Avoid These 5 Pitfalls in Multifamily InvestingBrian Hansen
Investing in a commercial multifamily property can be an exciting opportunity with promising results. In the right market, it can be a goldmine, but there are five common mistakes that keep investors from maximizing the return on their investment. Do you know how to identify and avoid these pitfalls before they hit your pocketbook? Here are some tips we think you will find invaluable.
1. Underestimating the Cost of Turning Units
Even if a multifamily commercial property is occupied, you may be forced to turn the units sooner rather than later. The cost of this is often much higher than anticipated. When considering a property, factor in the worst-case scenario of turnover costs.
2. Overestimating Tax Deductions and Credits
Investment properties are typically subject to harsh and complex tax regulations. There are some deductions that can ease the burden, but too often buyers overestimate these deductions and wind up paying more in taxes than they ever anticipated. It is essential to be realistic and conservative in your calculations. Always consider the possibility that you will have to pay more!
3. Buying in an Problematic Area
The financial upside of a commercial multifamily unit often depends on its location. The popular real estate phrase, “Location, location, location!” is tried and true. Familiarize yourself with each neighborhood’s apartment vacancy rates, marketability and current values, including the market value and sales/closing changes over the past year. Even if average rents show a promising future, the rental opportunities in an area may be in a decline.
4. Disregarding Current Residents
Owners may make concessions to tenants such as reduced rents or free utilities. Prospective multifamily unit buyers should be aware of such offers, and factor them into their projected income and profits. Buyers should also take in to account plans for handling current tenants, and what costs might be required to effect these plans.
5. Neglecting Important Research
Find out why the current owner is selling? Have there been recent changes (declines) in the property’s cash flow? In the general rental units in the area? Are there major renovations or mechanical/structural replacements needed? Before considering a property, these kinds of questions must be answered. Getting answers and ensuring that your investment will be successful requires more than an inspection by a qualified property inspector. You should gather as much information as possible before making any verbal commitment or signing any papers.