The Real (Often Overlooked) Reason Many Multifamily Investments Fail

by |

Well, I feel as though I haven’t been home in a month.

Likely, this is because I have not. It all started in January, when my wife said to me nonchalantly as she can, “The kids aren’t getting enough educational opportunities in Lima. We need to move — figure it out!”

It might be difficult for you to receive what I’m about to say, but I don’t like to argue. I mean, I’ll tell you when you’re being stupid all day long, but that’s not arguing — that’s just being real. Disagreeing with Patrisha, on the other hand, is quite detrimental to my health, so I don’t usually.

Thus, we took two weeks off in February, put the kids in the Tesla, and went to scope a few markets out. Which markets, you might ask? Let me put it in a way you can understand — if I am going to pay 6 CAP for apartments, I’d like it to be in a place people are moving into, not out of. I also must tell you that if I never see another snowflake, that’d be just fine and dandy by me!

Three days after coming back home from this trip, Patrisha and I flew out to California to hang out with my buddy Brian Burke. Al Williamson put together a great event in Sacramento.


Here’s the thing about Burke — the whole reason to be friends with him is just so we can hang out with his wife, Suzy. I mean seriously, Brian, talk about marrying up, dude!

As a side note, guys, something is very apparent to me. It seems that every successful man I meet becomes successful in large part due to pursuing the objective of making his wife proud. In other words:

Achieve to make your wife proud = success

This is certainly true in my case, and it is most definitely true in Brian’s case. It is so obvious that those two are tight as tight can be. No personal or business decision of any consequence is made without Suzy being onboard, period. No personal or business decision is made without Patrisha being onboard, period!

Related: A Real Life Example That Proves the Importance of Underwriting Multifamily Numbers

Brian, she is proud!

Well, to finish this intro off, I’ll tell you that I am writing this in a hotel room in Jersey City. I drove from Lima — 14 hours! I am here for the BP meet-up this Tuesday and whatever else he has planned. I’ll tell you what — this 14-hour drive was such a breeze compared to the flight to California, which took 12 hours all said and done. Here’s why…

Here’s How Tesla Works

Tesla is a fully electric car, and by that, I mean if you wanted to put gas in it, you couldn’t. What this means is that instead of stopping at gas stations to refuel, you have to stop at Supercharges to re-charge.

Well, all things being equal, depending on the outside temperature and how fast I am going, my car goes about 180 to 220 miles. This means that about every two hours or so, I have to stop for a charge. The car at that point tells me how many kWs I need in order to get to the next charger. But the end result is that I usually need between 30 and 45 minutes’ worth of charge for every two hours of driving.

Tesla Superchargers are most often placed near shopping and restaurants, which makes it convenient to plug in and go grab a bite. But more importantly, being forced to stop for a break every couple of hours is a good thing. Unlike sitting in a plane for five hours, unable to move your extremities, this offers some much needed “change of scenery” before you start going loopy.

And when traveling with kids, they can’t sit any longer than two hours anyhow. So, we pull off and either eat what we’ve packed, or I take them to Chipotle (because it’s non-GMO), and I go plug in for a half of an hour. Then, when I’ve got enough juice to keep going, I head over to the restaurant and finish eating with the family. It works out perfectly in terms of the kids getting the much-needed time to stretch and get some energy out at just the right intervals, so nobody gets crazy from being stuck in one place for too long.

I can’t really imagine a better way to travel with family!


A Call Came In

I was at a Supercharger when a call came in. No names, since you may know him from the Forums, but this is a very experienced investor in a fairly major Midwest market. Most of what he does is flipping; however, he does have a few rentals and wants to grow that part of his operation.

He had emailed before to tell me he was having real difficulty coming up with anything worthwhile in the multifamily space. To this I said, “Why? If you look on BiggerPockets, everyone seems to be finding fantastic deals on multifamily — what the hell is wrong with you?!” 😉

We agreed to talk, and he was calling back. Ladies and gents — pay attention. This is how the pros think!

He told me that as part of his DD, he had studied historical data on the cost of utilities in his marketplace. As it turns out, the cost of gas and water have both outpaced the cost of inflation by a very significant margin.

