5 Multifamily Mistakes to Avoid

five multif family mistakes to avoid every now and then everyone makes mistakes but they can be avoided if you are aware of them and my goal today in today's video is to make you aware of the pitfalls that are essential to your success as a multifam investor these are the top five multif family mistakes to avoid let's get started all right let's get started here I'm going to share a real quick 30 second story with you Warren Buffett the greatest investor of all time as you know made a mistake that cost this company billions of dollars here's what he did in 1993 he bought this company called the Dexter shoe company and here's a mistake that he made he projected that the income of this company would be here but it end up being down here and as a result he thought the valuation the value that company will be here but as a result of the lower income the valuation of the company end up being down here and he got rid of the company and lost $15 billion right huge sum of money because of a miscalculation of what the property could do an income that is mistake number one I want to share with you for multif family investing mistake number one is an overconfident performer performer is a table of what your income and expenses and and noi would be let me give you a quick example of what an overconfident performer could do and what the detriment is okay all right so let's say that you found a deal out there from a uh broker and um I'll use a broker as an example some of my best friends are Brokers so they totally understand this uh let's say the broker gave you this deal all right and he says the income is $80,000 right the expenses are $40,000 you have a net operating income 40,000 right after you subtract your mortgage you have a cash flow of 25,000 so pretty cool right so you think so of broker tells you this is what you can do if you operate it well all right so this is what's being sold all right so let's say you get it under contract you're excited you're going to make $225,000 per year based upon what the broker gave you and then during your due diligence period you pull the actual seller financials um what is what it actually is okay so the numbers are actually uh the income is about $5,000 lower okay not too much lower here but it is lower okay the expenses are a bit higher so you have a lower income higher expenses that's completely normal when you look at a broker deal okay it's completely normal so that means your noi is going to be lower too by $77,000 okay you have the same mortgage here so 33,000 minus 15 the C ends up being $188,000 not the $25,000 that you thought it would be okay so this is normal and this is uh so being overconfident of your broker performant is a mistake right so what if the performa is not possible right so the real estate agent is selling this and by the way as I mentioned some of them are my best friends but they're not investors we are okay we're going to do our research to see if we can make this make this happen here if we can't look what happens you're going to have lower than expected cash flow that's not good you overpaid on the property by $100,000 how do I know that how do I know that is if you go to your noi okay so the noi the broker says the property is worth this amount because because the noi is 40,000 but it's actually 33,000 that's $7,000 a year uh on the noi if you take $7,000 and you divide it by 6% this is how you come up with a change in value in a commercial property that's a little more than $100,000 think it's like $116,000 so if you if you pay the brok of the price based upon these numbers you overpaid by $100,000 that's exactly what Warren Buffett did all right so basically what you did you paid today for what the property will be worth in the future that is not something we want to do in commercial real estate we want to create the best deal today and then work out behinds off get their rents up beautify the property so it's worth a whole lot more money down the road if you overpay today based upon these numbers you pay this amount and you do all the work and it's still worth this amount that's not good that's what happened here because you're overconfident okay so overconfidence is a big mistake over confidence breaths disappointment now okay so the question is Peter so what do I do I have this video here it's called uh it's a video of my YouTube videos it's on due diligence how to do due diligence on a commercial property and one of them one of the solutions is going to help you uh solve this mistake there is a solution for this mistake so don't do this all right so that is mistake number one that most multif family investors need to avoid all right okay got it let's go to mistake number two mistake number two to avoid and that is taking on extremely distress multifam projects and what I mean by distress is both physical distress with the building but also the financial stress maybe with the seller okay so I'm going to Define for you what I mean by distressed and extremely distressed because there is a big difference okay uh so dist a distressed multif family project could have this it could be 30% vacant right so you have 10 units and seven seven of them remain unoccupied for for some reason that's a distress project okay you're coming up close to breaking even or negative cash flow at this point or 30% delin that means the 10 people that are in your 10 unit a third of them are not painting at all for some reason and you may have to go through three evictions three units you have to rehab and at that point you're going to be distressed or