3 Reasons Multi-Family Investments Fail and How to Avoid Them
Interest in real estate investing has never been stronger. More and more people are catching on to the amazing benefits of this alternative investment. This is especially true in light of the lack luster returns that are coming from the more traditional investments like CDs, stocks and precious metals etc.
So buying apartment buildings should be a no-brainer right?
- Anyone can buy a property and
- People have basic needs like food, water and shelter so they will always need a place to live.
Both of these statements are true, however when you are buying an multi-family investments there is a great deal more that goes into the decision to buy. Real estate follows a pretty predictable life cycle. For your multi-family investment to be successful you need to be able to survive periods of lower vacancy when the rental market is not as strong.
3 Big Reasons Multi-family Investments Fail
- Bad market: Choose the wrong property in the wrong market. You may be able to pick up a property for a great deal, but it is in a high crime area, you might have trouble getting tenants. Here’s another scenario: Buying an apartment building with all one bedrooms in a neighbourhood that is exclusively a family oriented neighborhood with 3-4 bedrooms could also be tricky to occupy.
At Simple Acquisitions we have strict selection criteria, not only for the properties we buy, but also for the market in which we are buying. I’m sure you have heard the expression that real estate is all about location, location, location. You need to do your research to ensure you buy the right property in the right area.
- Property Management: I have always said that the Property Management Company is the lifeline of multi-family investments. If you have a bad one, then your property is in jeopardy. Deferring maintenance, not being diligent in collecting rents, not dealing with tenant complaints, can all be catastrophic to your profits. Poor Management is a key reason many properties fail.
Poor Property Management isn’t always a bad thing. It just depends on what side of the fence you sit. Sometimes properties that are badly managed go up for sale because of lack of performance, so for us, this is a good source of properties.
If you are not going to manage the property yourself, you need to find a company that has the experience to manage your property. Choosing a management company whose portfolio is made up of only single family homes, may not be the right fit if your property is a 200 unit complex. You also need to find a company that you can trust will meet your performance requirements. You need to be on top of everything your PMC is doing. Handing over the management reins to your Property Management Company doesn’t mean you shouldn’t be on top of your property. One additional advantage to hiring a professional PMC instead of managing it yourself is that their services are tax deductible.
- Bad numbers/underwriting: A multi-family property profits when income is greater than expenses. If you under-estimate expenses and/or over-estimate income in your financial due diligence, it could be an uphill battle to get your property from not seeing red. Under estimating the capital expenditures and contingency requirements can come back to haunt you.
Always cushion your reserve fund to account for unforeseen expenses regardless of how old the property it. Nothing ever goes as planned so ensuring you provide enough padding for the underwriting exercise. It will help you should any unknown issues arise.
Another point to make is that if you overpay for property or over leverage yourself, you could be for bumpy ride. I can’t stress enough to that your decision to buy needs to be based on the numbers, and not on emotion.
All of these mistakes can be avoided by implementing one step. Get educated! Become knowledgeable about every aspect of multi-family investing, and it will set the stage for a successful acquisition. Do your homework and don’t take short cuts. When you identify a problem you need to take action immediately to rectify it. Don’t ignore establishing contingency funds for the unforeseen problems.
If you want to learn more about the intricacies of real estate or how real estate investing can benefit YOU, get in touch with us. Real estate is a great way to build wealth.
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Remember, real estate doesn’t have to be complicated. With Simple Acquisitions, it’s smart and simple!