Top Mistakes to Avoid With Multifamily Investments

What are the Top Mistakes to Avoid With Multifamily Investments?

There’s a wide variety of reasons why investing in multifamily real estate is a great way to have steady cash flow. However, new investors often rush in without taking the necessary time to educated themselves. Like anything else, multifamily investing requires knowledge, so that you don’t make critical mistakes. If investing was easy, everyone would be doing it— in a marketplace full of deals, the key to success is understanding the business, and what mistakes to avoid.

Continue reading to learn some important mistakes to avoid with multifamily investments. Some of these mistakes are costlier than others, but each and every one has the capability of putting a quick end to your investment efforts.

Relying on Future Appreciation

Avoid falling into the trap of assuming the future when you are buying property. Seasoned investors will tell you their philosophy was to acquire a property under value, hold it for a certain amount of time, and then sell it years later after its value appreciated. However, nobody can predict appreciation, and if you hold a property waiting for it to happen, you may be holding it for longer than expected. Sure, this approach may be beneficial when the market is hot and values are rising; yet, you can nobody can tell when the market will turnaround, so the appreciation you were banking on goes out the window.

Of course, this is not to say that appreciation shouldn’t be taken into consideration. Ideally, you should be conservative and expect to sell the property in a down market—if the numbers work when you sell in a down market, it’s a strong indicator that the deal is worthwhile. Simply, if you’ve based your investment on a hope or feeling that it’s going to appreciate, you may be headed for failure. Base your decision on the numbers, on cash flow.

Neglecting to Research Lending Options

Many first-time investors start by applying for a loan from their bank or through other traditional sources. Soon after applying, they realize that it’s not as easy as they though to get a loan—that’s because conventional lenders aren’t as well-versed in investment real estate. They may deem these transactions to be risky, and if they do loan you the money to purchase the property, there may be significant restrictions. Essentially, real estate investing offers the opportunity for sustainable growth and financial freedom, but you have to start small and with the right information.

Even a 0.25% difference on a loan makes a significant difference over time. Reach out to a variety of lenders and ensure that you are getting the best terms possible, including your interest rate, loan to value ratio (LTV) and amortization. Beyond that, establish a good relationship with your lender. If they enjoy working with you, it creates opportunities to ask them about foreclosures or bank owned deals they may encounter and need assistance with.

Ignoring Diversification

A real estate investor, even an experienced one with promising investments, needs diversification in his/her portfolio to reduce risks. So, when you’re considering multifamily investments, don’t rely solely on your rental property to bring you the returns you’re expecting.

Owning different types of properties, preferably in different geographic locations, is one of the most effective methods to reduce risks in your portfolio. This approach minimizes risks if one property or area doesn’t perform as expected.

Not Inquiring About All the Terms and Conditions of the Loan.

Some investors avoid the pain of inquiring about all the terms and conditions of their loan. Yet, being very specific and clear about every minute detail is crucial because small mistakes can lead to large losses in real estate. Obviously, we aren’t trying to frighten you, but it’s critical that you are prudent and conservative about all the terms and conditions of the loan. Not every private money lender is going to tell you all the terms unless you ask them to. In some instances, there may be a shocking condition of the loan like a high rate of penalty for prepayment of the loan. There’s no point in regretting this—take your time and ask about every term of the loan. 

RCN Capital: Financing for Multifamily Investments

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