let's say you have deferred maintenance you need a roof right you need to repair the stairs uh you need to uh redo the parking lot because no one can get in or there's a huge Plumbing Leak so this is a I just Define for you what a distress project is okay as a beginner with our help you can do that okay you can do that so it's risky but not that risky now the mistakes some people make is taking on extremely distressed multi family projects because they have their eye on the prize right they say Peter if I take on this extremely distressed project look what's on the back end all right and my thought is what experience do you have working on projects like this if you have none if you're beginner don't do it okay so here's what I mean by extremely distressed and again I'm going to go over physically and financially and again not recommend minute for beginners if you want to see a picture of what I mean by an extremely distressed multif family project the the picture of it will appear right on the screen a couple of them so you can see what I mean by extremely distressed okay it's not pretty but if you can fix it up it has great potential but it's still a mistake for a beginner okay all right so here's the first example of an extremely distressed multif family project let's say the property is 100% vacant okay for some reason but it has great potential okay so you have a 10un property a 20 unit property all the units are empty and it has been empty for 5 to 6 years but if you can just fix it up it'll be worth millions of dollars that's a mistake for the beginner okay don't do it and I'll tell I'll give you the number one cause of failure in a second okay number two let's say one half of the property burned down let's say you have a 10un property and and uh one unit caught on fire and it CAU to other foreign fire so you only have five units available but it has huge upside if you can get the insurance money from the seller and uh get all those units fixed up it'd be worth a whole lot more money so that is what they how they how they lure you in with the potential of the property but as a beginner when you have five burnt down units the the risk that you take and how long it would take and the city issues and the permits and the holding cost and actually watching the contractor do all the work as a beginner is a recipe for disaster that's also a mistake okay and again I'm giving you uh the the scenario and the potential then you can choose I'm telling you that it's not worth the potential if you are a beginner okay and number three let's say this situation you have 50% of the tenants aren't paying because of property management issues this is very common okay when you have a very very bad proper manager who has bad relationships with the tenants not fixing anything the property is tore up from the floor up and the tenants refuse to pay half of them and uh that is an extremely distressed property because not only is the proper management taking you down and has these horrible relationship with the tenants that needs to be resolved but there are underlying issues that's causing all these issues right it could be that uh there's uh bed bugs it could be that the plumet the the toilets don't flush it could be leaks in the ceiling it could be any number of things you could they they could have allowed pit bulls on the property and that now half of them are not paying and guess what tenants do talk to one another so if they if one tenant is not paying right and uh and he has a neighbor who is paying guess what they're going to talk and this number was going to stop stop paying as well so pretty soon this 50% turns into 100% as a beginner that is extremely distress and it takes skill to resolve an issue like this okay so these three situations 100% vacant uh you have a a fire on your property or half of them are not paying because of property management issues property issues that is extremely risky for the beginner right because the number one one cause a failure for extremely uh distressed uh multi projects that is running out of money and also the lack of experience these type of issues we can handle I can handle I've been there done that but as a beginner if you wanted to buy something like this and try to get the potential you're going to fail and I don't recommend that to any beginner without expert advice and handholding along the way okay so that is mistake number two and I made it number two because a lot of you get lured into the potential of the place and not really understanding what it takes okay what it takes to get there all right got it all right let's go to mistake number three to avoid here is mistake number three let me set the scenar for you you have this beautiful plot of land that's zoned for an apartment building for multif family and you would like like to build a nice 5 unit 12 unit structure here and own it and that's your retirement okay so I I set the scene for you mistake number three is building new multif family what's the problem right here's a picture of a beautiful apartment building that was just completed it's beautiful what's the problem with this building as a new investor wanting you you wanting build something new here the problem okay the problem with that is the length of time from start to finish there is a project near one of my properties and I watched I drove I drove by it so many times all right and as neighbors we have to get notified when a new projects is going to go up so we can go contest it or encourage it or do whatever but we know uh what's going to happen so here's happened with this project