Multifamily real estate properties are residential properties leased to more than one tenant. These properties usually contain several units, which can be apartments, condos, or duplexes. Buying multi-family properties is a great way to grow your wealth. But it’s not as simple as buying and holding a property until you flip it for profit. There are many things to consider when analyzing multifamily real estate deals, including the cap rate, vacancy rates, cash flow after repairs, turnover costs, etc.
Here are some common mistakes investors make when they invest in multifamily properties and what you should do to avoid them:
Mistake 1: Only Considering the Cap Rate
The capitalization rate is a very important metric that should be contemplated when analyzing multifamily real estate deals, but it’s not the only thing to consider.
Cap rates measure the cash flow and return on multifamily housing investment. They are useful for comparing different properties and testing assumptions about a potential investment property’s financial feasibility. However, they don’t tell you much about what those properties will actually look or feel like when you visit them in person. You must analyze current market trends, past market values, and your expected Net Operating Income and debt-to-income ratios.
Mistake 2: Not Factoring in the Vacancy Rate
The vacancy rate is the percentage of vacant units and represents a major factor in your cash flow. It is affected by many factors, including the economy, location, and management. Generally, as unemployment increases, so does the vacancy rate. If you are buying multi-family properties in an area that has been hit hard by layoffs or downsizing at local corporations, then be prepared for high vacancies during these times.
When analyzing multifamily properties for investment purposes, it’s important to consider the number of foreclosed properties nearby and if the local government will allow you to evict nonpaying tenants when they become delinquent on their rent payments. You can read different multifamily blogs to know more about the importance of vacancy rates.
Mistake 3: Focusing Too Much on The Top Line
When looking at multifamily properties, it’s easy to focus on the top line – the income you will receive from your property. However, it’s important to consider what happens to that top line after expenses, as it’s what matters when analyzing multifamily housing investment deals.
The bottom line is often referred to as Net Operating Income (NOI), which includes rent and any expenses associated with running the property. Expenses like taxes and insurance can be fixed or variable depending on the deal structure; therefore, they are treated differently depending on whether they’re considered part of NOI or not.
Mistake 4: Overlooking Cash Flow After Repairs
While the initial purchase price may seem low, you should never forget that there will be significant ongoing costs associated with buying multi-family properties.
However, it isn’t just one-time costs that must be accounted for when determining your monthly cash flow. The cost of repairs can vary widely from property to property, depending on age and condition. It’s important not to make assumptions regarding how much money you’ll need each year based solely on experience at other properties. Likewise, even if a deal seems like it came with too many problems at first glance, you should still run your numbers before deciding whether or not this makes multifamily housing investment undesirable due.
Mistake 5: Not factoring in Turnover Costs
When you invest in multifamily properties, you buy more than just the building and its physical assets. You’re also purchasing an existing tenant base and the right to collect rent from those tenants for the foreseeable future.
If you don’t plan for that future by including turnover costs in your analysis, then when it comes time to refinance or sell that investment property, you’ll have no way of knowing how much cash flow is there, and neither will potential buyers who want to determine your asking price.
Mistake 6: Ignoring your Management Strategy and Expenses
Many investors focus exclusively on the purchase price when considering the value of a property, overlooking the management costs that will be incurred during ownership. Before buying multi-family properties, you should consider the cost of maintenance and repairs. As with any asset, there are certain aspects that require regular upkeep, even if they don’t seem like an immediate concern at first glance. You’ll also have to pay for vacancy periods after an apartment becomes vacant and turnover costs when tenants decide to move out before their lease expires; both involve additional funds that add up over time.
Mistake 7: Not Factoring in Reserves for Capital Expenditures and Improvements
When you’re analyzing a multifamily housing investment deal, it’s important to know how much money you’ll need in reserve funds for capital expenditures and improvements. You can also use this information to estimate the number of reserves needed for repairs.
CAPEX includes large-scale upgrades like new roofs or major appliances. Improvements involve smaller updates like new flooring or paint that require a contractor but won’t require tearing down walls or completely renovating an apartment unit. Repairs are issues that arise with buildings over time due to normal wear and tear, such as broken windows or leaky plumbing.
Mistake 8: Not Running the Numbers for a Long-Term hold vs. Fix-and-Flip Scenario
Before buying multi-family properties, you should consider what your exit strategy is going to be. Are you planning on holding this property for a few years and making it your home? Or are you buying this deal as an investment property that requires immediate cash flow? Answering these questions helps narrow down which properties make sense for your portfolio since different strategies require different types of returns.
Mistake 9: Underestimating the Amount of Financing you’ll Need to Pull off the Deal
Another common mistake is underestimating the amount of financing you’ll need to pull off the deal. The amount of financing you need depends on a variety of factors, including the location and condition of the property, the down payments, and interest rates.
You can determine the right financial amount to support your multifamily housing investment. You have to explore the financing options various lending institutions offer and pick the best deal. It’s better to research and ascertain the right numbers thoroughly. It’s not something you should take lightly, as the funds you possess can make or break the deal.
Mistake 10: Using an Online Rental Property Calculator to run your Numbers
Online rental property calculators are inaccurate because they don’t provide all the information you need to calculate your multifamily housing investment accurately. You’ll need to use a professional rent roll and see if the management costs are included in their calculations. If they’re not, you’ll need to add those expenses into the equation.
Some online rental property calculators are free, and some paid; some are better than others, but unless you can review their methodology in detail, the end result will be inaccurate and possibly misleading information that could lead you down a path toward financial disaster!
As you can see, there are many things to consider when buying multi-family properties. If you’re new to the industry or looking for a new way to make money, jumping in without doing your homework may be tempting.
One assured way to make wise decisions regarding multifamily investments is to take a multifamily investing course from an education company like The Multifamily Mindset. The resourceful organization aims to help seasoned and inexperienced investors make the best out of multifamily real estate through educational courses and informative content like podcasts and blogs written by real estate expert Todd Millar. Learn what you should and shouldn’t do when investing in real estate with The Multifamily Mindset!
Do your research and let your investment strategy succeed!