He told me that he could not anticipate rent growth anywhere near the magnitude to accommodate OPEX growth, and with this being said, he wasn’t sure how to underwrite apartments nor why so many people are buying so much junk.

Related: The Costly Mistake Most Investors Make When Underwriting Apartment Expenses


Why is this a problem?

Well, if the building is heated with a boiler system, the the cost of gas is a problem and so are the incessant leaks, which cost nothing but money. Many building in the subject market are indeed heated this way. Additionally, most buildings are not sub-metered for water, thus making the ever-rising cost of water a big issue.

But there is a deeper issue. Even if the cost of gas and water could be passed onto the tenant, people’s ability to fund their living expenses is not unlimited. If most people in the marketplace bring home $2,000/month, then the most they can reasonably spend on their housing expenses is about $700. Any more than that, and they will default.

What this means is that if tenants have to pay utilities, all it does is compress rents. Understand — these people cannot spend any more than a cumulative $700/month, and it doesn’t matter if that’s $700 including utilities or $500 rent + $200 on utilities.

Unless the economics of the market are such that population growth, fueled by job growth, is responsible for income growth, there is nothing you can do as a landlord to combat OPEX inflation in a sustainable way, period.

Did I mention I am moving? I’m not moving to another depressed Midwest town, I’ll tell you that right now. 🙂

It’s Not About Today!

First, I told him that he was right — and the people buying are either aware that their NOI will be compressed over time but don’t care because it’s still better than being in the stock market, or are simply too stupid to know.

Second, I told him that this is precisely why I am not interested in buying in his market. I looked at it, and while the pro forma looks OK, the future is very cloudy in my estimation due to rents not being able to keep up with OPEX. The only way to compensate for this is to buy at a much lower basis and with plenty of up-front value add. But this doesn’t seem to exist in this marketplace today…

Which is why I am looking elsewhere. 🙂


Underwriting the Right Way

Understand, what’s going on here is that we are considering the future. Is it a guess? Yes! Everything in this business is a guess. But not taking a guess at what the future might look like is akin to sticking your head into the sand.

It has become increasingly popular on BP to say things like, “Don’t buy for appreciation,” and, “This is a cash flow play.” This messaging is especially popular among the TK crowd.

Although it’s not completely void of logic in that we don’t want to bank on incidental appreciation, we must underwrite the future to ensure sustainability. If there are two lines on the graph, of which one stays horizontal while the other keeps going up year after year, then eventually they will meet. And if the way you make money is in the spread between those two lines, then eventually you won’t make money — unless there is appreciation of different kinds.

Be wise about this stuff, guys. REI is not black and white!

Investors: What are your thoughts on OPEX and making solid multifamily investments?

Leave your comments below!

About Author

Ben Leybovich

Ben has been investing in multifamily residential real estate for over a decade. An expert in creative financing, he has been a guest on numerous real estate-related podcasts, including the BiggerPockets Podcast. He was also featured on the cover of REI Wealth Monthly and is a public speaker at events across the country. Most recently, he invested $20 million along with a partner into 215 units spread over two apartment communities in Phoenix. Ben is the creator of Cash Flow Freedom University and the author of House Hacking. Learn more about him at


  1. Curt Smith

    Tnx Ben. Good luck on your move. BTW There might be more than a few of us who’s wifes are saying the same thing. Mine is yet she’s also saying quit your job (and live off our hard earned rental income). So she’s not wanting to move bad enough to be a road block for my quiting thankfully!!!! You have a more immediate issue, kids and better schools.

    Re this issue of underwriting RE deals. Where did you get $2k/take home a month number from? And why do you think that’s a constant? IE same as your family problem, if you jump to better schools, great schools 6 or better (our business’s line in the sand) then I believe the better renter class does have income appreciation. I see this in my better high school renters. SFR or MF both can benefit if you buy in a better school district. Just go to an appartment complex near good schools at school bus time to see how many kids live in appartments when the schools are decent.

    We moved to mobile home parks because of the MF tight market!! Parks are pricey now too out side of the SE but not nearly so as MF. 10 cap is the standard offer rate for medium to smaller parks. Large parks attract the same crowd wanting to park cash as large MF so the caps drop to similar lows like 6 cap. So offer at the $1M +/- range for parks that cash on cash can do 20% or better.

