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.
@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 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?
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.