costs.
Repairs are a fact of life when purchasing a multi-family property so it’s best to always anticipate the repairs that a property is going to need and be very conservative about the money that you plan on saving to make those repairs.
Failure to anticipate multi-family repairs means that you could possibly run out of money in the near future so it’s best to have the multifamily property that you are considering purchasing fully inspected by a licensed property inspector just so that you are 100% clear on the repairs that the property is going to need before you purchase it.
#5 – Running Out Of Money
There’s no doubt that it’s easy to make mistakes as a multifamily investor, besides the most common mistakes that multifamily investors make, which we’ve offered you so far in this article, another mistake that you want to avoid making at all costs is running out of money.
Multifamily investors typically run out of money when they either underestimate repair costs (as we mentioned above) or they underestimate future capital expenses on their rental property.
To avoid running out of money, it’s best to have a multi-family property professionally inspected before you purchase it.
During the inspection, you can get a complete analysis of what repairs the property currently needs, and the repairs that it may need either one year to 10 years in the future. Doing this will help you to be prepared to budget for those repairs and able to handle them when they arise.
#6 – Making Business Decisions Based On Emotions
There’s no doubt that purchasing your first multi-family property is going to be an emotional experience because it’s your first investment and you want it to go smoothly.
Sadly, many investors make the mistake of getting emotionally involved with their first multifamily transaction without making an objective analysis.
Don’t make the mistake of getting emotionally involved with your first multifamily deal, take the time to thoroughly analyze the deal, have the property inspected, and do your due diligence before moving forward with purchasing the investment property.
If you’re purchasing your first multi-family property yourself, you should consider running that deal by someone else who has already invested in a multi-family property. This could be a mentor, advisor, or business partner. Taking the time to have somebody else look at the deal could save you the time, money, and hassle of potentially making a bad real estate investment.
Another easy way to avoid getting emotionally involved when purchasing a multi-family property is to have a criterion for a property in mind before you start searching.
If you haven’t established criteria yet, some of the things that you should add to the list of things that you should be on the lookout for when purchasing a multi-family property included the general location of the property, neighborhood, housing type, and quality of construction.
#7 – Not Having An Exit Strategy
Even though you may be excited about purchasing your first multifamily property, another mistake that you do not want to make is not having an exit strategy in place for your first property.
An exit strategy refers to your plan for what you’re going to be doing with the property. Are you going to buy and hold, Fix and Flip, wholesale the property, for rent to own?
Before agreeing to purchase a property, it’s best to think about your exit strategy because having a strategy in place could save you potentially thousands of dollars and the hassle of making very costly mistakes.
#8 – Failing To Do Your Due Diligence
Every year many new and experienced investors make the mistake of agreeing to a fast closing or purchasing a multi-family property in as-is condition without having a due diligence period.
Utilizing a due diligence period is vital because it’s going to enable you to find out what’s really going on with the property before you actually purchase it
During your due diligence period, you should have the multi-family investment property professionally inspected to confirm if it currently needs work right now or possibly in the future. You should also evaluate local zoning laws and ordinances and get a professional third-party comparable analysis of rents in the area so that you know what’s the property could potentially rent for.
The reality is that mistakes are going to come as a real estate investor. The biggest thing that you can do when they come, is taking the time to learn from them so that you don’t continue to make the same mistakes down the road and potentially cost yourself tens of thousands of dollars.