  2. Roy N.

    Ahh Ben … your narrative has been our dilemma for the past couple of years … and why, try as we have, we’ve not brought home a new property in months.

    Many parts of this country are miles … or, rather, kilometres … ahead of the U.S.A. in the divergence of the cost of housing (rental or purchase) and household income {we did not experience a little reset back in 2008/2009}. While some markets (TO, Vancouver) are still experiencing a frothy feeding frenzy, over supply and rent compression are creeping … hell, it’s boldly sashaying … into many other areas.

    Back to the never ending search for something that can be acquired at a price which will allow me to make it energy efficient so my tenants can afford to live there, yet we can still make a living.

  3. David Roberts

    Its isnt just about multifamily, it has to be considered with single family.

    In todays market, you have to consider being reassessed to SEV value which is hard much higher in great markets instead of using current taxable value. (cash flow)

    You also have to consider rising utilities like you stated, as most of the time they are passed to the tenant, which will lose rent paying power.

    Just had a tenant complain that “there must not be much insulation in the attic because my heat bill was 200”. While this isnt enough info to state that must be the reason, it is funny that its the first time in 5 years that they even mentioned their heat bill. But, thing is, we had a very mild winter this season, yet heat bills didn’t fall.

    Why? Because utilities never fall, just like insurance premiums. So definitely these have to be considered.

    When future contracts for natural gas, copper, etc are worth 2009 levels yet your bill didnt change, somebody is making big margins, and it isnt the end user.

  4. Michael Williams

    I was listening to a national radio show yesterday and the topic was EB5 investors. The expert said the EB5 investors not “needing a return” on their money makes them attractive to syndicators. They just wanted a “green card”. The offering had to do with the Donald and the offering was 500k each. I was hearing about lawyers taking EB5 investors money years ago by putting them into horrible overvalued deals… years ago. I vowed I wouldn’t put anyone in a bad investment just to make fees. I don’t want to live like that. I’m in the short term rental business in the Caribbean. Currently in acquisition and expansion mode. This is one of the best most relevant articles on MF I have ever read. Thank you Ben! Wish you and yours all the best.

  5. Jerry W.

    As usual a very insightful article. I live in a town where real estate is difficult to do because it was a good place to raise a family. I was also wondering how often Tesla was going to creep into your next article or blog. Looks like I guessed that one right.

  6. Jason V.

    So what you’re saying is: Don’t buy thin deals thinking performance will improve with rent increases, because that will only be offset by expense increases, and you’ll wind up never making any money – correct?

    I’ve listened to the BP Podcast you did with Brian Burke and Serge Shukhat a couple of times, and the one thing that stands out to me right now is: maybe this is why Brian doesn’t keep properties for more than 10 years (if I’m remembering correctly from the podcast, that is.) That way, even if your profit is actually trending down year over year (instead of up, like many people assume it will) you can still have decent returns, and a good projected exit. If I know from the start that I’ll make slightly less in year 10 than year 1, that’s fine as long as I bought it right and I’m still making a satisfactory return in year 10.

    Maybe it’s just me, but when it comes to calculating IRR, the sale price of the property is the hardest thing for me to figure out. I’ve actually come to the point where I use a small negative rate for appreciation, because I don’t want to count on the supposed 1.5% increase for my area. In any event, thanks for posting Ben. I’m still extremely new to real estate investing (waiting to close on units 2-5 now) and reading something that isn’t endlessly optimistic is good every now and again.

    “If everybody is thinking alike, then somebody isn’t thinking.”

    • Ben Leybovich

      No, what I am saying is – only buy deals whereby there’s a clear value-add story on the front end which gets you a substantive bump, and there’s support from the market fundamentals to ensure that GOI can outpace OpEx 🙂

  7. Jered Sturm

    Why keep me anonymous? I could use some of that Ben Leybovich PR ;). I was afraid when you kept me nameless that I was about to get ripped a new one in the remainder of the post haha. Great article, and of course good chatting with you. Good luck with your search for new areas to live/invest.

Leave A Reply

Pair a profile with your post!

Create a Free Account


Log In Here