Investing in a multi family property can be an exciting opportunity with promising returns. However, while it’s true that multi family homes make lucrative investment properties, they come with their fair share of risks and challenges. Investing in multi family real estate is hard work and many property investors end up falling for common mistakes that kill their returns and lead to loss and frustration. Don’t want this to happen to you? Take a few minutes to read this blog post in which we break down 8 mistakes real estate investors need to be aware of and tips on how you can avoid making them.
#1 Ignoring the Housing Market and Demographics
This is possibly the biggest mistake a real estate investor can make when investing in a multi family rental property. Most of the time, beginner investors are tempted to buy and invest in their local housing market simply because they feel comfortable about their investment being close to them. This does not guarantee success! As you should know, investing in the right location is key – especially when investing in multi family real estate.
Is your local housing market a buyer’s market or seller’s market? What is the cap rate of rental properties? What about job growth, population growth, unemployment, tenant laws, etc., etc., etc.? Are all these factors favorable for a multi family rental property investment? The answer might be no, meaning it’s best to invest in another market.
You can easily avoid making this mistake by performing a real estate market analysis. It’ll provide you with all the information and data you need to make the best investment decision and find out whether or not investing in multi family real estate is even profitable.
#2 Hoping for Real Estate Appreciation
In the real estate investing business, there are two ways of making money: cash flow and appreciation. Hoping for appreciation means that investors buy low, hold their properties for a few years, and sell high. If this is the approach you’re going for with your multi family home investment, then you’ve made a big mistake. Why? For many reasons.
First, multi family properties take a longer time to appreciate than single-family homes. Thus, even if you’ve managed to buy a multi family home for a discounted price, you’ll have to hold it for at least 10+ years until it appreciates in value. Second, economic conditions affect those investing in multi family real estate more directly than others. For example, you might get away with this approach in a rising market, but you’ll find yourself in huge trouble if the market turns.
This brings us to reason #3 which is: No one can predict the future. Thus, real estate experts recommend multi family property investors focus on making money from cash flow. Make sure that your rental property brings you sustainable income and that the numbers are working in your favor. If they don’t, don’t hope that future real estate appreciation will bring you profits!
#3 Disregarding Diversification
Remember the old saying “Don’t put all your eggs in one basket”? Well, this is actually a very wise piece of advice for real estate investment. A real estate investor – even a knowledgeable one with promising investments – needs diversification in his/her portfolio to reduce risks. So, when investing in multi family real estate, don’t rely only on your rental property to bring you the returns you’re aiming for.
One of the best ways to reduce risks in your portfolio is to own different types of properties, preferably in different geographic locations. This approach minimizes risks if one property or area doesn’t perform well. Also, having a diversified portfolio of properties can build wealth – what investor doesn’t want that? For an even more diversified real estate investment portfolio, a good idea is to turn to a private real estate fund or trust. They will charge fees, but they can reduce risk and generate higher yields.
#4 Overestimating Tax Deductions
Multi family investment properties are typically subject to harsh and complex tax regulations. While there are some deductions that can ease the burden for a real estate investor, too often beginner investors overestimate these tax deductions. In some case, they even wind up paying more in taxes than they initially anticipated. Thus, it’s crucial to be realistic in your calculations when investing in multi family real estate. In addition, keep the possibility that you will have to pay more in mind.
#5 Underestimating Costs and Expenses
Another major mistake that multi family property investors make is overlooking the fact they may need to pay for rental expenses from day one in order to run the property and start making money. For example, renters’ expectations could rise in a slow rental market. Prospective renters will start demanding nicer units and amenities for their dollar. As a result, you might have to pay for major upgrades and repairs to bring your investment property up to market expectations to attract qualified tenants.
On the other hand, renters in a hot rental market with plenty of new construction will demand the latest and hottest amenities. In effect, a real estate investor might have to pay for repairing or adding major building systems. What you can do to avoid underestimating these costs and expenses is to analyze the investment property before you start investing in multi family real estate. This analysis will help you identify your rental expenses AND estimate your potential return on investment!
#6 Overlooking Rental Rates
As a multi family property investor, there’ll come a time when you start thinking of raising the current rents as a way to boost your rental income. Not so fast! If you want to raise the rent without losing tenants, you need to make sure that your current rental rate is at the market’s rate. Raising rent higher than the rental rate in your housing market will cause complaints and you could lose a good renter to a more affordable rental.
You can avoid making this mistake by looking at real estate rental comps. If similar multi family rental properties in your housing market are renting at a higher rate, this is a good indicator that you can increase your rent as well. Wondering where you can get a hold of real estate comps? Our Rental Property Calculator allows you to find rental properties in your location similar to yours along with their data and analytics which include their comparable rental income!
Sign up to Mashvisor to access our Rental Property Calculator and start analyzing properties in your city and neighborhood of choice!
#7 Not Keeping Adequate Cash Reserves
Unexpected events will occur when owning a bigger rental property. For example, you can’t assume that the property will be fully occupied all the time or that tenants will pay consistently. In addition, there may come a time when you’ll need to evict a tenant. Therefore, set aside a fixed amount per unit per year to protect yourself and your investment.
If you fail to hold enough cash in reserve when you’re investing in multi family real estate, you’ll find yourself struggling when unexpected maintenance expenses cause havoc on your balance sheet. A good rule of thumb from real estate experts is to take 10% off of rents and set it aside in preparation for unexpected market declines, vacancies, and other situations.
#8 Not Hiring Professional Property Management
When transitioning from single family to multi family homes, many real estate investors find it harder to manage these properties. From finding tenants, leasing, collecting rents, and handling evictions – these require a certain level of skill and experience in addition to legal knowledge. If you don’t think you’re able to handle this on your own, seek out a professional property management company.
These companies take care of all the tasks associated with investing in multi family real estate, which is why hiring one is a good idea – especially for first-time multi family owners. As an investor, take the opportunity to learn from a professional manager rather than learning by making the mistakes yourself!
Another tip is to pick the right company to hire. Look at the firm’s team, track record, fee structure and the other properties they manage to ensure it’s the right one for you. Furthermore, professional property management fees normally cost 3 to 10% of rents. So, make sure you’re able to cover these fees and still make a profit from your rental income.
While it’s good to learn from your own mistakes, it’s even better to learn from other people’s mistakes. In this blog post, we covered 8 mistakes property investors can fall into while investing in multi family real estate. As you can see, it’s not very difficult to avoid making them. All you have to do is perform your due diligence and you’re set for making good returns on your investment.
What are some mistakes you have made when investing in multi family real estate?
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