Avoid the Top 10 Multifamily Investment Mistakes Part Three

July 20, 2011 By aagla

By Dawn Dyer, Dyer Sheehan Group, Inc.

Demand for rental housing has increased dramatically over the past several months, with vacancy rates down locally and nationally. Rents are expected to rise, as the supply of new rental housing has not kept pace with anticipated demand.

As a result, it is a great time to purchase a multifamily investment property, or to enhance your equity position by trading up into a larger building. However, real estate investing is never fool proof. It is a business, which like any other endeavor, merits careful planning and attention to detail in order to maximize your return.

In the past two installments of this column, we have explored some of the most common investment mistakes, and offered suggestions to avoid or mitigate them. This article will round out the Top 10 list, and help apartment owners safeguard their assets. First, let’s briefly recap the six issues we have covered so far.

Winging It– Lack of a strategic business plan

Getting Emotionally Involved– An experienced multi-family broker can be a valuable buffer.

Thinking You Can Time the Market– Real estate is not a get-rich-quick scheme.

Dodging Due Diligence- Do your homework!

Over-paying for Property - You are supposed to make money when you buy real estate. Right?

Lack of Staying Power– Expect the unexpected. Be sure your plan includes adequate reserves.

And now, here are the final four most common multifamily investment mistakes.

Failure to Budget for Capital Expenses and Reserves
Eventually, every building will need a new roof, major plumbing or electrical repairs, exterior paint, and some rehabilitation of rental units and common areas. If you don’t budget for these items annually, and account for these significant expenses in your financial analysis, you’re fooling yourself about the property’s cash flow. What’s worse, you may not have sufficient funds available when major repairs are needed, putting your property at risk of deteriorating and then losing quality tenants.

Poor Management Oversight
No one will ever care as much about your bottom line as you do. While many reputable property management companies will do a terrific job of leasing vacant units, and paying your bills on time, you should review all monthly operating statements closely, regardless of who is doing the managing (yourself included), ask questions, and compare expenses, rents and vacancy rates with other properties or local industry standards.

Cutting Corners
Deferring maintenance will cost you now or it will cost much more later. Skipping background or credit checks on potential renters could cost you a fortune in legal and other expenses. Use AAGLA’s tenant screening services.

Using sub-standard materials, hiring unlicensed contractors, or neglecting to pull required building permits can all lead to catastrophic results that cost far more than you thought you were saving.

Thinking You Can “Go it Alone”
Investing in and managing real estate is a complex affair that involves many disciplines. Few people are experts in all of the fields that are needed to succeed. Build strong relationships with a team of reliable professionals, who you trust. Heed their advice. Your team should include: a qualified investment real estate broker, an attorney who is well versed in landlord/tenant law, an experienced accountant, mortgage professional, insurance advisor, and general contractor.

Now is a great time to invest. With careful planning and execution, you can build a portfolio of properties that will provide substantial returns for the long run.

Dyer Sheehan Group, Inc., is Ventura County’s Apartment Expert. Our professional Brokerage & Real Estate Consulting Services enable Clients to Make Informed Investment & Development Decisions by Identifying Opportunities, Solving Problems & Mitigating Risks. All information provided herein is from sources deemed to be reliable, but no guarantee or warranty is stated or implied. Copyright© 2011 Dyer Sheehan Group, Inc.

June 11, 2011 By aagla

By Dawn Dyer, Dyer Sheehan Group, Inc.

Last month, I highlighted two of the top 10 mistakes made by multifamily investors, and how to avoid them. We discussed these, as well as other potential property owner pitfalls, at the May session of the Apartment Investor Academy, held in Camarillo.

If you missed it, it’s your lucky day! Over the next two articles, I will finish the list of the Top 10 Multifamily Investment Mistakes that you can make. Included below are four more of the most common impediments to success for apartment investors, as well as ways you can help ensure that your properties run smoothly and generate the best possible return on your investment.

3) Thinking You Can Time the Market

Real estate is not a get-rich-quick scheme. It is a powerful tool for building financial wealth and security over time. It is very difficult to time the market well enough to get in and out quickly with large profits. Buying real estate solely for short-term appreciation is a risky gamble…one that many experienced investors lost on during the recent sudden and dramatic correction in the real estate and mortgage markets.

Multifamily properties should generate an acceptable return on investment, considering realistic income and expense assumptions, including adequate reserves; but don’t expect to retire on the merits of one acquisition.

4) Dodging Due Diligence

Jumping into a property acquisition without completing sufficient analysis is like flying blind…it’s dangerous. You must do your homework to understand the property, tenant profile and demand drivers, market dynamics, pipeline of new product, and regional and local economic conditions.

Once you own rental property, it is critical that you complete a thorough check on tenants before leasing to them. Call former landlords and references. Run and review credit and criminal background reports through AAGLA. Also, be sure to check references on contractors, lenders, brokers and other professionals before you engage their services.

5) Over-paying for Property

You make money when you buy real estate right. This doesn’t mean fixating on a pre-determined “discount” (as in, “I only make offers at 70% of listing price”). Careful scrutiny of all aspects of income and expenses and market dynamics is required to really understand the property financials, physical condition, any maintenance issues, and upside potential. Don’t just rely on the cap rate analysis provided by the seller or listing broker. It may not be based on realistic assumptions. Do your own analysis, and then make a reasonable offer based on comparable market data.

6) Lacking Staying Power

Real estate is a business. To succeed over the long term, you must have a business plan that includes adequate reserves for potential challenges, including, but not limited to, spikes in vacancies, falling rents due to unexpected events or disasters, or emergency expenses for repairs or an uninsured liability. Reserves are needed to protect your investment over time, and to allow for rational versus reactionary decision making.

Tune in next month for more tips to success in multifamily investing!