How to Avoid Mistakes Commonly Made by First Time Multifamily Investors

Do you know which real estate deal is the most difficult one to make?

It's a simple answer: your first one. Most investors really don’t know enough to avoid the pitfalls and mistakes that more experienced investors would avoid.

While we continue to feel that multifamily properties are a great investment, there are some mistakes first-time investors make that can hurt them financially. You can’t just sit and wait until you’re completely ready and knowledgeable, or you’ll never get into the market. Plus, there are many different ways you can passively invest in real estate. So, if you’re a first-time investor, pay close attention and learn from the mistakes of others.

Mistake #1:

Going it On Your Own

Making the decision to invest in multifamily properties is a huge first step, and it can a good one. The mistake most new investors make is trying to go all in on their own. After all, if it’s their deal and they do all the work, they’ll reap all the rewards. You can almost predict a bad outcome if this is the approach a new investor takes.

Here’s why: investing in multifamily properties is more of a group effort - a “team sport” if you will. Sure, you’ll “reap all the rewards” by going it alone, but you’ll also assume all the risk and lose all of your money if the deal goes south. It probably will.

As a passive investor on your first deal, you probably don’t have an extensive knowledge, or time to do carry a deal on your own; evaluating, negotiating, managing – all require vast experience. The other issue is having enough money or borrowing ability to purchase a multifamily property on your own. In order to buy a property, you’ll need net worth equal to the loan amount, and that could be an issue for many investors.

What’s needed is an experienced syndicator or sponsor, to assume the role of lead investor. Sponsors bring experience and expertise to the table, often acting as a mentor, a guide and a knowledge bank at the same time. (Shameless plug, if you'd like to work with Blue Lake Capital as an LP or fund, just reach out to info@bluelake-capital.com or click here to complete our investor form and our Investor Relations team will connect with you.)

Good ones have a successful track record in multifamily property investments, knowing how to locate a good property and properly vet the numbers. They also have other investors that they work with, which help to make the deal attractive to lenders. They earn fees and take on a portion of the equity, but the money spent to have a sponsor at the helm is well worth it.

There are several ways to find a good sponsor, from referrals from friends to listening to podcasts and going to meetups. Do your homework, and you’ll be well on your way to successfully investing in your first property.

Mistake #2:

Failure to Stick to Your Budget

Some new passive investors let emotions get in the way of good judgment.

When a sponsor brings an attractive deal to the table, the excitement overtakes the practical aspects of investing and the budget is the first to go. Instead of doing proper due diligence, which includes researching the market conditions like rents, resale values and surrounding areas, the new investor is ready to jump at the chance to invest. Even though there was a budget in place initially, the emotion overtakes those original numbers and the investor looks for ways to find additional funds.

Hurrying into participating in an investment is a common mistake of new investors, and one that can have negative consequences. Properly doing your due diligence takes discipline and a lot of time. Take the time needed to analyze the deal, review the numbers. It may take five or ten deals to analyze before the right one is presented -and that it’s one that works within your original budget. Do what is necessary to review each deal, and never rush your decision or feel pressure to do so. There will always be another opportunity available.

Mistake #3:

Counting on Future Appreciation

Don’t fall into the trap of “fortuneteller” property buying. Nobody can look into the future, and hoping for future appreciation won’t do anyone any good. Long time investors will tell you their philosophy was to acquire a property under value, hold it for a period of time and then sell it years later after it appreciated significantly.

Unfortunately, nobody can predict “future appreciation,” and if you hold a property waiting for it to happen you may be holding it for a long, long time. When the market is hot and values are rising, you can certainly use this approach and hope for the best. But nobody can tell you when the market will do one of its infamous turnarounds (and honestly, it will do this!), so the appreciation you were hoping for goes out the window. What you end up with is a property valued less than what you paid.

This is not to say that appreciation should not be taken into consideration; it definitely should, but you should be conservative and expect selling the property in a down market.

If the numbers work when you sell in a down market – then it’s a strong sign that the deal is solid. My team normally underwrites deals assuming a down market when we sell, to account for a moderate appreciation. If your investment in a property is based on a “hope” or a feeling that it’s going to appreciate in time, you may be headed for failure.

Toss the fortuneteller! Base your decision on the numbers - on cash flow. If you don’t see sustainable income based solely on the cash flow, walk away.

Mistake #4:

Not Having Accurate Costs and Expenses

It’s really up to the sponsor to provide you with proper cost and expense estimates on the property under consideration, but it’s your responsibility to do your due diligence to ensure those estimates are accurate.

If you’re working with someone you’ve worked with before, this shouldn’t be a problem. But if this is your first investment with the sponsor, pay attention!

The mistake most first-time investors make is they forget that they have to pay for rental expenses from day number one. In a slow market, renters may start asking for (or even demanding) nicer units and amenities. That means the sponsor may come back and report that major upgrades and repairs are needed to bring the property up to current market standards in order to keep and acquire new tenants.

If it’s a hot market, renters may want the top amenities available or insist on major building system upgrades. To avoid those type of problems, make sure you analyze the property in relation to other properties that are available in the market you’re looking at before making an investment It will provide you with an accurate rental expense estimate and provide an estimate of the potential return on your investment. Otherwise you may be in for a negative surprise down the road.

Mistake #5:

Focusing on the Wrong Market

Most first-time investors think that investing in a local property is safer, simply because they know “the neighborhood.” This is a huge mistake! Remember the old saying about real estate? “Location, location, location!” Well, the best markets for investing in multifamily real estate could be halfway across the country! Local investments do not guarantee success.

Your sponsor will provide you with a market analysis that includes information on the cap rate of rental properties, area job growth, employment and unemployment numbers and more. This is the information you need to ensure you’re investing in a sound market. The information and data you receive will help you decide on the best investment decision you can make, so be sure you review the numbers you receive.

Summary

Just because you’re a first-time investor doesn’t mean you have to repeat the common mistakes made by other investors.

Find a sponsor with a successful track record and a good reputation, do your due diligence on the property that’s offered to you and avoid the pitfalls outlined in this article. That way you’ll be on the road to a successful property investment.

Be Bold, Be Great, and Keep Pushing Forward!

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Invest with Blue Lake Capital

If you are an accredited investor interested in learning more about passively investing in multifamily properties, click here to complete our investor form and schedule a call with our Investor Relations team.

About Ellie Perlman

Ellie Perlman is the founder of Blue Lake Capital, a commercial real estate investment firm specializing in multifamily investing throughout the United States. At Blue Lake Capital, Ellie partners with both institutional and individual investors to grow their wealth by achieving double-digit returns by investing alongside her in exclusive multifamily deals they usually don't have access to.

A defining factor of Blue Lake Capital’s strategy is founded in utilizing machine learning/artificial intelligence throughout the course of all acquisitions and asset management. This advanced technology enables the company to produce accurate and data-driven forecasting for all assets on a market, property, and even tenant basis. In doing so, Blue Lake is able to lead commercial investments with the full capabilities of today’s technology.

Ellie was the original host of REady2Scale, a podcast she created that highlights the assets, processes, and strategies for the multiple approaches to successful real estate investing.

She started her career as a commercial real estate lawyer, leading real estate transactions for one of Israel’s leading development companies. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100MM. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations.

Ellie holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.

You can read more about Blue Lake Capital and Ellie Perlman at www.bluelake-capital.com.