and I think this is pretty common and why I would suggest you as a beginner to not do something new because it took uh two years to get the the submitted plans approved so the developer hired an engineer civil engineer uh architect everybody came together to put to get to put together plans to submit to the city to get approved to build this um property here it took two years to going back and forth between the city the commissioner the architect the civil engineer to to plan approval to public meetings back and forth it took it took two years to get that finally approved and was approved and then it took 18 months to build which is about average for a large apartment building so we're talking almost four years from date of submitt to get built so you you had this uh you had this Inception of building this property 4 years ago until it's completed so my question to you and and it four years that has elapsed has the market changed has the demand changed has the style of renters how they want to rent has changed that's risky because you started this four years ago and things probably did change so what you end up producing is it going to uh meet your expectations that's too risky uh as a as a beginning investor in my opinion okay so the length of time from start to finish is H risky number two is construction delays caused by and I'm personally speaking about this this happened to me okay so construction delays caused by uh bad weather okay labor shortage oh man I tell you during uh covid no one wanted to work we had a big issue with this of hiring quality people and then supply chain you know how Supply chain issues with our current leadership uh supplying is supply chain issues have been a huge issue of getting supplies to complete your project okay so the big question is when you have construction delays do you have the financial reserves or the horsepower the dollar horsepower the holding power to withstand all these delays if not you're going to get in big trouble okay most beginners uh they don't realize that this area costs money okay and what it comes down to is number three the construction loan that you're going to use is going to mature at some point so the uh bank will give you money to build the project but it's not indefinite it's not a 30-year loan they are going to give you a construction loan before it goes to a permanent loan and that construction loan has a time limit all right so and here's what happened uh this is what happened recently within the last couple years is rising interest rates have caused some projects to be abandoned because they started their construction loan where the rates are really really low and things are more affordable fast for today the rates have doubled tripled and now this project no longer makes sense it no longer pencils out because it took four years okay so as a beginner I do not recommend you build something new that is a mistake got it all right let's let's go to mistake number four to avoid here is mistake number four here's a scenario you are online one day and you're on Loop net or kxy or some or the MLS and you or and you see a multif family deal and it and it the headline says 10 cap right you go whoa it captures your attention then right below it says 20% cash on cash return and then it says uh you know $44,000 a month cash flow and the price is really low it gets you so excited that's a mistake to chase here's why here are the promises right with that type of deal right the mistake is chasing High cap rate deals because the promises are high cash flow it promises a cheap price and it promises a high cash on cash return High Roi here is the reality all right uh so number one the reality is these high cap rate deals are not in the best areas and you know about me uh we want to have properties and our students have properties in areas that are good where tenants actually pay rent right because you know the saying you can fix a property but you can't fix a location okay so in these high cap rate areas these neighborhoods the tenants don't pay rent on time or at all there's a correlation between the quality of the neighborhood and the quality of the tenant unfortunately okay and um so these type of tenants either don't pay time or pay at all you're going to struggle okay so it's not something I recommend you do uh next the cheap price the lower price that you saw you were excited because the price was so low compared to everything else you you saw the pricee comes with that bad neighborhood okay so the low the price the worse the neighborhood the higher the price the better the neighborhood you know that that's common sense right and number three you think you're going to get high cash on cash return but actually you're going to end up with a lower cash on cash return because you're going to have uh High vacancy you're going to have continual turnover with the tenants because you have a bad area and you colle and you're you're uh renting to people who don't pay on time so you're going to have high your vacancy people will move in they don't pay rent they move out you got to do an eviction you got to fix up everything and then you're actually going to end up with lower income and that's because of the poor rent collection again when you have a very uh you know bad area you have people that that that don't that don't pay rent so your rent collection will be low so you're going to experience a lower income and number three you're going to have higher expenses okay because of one and two all right you're going to have a higher expenses because when you put put in the tenant