Updated: Jan 9
Do you know which real estate deal is the most difficult one to make? Simple answer: your first one. It’s a pretty easy answer, because on your first deal you really don’t know enough to avoid the pitfalls and mistakes that most investors tend to make.
The good news is that the multifamily market is doing quite well. Vacancy rates are down thanks in part to a new group fueling the rental market: baby boomers. Many are choosing to sell their homes and rent, deciding to forgo the work and effort involved in maintaining their single-family homes. Another strong group that prefers renting over buying Millennials; a generation that emphasizes flexibility and mobility over settling down in one location, and renting an apartment allows them this desired lifestyle. Also, rents are up, thanks in part to savvy property managers and owners who are capitalizing on their tenants’ demand for new, state-of-the-arts technology and amenities that justify rent increases.
While it’s a good time to invest in multifamily properties, 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.
Going it On Your Own
Making the decision to invest in multifamily properties is a huge first step, but a good one. The mistake most new investors make is deciding 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 a 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. 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.