How to Avoid a Bad Deal When Investing in Multifamily Properties
As a real estate investor, you need to make sure that you get the most out of your money. This means you have to look for deals that can actually translate to a good cash flow. However, you will also encounter bad deals along the way.
Obviously, the best course of action when you meet a bad deal is to step away from it. In some cases, it will take a long time before you realize you have accepted a deal that’s disadvantageous from the very beginning.
For me, the best way to handle a bad deal is to identify one from the get-go. We are always told by doctors that “prevention is better than a cure.” In the multifamily sector where every cent you invest should secure high returns, in the long run, you should be able to approach a proposal with extra care and vigilance. Doing so will allow you to close a deal that’s highly beneficial to your bottom line.
You don’t have to be a psychic or a fortune teller to know if an investment proposal will result in a bad deal. All it takes is to apply the right skills.
Research, research, research
A good investor deals with a lot of data. Numbers are important because they guide us in making the best possible decisions. If you want to take part in a multifamily syndication, you need to make sure that the properties you are going to purchase are located in growing communities. We call these emerging markets because they are characterized by high job growth, improving lifestyles and availability of basic utilities. You can partner up with local brokers and chambers of commerce to find highly lucrative markets. This way, you can find locations that offer the best possible deals.
Make price comparisons
If you are a syndicator, one important factor that should help you decide on a property acquisition is its comparison with other properties in the area. The amount you are going to shell out can determine how strong your cash flow will be and how the acquired properties will appreciate over time.
I am going to use a real-life example for this. I was set to acquire a large Apartment Complex in Georgia. Before making the purchase, I had my brokers work on the comps. To my surprise, the effective rent for these units was $646, way below the average for the area which was $872. It turns out that the property was not managed well, resulting in its depreciation. This pushed me to make the purchase right away. I could push the rents up by $200 and they would still be low by comparison. In two years’ time, I will have increased the value of the property to an amount higher than what I paid for.
As you can see, making market comparisons can provide you with a lot of valuable insights into finding a great deal.
Conduct effective due diligence
Before acquiring a multifamily property, due diligence must be conducted. For many investors, this basically means determining the specifics of a property and making sure it will be a good investment across the board. Inspections of the sewer lines, boiler, roof, foundation and the overall condition of the buildings must be foremost.
Different investors have their own style when it comes to conducting due diligence. If your main focus is to know whether the property can secure a steady income, you need to take a look at the financial statements of the previous owner. You also need to look at the community itself and check whether it’s a good place for tenants.
Another important consideration is the studies you are going to conduct. A thorough inspection of EACH AND EVERY property is important. Inspecting a few units out of a total of 100 will create a difficult problem later on. What if 25 percent of the units are not good in condition at all? It’s important to protect your investments by making sure everything is in order before closing. Otherwise, you will be left with a lot of units that are unsellable.
Keep these tips in mind before making a purchase, and you will find a deal that delivers more than it can promise.