Worst Mistakes while investing in multi-family
To all the intelligent investors here, what are some of the worst mistakes you made and what would be your recommendations for a new multi-family investor to avoid those mistakes.
@Amby Bhagtani some of it could be dependent on the size asset and whether you are planning to buy it by yourself or with partners, so some additional context would help.
Never give your property manager too much rope. They need to be managed diligently. It's a bit easier to get their attention when they're managing several hundred units for you (rather than a handful). Also bear in mind that there are unsavory folks out there who can take advantage of uninvolved property owners.
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@Amby Bhagtani
One I see frequently is sponsors only having one exit strategy. Speaking with a lot of investors right now whose $ is tied up and the fund syndication was to be liquidated and they cannot exit because the sponsors sole exit was based on refinance. They also took out short term debt that is requiring now a capital call.
We manage many small multi's - the most significant issues that we have are with trash policies, noise between floors, pets, and parking.
Trash is tricky as there is often a tenant, a neighbor, or a visitor that fills the waste receptacle up causing stress on the rest of the tenants...and sometimes us if they drop a tire, paint cans, furniture ...etc.
Noise issues always come up; much has been written here about it. As much as we hate carpet, we try to put it in the upper units to dampen the sound but not the first-floor units.
Pets - we try not take them in multi's, but we can't easily avoid the army of ESA's, when possible we try to keep them located on the first floor. Pets & carpets aren't a good mix.
Parking - is always a contentious issue if you allow assigned or numbered parking spaces, as there will always be violators and angry people. We spell out how many cars tenants can have on the property and do not allow assigned or reserved parking.
With all of the above, we aren't going to mediate disagreements between angry tenants. We tell them they need to work it out on their own or invite them to move out if they can't. Our mistake was getting involved with these squabbles in the past...no more.
Quote from @Chris Seveney:
@Amby Bhagtani
One I see frequently is sponsors only having one exit strategy. Speaking with a lot of investors right now whose $ is tied up and the fund syndication was to be liquidated and they cannot exit because the sponsors sole exit was based on refinance. They also took out short term debt that is requiring now a capital call.
Sorry what's a sponsor?
Quote from @Rick Bassett:
We manage many small multi's - the most significant issues that we have are with trash policies, noise between floors, pets, and parking.
Trash is tricky as there is often a tenant, a neighbor, or a visitor that fills the waste receptacle up causing stress on the rest of the tenants...and sometimes us if they drop a tire, paint cans, furniture ...etc.
Noise issues always come up; much has been written here about it. As much as we hate carpet, we try to put it in the upper units to dampen the sound but not the first-floor units.
Pets - we try not take them in multi's, but we can't easily avoid the army of ESA's, when possible we try to keep them located on the first floor. Pets & carpets aren't a good mix.
Parking - is always a contentious issue if you allow assigned or numbered parking spaces, as there will always be violators and angry people. We spell out how many cars tenants can have on the property and do not allow assigned or reserved parking.
With all of the above, we aren't going to mediate disagreements between angry tenants. We tell them they need to work it out on their own or invite them to move out if they can't. Our mistake was getting involved with these squabbles in the past...no more.
Thanks so much, this is excellent advice.
Quote from @Amby Bhagtani:
Quote from @Chris Seveney:
@Amby Bhagtani
One I see frequently is sponsors only having one exit strategy. Speaking with a lot of investors right now whose $ is tied up and the fund syndication was to be liquidated and they cannot exit because the sponsors sole exit was based on refinance. They also took out short term debt that is requiring now a capital call.
Sorry what's a sponsor?
A sponsor is someone who is heading a syndication. They find the deal and market it to other investors to hopefully invest in. This is common in large scale multifamily due to the financial constraints an individual would have in purchasing.
@Taylor L. Totally agree with that, but what is the best practice to manage the property managers? What is best involvement should the investors get into the multifamily investment?
Quote from @Vincent Chen:
@Taylor L. Totally agree with that, but what is the best practice to manage the property managers? What is best involvement should the investors get into the multifamily investment?
It depends. For heavier lift deals we've done weekly conference calls with our PM to track and manage turns, renovations, move ins/outs, collections, etc. But in that case we're talking about several hundred units, which have more turns, renovations, etc to deal with.
@Taylor L. Agree with that, but in the day-to-day operation, how much should we involve? When to increase the rent, how to execute the process and how to make sure the expense reasonable, maintenance or Capex?
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Hire a good GC or project manager, especially if you are an out of state investor. Do not pay contractors too much up front, just enough for material or to begin work until you build a relationship. Always check work before paying the final draw, or have someone else inspect on your behalf. Its worth the extra costs for peace of mind. I lost about $3500 on my first deal by not doing this correctly, and that was a ton of money for me at the time.
Quote from @Rick Bassett:
We manage many small multi's - the most significant issues that we have are with trash policies, noise between floors, pets, and parking.
Trash is tricky as there is often a tenant, a neighbor, or a visitor that fills the waste receptacle up causing stress on the rest of the tenants...and sometimes us if they drop a tire, paint cans, furniture ...etc.
Noise issues always come up; much has been written here about it. As much as we hate carpet, we try to put it in the upper units to dampen the sound but not the first-floor units.
Pets - we try not take them in multi's, but we can't easily avoid the army of ESA's, when possible we try to keep them located on the first floor. Pets & carpets aren't a good mix.
Parking - is always a contentious issue if you allow assigned or numbered parking spaces, as there will always be violators and angry people. We spell out how many cars tenants can have on the property and do not allow assigned or reserved parking.
With all of the above, we aren't going to mediate disagreements between angry tenants. We tell them they need to work it out on their own or invite them to move out if they can't. Our mistake was getting involved with these squabbles in the past...no more.
We have a tenant whose dog infrequently will go to another tenant's unit (ADU) and bark through the window at their cats. There doesn't seem like much we can do to prevent this from happening. Any advice on situations to satisfy the one tenant with cats who are understandably upset, even though I feel like it is not as big of a deal as they are making it out to be.
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Not having a buy right criteria, not being patient enough, quitting too soon on a market, not understanding how to buy a deal in the market cycle.
These are just a few. I had many limiting beliefs starting out, but not understanding the due diligence process and not buying the correct assets were two of my biggest
Gino
Quote from @Gino Barbaro:
Not having a buy right criteria, not being patient enough, quitting too soon on a market, not understanding how to buy a deal in the market cycle.
These are just a few. I had many limiting beliefs starting out, but not understanding the due diligence process and not buying the correct assets were two of my biggest
Gino
Thanks - would you be kind to spare ~25 minutes with me talking through how you go about your due diligence? Thanks !
I have to second the responses about due diligence and more than one exit strategy.
Identify risks and come up with mitigation plans as best you can.
Quote from @Amby Bhagtani:
To all the intelligent investors here, what are some of the worst mistakes you made and what would be your recommendations for a new multi-family investor to avoid those mistakes.
I wouldn't call it a mistake but I would prefer buying a multi family building with city water and sewer. I own one that has a large septic tank. Nothing majorly wrong with that other then an additional cap ex expense
Buying in the wrong location (the hood) unless you have a very good understanding of what managing that asset is going to be like. I know a number of guys that specialize in section 8 housing, and they have a system that really works for them. Unless you are willing to put in the time to build out that system, and have the nuts to execute it - I would stay away.
Overpaying and assuming rent appreciation will magically carry your proforma.
Not budgeting enough for remodel/unit turns.
Not planning to enact as many strategies as possible to increase NOI and truly understanding if at least a few of those strategies will really work at the specific property you're purchasing.