into that bad area who's maybe not the best qualified or has the best income he's not or he or she's not going to pay the rent and you're going to end up evicting them that's a cost you have to Market it that's a cost you have to clean up that's a cost you have to wait a month that's a cost so you can see all this starts to add up where these promises are just going to fade away because you're chasing High cap rate deals and that is a mistake got it all right let's move on to once and for all mistake number five here is mistake number five the fifth and last one to avoid uh I had a a mentor and he told me this because by Nature I'm an introvert and back then I was an extreme introvert and he told me this that kind of woke me up he he said Peter there's no such thing as a rich hermit right and that is so true you need to have team teammates around you other people that are really smart around you to make you better and that is so true one of my favorite basketball players Michael Jordan very talented he says Talent can only win you games but to win a championship you need intelligence and a team that's what you need so mistake number five is going at it alone okay that that is a mistake because none of us is as smart as all of us that is so true I would not be where I am today if I didn't have the team members that I have that will support me and create for me and and provide for me to make everything better the same applies to you okay so I'm going to share with you to give you a glimpse of what your championship team should consist of okay this is your group of advisors all right number one I'll go through this quickly there there's five of them five basic ones okay number one is you need a property manager right to be successful at multif family with at least 10 years of experience not three years not five years 10 years of experience I'm talking the best proper manager has a decade of experience they have seen everything okay all the the good and bad markets the good and bad people the good and bad properties and they've been through it all you need to have a championship you need this type of proper manager okay don't set up for Less next is you need an investment advisor with a 20-year track record I wonder who that may be that's me that's us that's commercial property advisors we can be on your team okay next is a lender okay this is a A lender who lends you money for your property who's entrepreneurial in nature a lot of lenders are by the book and if your deal does not fit in their box they want nothing to do with it and they tell we can't do it no thank you you want a lender who's entrepreneurial who says okay Peter it doesn't work this way but we can probably figure out a way to do it the other way and I have the connections that can make that happen you need that lender okay all right next is you need a real estate attorney who's not a deal killer uh as you know attorney will tell you what they'll tell you for days what you can't do but rarely do they tell you what you can do you want the attorney that will tell you what you can do how you can structure deal and still protect yourself how you can structure a deal and still make it worthwhile and make a lot of money while avoiding some of the mistakes one through four that I just went with went through with you okay and then the last one the fifth one is a CPA okay and a accountant who understands real estate investment and is a real estate investor themselves many CPAs um are so conservative they do not own real estate in Investments they own the house but that's about it or maybe they're maybe they're too young and haven't gotten started yet you need to use someone who's experienced who understands real estate investing and real estate investing tax planning and is a real estate investor themselves those are the best ones because guess what they are maximizing their tax benefits for themselves that they can apply to you direct experience you can't replace any of that okay got it all right so do not use a uh a Franchise Tax Advisor right for for your tax prep if you want to compete at the championship level and that's what uh this video is about showing you how to compete at the championship level and avoiding the five mistakes got it all right if you hung out with me this long you are absolutely my favorite so I thank you now if you want to learn more learn more about what we do I invite you to uh text directly uh to us text Peter 2833 942 4516 text us any question about anything uh learning how to be mentored if you want a copy of our book uh any question that you want uh just send it on in and we be we we'll be behind the computers answering your questions we would love to hear from you thank you everyone I appreciate you so much if you like this video go ahead and click the like button if you want to send if you want to receive more videos like this go ahead and subscribe to our Channel and we'll shoot them right over to you all right everyone have a great day and I'll see you at the next video

Channel: Commercial Property Advisors

Views: 6,026

Keywords: multifamily mistakes, multifamily investing mistakes, multifamily real estate, real estate, real estate investor, investing in real estate, real estate investing, commercial real estate investing, multifamily real estate investing, commercial real estate investing mistakes, multifamily real estate investing 101, Commercial Property Advisors, Peter Harris Real Estate, multifamily investing, multifamily property, commercial real estate

Id: e7VB1_U50g0

Length: 25min 25sec (1525 seconds)

Published: Tue Apr 23 2024