Multi-family properties and office parks are two major steps forward in real estate investment. Multiple incomes entering one property with one set of maintenance needs is a big cost with a tempting payoff.
There are a few mistakes to avoid, since multi-family homes can also deliver multiple tenant headaches with one wrong headache. Here are a few mistakes that are costing you money when investing in multi-family properties.
Ignoring Market Indicators
Too many people talk themselves into new dreams rather than sound investments. While a long-term, grand dream is worth chasing, don’t trick yourself into turning a money pit into an economic powerhouse.
When looking into multi-family homes, don’t ask yourself about potential. Unless you already have multiple, well-managed, profitable multi-family properties in your portfolio, potential should be completely off the table in most cases.
Instead, look at the neighborhood and surrounding areas. Is there a need for that kind of housing? Are there multiple, vacant apartment complexes? Are there more empty houses than lived-in homes? Are the locals on the verge of overthrowing the status quo?
The last part is a bit extreme, but comes with a grain of truth: unhappy locals may not be lining up to rent from you. Although some areas have captive markets that may pay anything, all it takes is a local buying or building a new property to send your investment into an abandoned failure.
Figure out what locals are willing to pay, learn about professionals who need to move to nearby business or vacation areas, and figure out how much it costs to maintain your investment.
The final answer is different depending on how many repairs are needed or how much breaking ground will cost, but the core advice remains the same: let the market, not your dreams, guide your multi-family investments.
Overspending on Properties and Services
A fool and their money are soon parted.
That warning is great advice that is often ignored because of ego. No one wants to be called a fool, especially not for an idea they’ve been considering seriously.
That said, considering an idea isn’t being a fool. Not yet at least. Not putting more thought into the idea is far worse. When it comes to buying multi-family homes, being the first to do something outrageous can be a disaster.
Just because you can afford to pay top dollar for a property doesn’t mean you should. Spending millions on a property—sight unseen—means you may be wasting all of your initial investment, wasting more on repairs, and potentially getting no return if the area isn’t popular anymore.
If you spend too much, you may drive up the cost for your future investments. If you, friends, or colleagues want to purchase future properties, others may think that the area is worth more than it actually is.
With one heavy investment, you could create the wrong kind of inspiration—or the right kind, if you’re real estate agent or private seller who just needs a sale. It can happen faster than you think, especially if a whole small town or county sees your purchase as the biggest spending in years.
Another bad trend would be overspending on parts and services. Whether you’re purchasing a bulk load of replacement building materials or starting a service contract with an electrician, you don’t want to lock yourself into something unsustainable.
Today’s money could be tomorrow’s regrets. Your new property could drain your accounts, or you could have financial trouble that leaves you struggling to handle a poorly-performing multi-family obligation.
Spending the right amount of money on an electrician, plumbing, renovation, and internet service set of contracts can keep your contractor partners happy without creating a massive drain. It’s about being fair, and that goes for the worker as well as the buyer.
While any contractor would be happy with a massive contract, they’ll be happy with market rates or slightly above market rates. Pay what’s fair first, and think of incentives if you love their work later.
All in all, like any form of real estate, multi-family properties demand research and steady attention on the numbers and indicators that matter most. When you’re attentive and savvy, your investment will go swimmingly.