A common question investors ask is what can go wrong in a multifamily investing deal.
Particularly, they want to know about passive multifamily deals.
People often think that multi-family deals are all growth and no loss.
They think there are never any problems.
I’d love to say that that’s true!
Unfortunately, it’s not.
Issues always come up in deals.
Today, I want to go over three things that can go wrong in multifamily deals so you can better prepare!
1. Not Being Conservative in Projections
People are not conservative enough when it comes to projecting property performance.
It’s not uncommon that on paper, things can look phenomenal.
We had single family houses in the Cleveland area in the past before I got into multi-family.
The deals always looked incredible.
I thought it was the best investment in the world.
But then came the problems with tenants and higher expenses than what we thought.
All kinds of stuff can happen!
There’s a difference between how you projected and how things really perform.
When it comes to being conservative, you need to stay away from having rosy projections.
Particularly, you need to be wary of rent growth assumptions.
(Aka: Assuming rents will grow at a high rate continually)
You should also watch out for exit cap rates.
(Aka: Assuming the property will sell at a more attractive rate than when you bought it.)
On those two measures, we typically try to be more conservative.
It’s going to be a higher cap rate, we lower the rent growth so we stay away from making rosy projections.
Conservative underwriting is important not just in name but in what you’re doing.
There’s also always going to be things you forget as an operator.
When you look at a deal, especially as a passive investor, and don’t see any sort of reserves…
What happens if this thing doesn’t go exactly according to plan?
That can lead to a problem where the property itself starts to run low on cash.
If that does happen, you have to start asking investors for more money or maybe withhold distributions.
That’s bad news!
But if you’re conservative, you can avoid situations exactly like this.
2. Poor Performance by Property Manager
Poor performance by a property manager can be detrimental to your investment.
A property manager should manage the property completely.
They are the most important part of your team when it comes to making sure a property performs.
If a property manager does not lease up available units, you can go from 90% occupied to 70%.
This can be really rough because that is the entire income.
As an investor, you are doing two things to really manage a property:
You’re trying to increase the income and you’re trying to lower expenses.
If the property manager is not doing well on the income side, that’s going to hurt your bottom line.
That’s why really good property managers are in demand.
Typically, you want to get property managers that have experience in that particular market.
If they have proven they know what they’re doing, you want to snatch them up to avoid these scenarios!
3. Expenses Are Higher Than Expected
What if all of a sudden you have a pipe burst?
What if a gas leak affects dozens of apartments?
What if all the roofs on the property need to be replaced?
These questions may sound extreme, but this stuff can come up.
Having money in reserve during these situations can be very helpful.
But even that won’t completely solve the problem.
Unfortunately, you can’t predict situations like this.
That’s why having contingencies is important.
On the other hand, if you decide you want to do more renovations than you expected…
That will probably cause the property to not perform as well as you’d like.
With property investments, everything comes down to understanding what the numbers are.
You need to be familiar with what the rents have been and what competing properties are doing.
You have to make sure your budget and the way you’re working is going according to plan.
Don’t let all of this scare you!
In general, there are a lot of things that allow properties to perform well.
Here, we love doing multifamily syndication.
If you are interested in investing with us, we are happy to answer any questions that you may have. Join our investment club today and we will be in touch.
Before you leave, make sure to check out our special report about investing. It compares the stock market to real estate, and it also includes how the pandemic affects your investment future.