There’s no doubt that owning multifamily properties is the best way to generate cash flow while building wealth but it’s also an industry that has had its share of failures.
If you do a simple Google search, you can see from the feedback online that there is a fair share of investors out there who hate multifamily and prefer single-family due to their failures associated with investing in multifamily properties.
Sadly, those investors who have failed in the past are scaring off other investors from getting started with multifamily because they don’t want to make the same mistake that their relative, co-worker, friend or business associate did.
In this article, we will share with you several reasons why multifamily properties fail and the things that you can do to avoid falling after you’ve invested in a multifamily property.
Reasons Why Multifamily Properties Fail
As with any business, or form of investing, it’s possible that a multifamily investors property may fail. Thankfully, every investor can learn from the failures of others so that they don’t experience the same failures.
Here are several reasons why a multifamily property can fail:
Ineffective Property Management – This is the most common reason why a multifamily property can fail because of the obvious reason that if your property manager isn’t enforcing leases, dealing with problem tenants or staying on top of maintenance issues, these problems will affect your bottom line and ultimately lead to failure.
To avoid this happening to you, it’s best to take the time to fully “vet” a property management company before you hire them. This can be done by researching a company online, reading feedback from their clients or tenants and taking the time to view one or more of their current rentals to see how they are being managed.
A Horrible Rental Market – Another reason why a multifamily property can fail is due to the condition of the rental market where the property is located.
The easy way to avoid investing in a multifamily property that’s in a bad market is to research that market in advance to confirm how it’s really doing and see if there’s going to be demand for the property after you purchase it or not.
Besides investigating the market, you should also find out how the local jobs market is doing as well because of the obvious fact that if the jobs market is tanking, people aren’t working or they won’t be able to afford to rent one of the units in your property.
Improper Underwriting – Yes, this is another common reason why some multifamily properties fail. There are some investors out there who financed the property but overpaid for it significantly and once the rental market tanked, or interest rates went up, they were unable to continue making their monthly payments.
The Property Was Undercapitalized – Last of all is the problem with undercapitalized. This is a huge problem nationwide because many investors are not able to pay for the repairs that their properties need and when their properties fall into a state of disrepair, tenants move out, the investor loses money and the property ultimately goes back to the bank.
How to Avoid Multifamily Failure
Investigate the Location Thoroughly – One of the most obvious ways to avoid multifamily failure is to do a deep dive into investigating the rental market where the property is located to confirm if the property will make a great investment or not.
Do Your Due Diligence – When investigating a property, you should always have a due diligence checklist handy just so you don’t make the mistake of skipping one or more steps that are imperative when it comes to you investing in a property that’s going to flourish or fail.
Have Multiple Exit Strategies in Mind – Although you may be the type of investor who likes to have one exit strategy, you should always have multiple exit strategies in mind because having tunnel vision may cause you to miss a great opportunity.
Run Your Property Like A Business – Regardless if you buy a small multifamily property, or a large apartment complex, you should always run your property like a business and not a hobby! Treating it like a business will lead to better ROI and eliminate the chance of you losing money in the business.
Don’t Pile on The Debt – This is often one of the hardest principles for many investors because they cite the “Rich Man Poor Man” ideology about debt and aren’t thinking clearly about investing too much money into one property. The reality with debt is that if you don’t have enough money to fix one of your properties due to your high debt payments, it’s going to be more difficult for you to keep your portfolio of investment properties afloat.
Instead of getting into too much debt with any property when you’re trying to “hit a home run”, focus on trying to hit “base hits” instead. This means that you shouldn’t put all of your liquid cash into one deal, you should focus on spreading your investments among more than one property and having plenty of cash reserves when needed.
Build Wealth Slowly – Remember that building wealth with investing in multifamily properties takes time and isn’t something that you can do overnight. Focus on growing slowly without adding a lot of debt at once because this will lead to less stress and also make your life a lot easier.
Always Acknowledge Problems and Solve Them – Last of all, but most important, remember that problems are going to occur when you own multifamily property. The key to success with those problems is acknowledging them and then taking steps to solve those problems rather than acting like they don’t exist.
By becoming a proactive problem solver, you will be able to stop a small problem from turning into a huge problem that could ultimately cost you money and even lead to bankruptcy.
We’ve provided you with several real-life examples of why multifamily properties fail and things you can do to avoid multifamily failure.
Remember that no investor is immune to failure but that doesn’t mean you have to accept the failure if you take the time to acknowledge what’s failing with your property and then find solutions to fix the problem.