Biggest Problem Multifamily Buyers Have Faced

11 Replies

Personally i cant point of one biggest problem.

I think the bigger the property the more professional you need to manage it, this could be challenging if you cant figure that out. 

One of the more challenging thing in Multifamily is probably financing. 

in swaying that, once you figure that out it is easier. 

so to summarize, anything could look like a "big problem" if you don't know how to deal with it.

Thanks Hadar

As a newbie to multifamily investing I was thinking the big problem would be something like high tenant turnover or high vacancy rates.  But now that you mention it it makes sense that raising money to fund a deal can be a big problem.

All of the above but 2015-2017 IBC compliance is getting a lot of attention around here with older 'grandfathered' multi's. Detailed electrical compliance along with the long overdue & more stringent fire safety requirements such as fire sprinklers & 24/7 first responder alarm panel systems etc. Retrofitting these are very expensive.

Can't think of any major issues related specifically to multi units. Tenant turn over is consistent with industry average. Class of property is more of a driver regarding tenant turn over.

I agree with @Pat L. ! Depending on the code in your town, if you ever do any work ( by me at least ) that requires changing floor plants with permits, you need to do sprinklers and so on, so it gets crazy! Be careful with that!

As far as financing, I feel like thats easy for up to 4 units ( try and buy a 4 unit first, or a 3 unit ) because you can do FHA or a state program to help get started for like 3.5-5% down! Usually you can always refi these after some appreciation and re-use FHA as long as it stays owner occupied, so that helps with getting more property. Financing certainly becomes an issue once you get into multiple properties though, because youll need more down for sure.

As far as Tenant turnover, treat it like any business! Credit, background check, interview and do as much screening as possible within the law / reason. Personally, I never really have vacancy, although we under write for it & plan for it at ~5% of Revenue ( bank standard here with my bank ) we have yet to have an apartment sit vacant. The reason for this is simple - Math! Think about it, lets say you want 2000 for an apartment, which lets say is "high" but you are trying to get a great tenant. Instead of letting 1 whole month go by trying to get a "high" rent, you can just drop the price. This standard may be conflicting of others, but I would rather rent it at 1800-1900 vs. 2000, because 2000 is a lot of lost rent, 100 or 200 x 12 is almost the same number, Id rather the income over time, let someome move in, and re-raise the rent the following year knowing that if im a great landlord and I have a great apartment they will want to stay. Plus, who wants to move that much!? Just my two cents there. 

Biggest thing that rookies forget is expenses & repairs, stuff comes up, dont spend the money! That simple! Save it for the next deal and improvements. 

I would have to say the biggest problem has been financing, not just for me but for people in general. If you look at BP Forums you will see some variety of how to buy multi family with low or no money down.  This seems to be a daily occurrence from what I have seen.  

Finding the right building. A lot of "stable "multi-families are being overvalued but regardless they are selling so that tells you that investors are buying and spending more to make less. You can join the bandwagon or just keep waiting around. 

Be prepared to pay market value and maybe even more. I am OK with this however finding the building (searching for the last year) has been difficult. 

Have your downpayment or cash ready to roll and when the right one goes on the market, underwrite it severely fast and make a move. I see multi-families selling as fast as SFH's. Mind blowing but real. We will be due for a correction however as long as the numbers & area make sense, multi-family is the way to go.

I got beat out on an 87 unit property recently, it actually was an awesome deal. I went a measley $25k over asking and got beat out by an ALL cash buyer who paid $100k over asking. Discoursing but as they say some of the best deals are the ones you never made....right??? :-) 

Let the search continue...........!

@Robert Carpenter good question. I would have to say just generally capex and repairs. If you listen to a lot of the syndicators they don't really talk much about this issue because their business model is to buy a property and immediately pump money into improving it. 'value-add' is the buzzword. But what you don't hear much about is the repairs and upgrades needed to a property if you hold it long-term.

It can be very expensive. Just as a simple example, let me talk about trees for a minute. People love trees. They looke really cool and down here in the south they add much needed shade. But they also cause lots of problems. 

When they die or even if they're healthy and a storm comes through they can fall and cause all kinds of problems. And yes, insurance will cover some of that but you'll have a deductible and it will cause your rates to go up.

But probably the worst thing with trees is underground. Their roots will cause you lots of plumbing problems, possibly driveway and side-walk issues and in the worst case, foundation issues.

For me, I'm big on heading off these problems before they occur. I have some neighborhoods where I know the 'gorgeous big trees'  can be a big problem and I'm careful to get them out of there before they become a problem.

But guess what? That is very expensive. Most professional tree guys that are experienced and have insurance are very expensive so it's a case of you pay for it now or you pay a lot more later.

One of the biggest concerns I see with larger MF units comes in the form of not having enough Cap Ex reserves to remain competitive or for that matter compliant with gov and other regs. With smaller unit buildings your costs may seem more controlled with lower amounts of cash needed.

@Robert Carpenter IN your question you didn't clarify whether you're referring to smaller multi-family (residential ones) or 5+ (commercial ones)?! Also, not sure if you plan to look for multifamily locally, but thought I should mention. NJ is a tenant-friendly state. A lot of NJ towns have rent controls. Some even have some old rent control rules grandfathered when it comes to tenants speeding their lifetime in a place. This can be one the biggest hurdles. So if you plan to become a landlord of NJ buildings, check for the rent control laws with the town first.

If you're looking for more feedback, please feel free to PM.

Best of luck!

2 of our biggest challenges: 

1. Finding good, quality deals with value add that we feel are not over-priced

2. Finding good quality property management and contractors