Since success of an apartment investment is based on its current and future income stream, you must avoid the 6 biggest and most costly mistakes when buying a real estae apartment investment (and other types of investment property) that dramatically impacts the income of an investment.
Losers in the real estate investment game regularly commit any combinations of these 6 mistakes with no favoritism given to the size of an investor. From a small investor like a husband and wife or an individual that buys a 4 unit building; to a large investor such as a REIT or an investment partnership that buys an 800-unit building, committing these 6 deadly mistakes can lead any size investor (experience or not), or apartment building investment to decline and failure.
By understanding these 6 most common reasons that causes an apartment building to suffer and have problems, you will be able to avoid these problems and make money on your investments.
6 Most Costly Mistakes Apartment Investors Make
- Hiring Ineffective Management
- Don't Have a Viable Business Plan
- Excessive Leverage
- Not Making a Good Deal
- Lack of Local Market Knowledge
- Poor Market Timing
How To Invest In Apartment Buildings
Buy rental properties in supplied strained markets where demand is outpacing the supply so that you have optimum market timing. Don't run with the herd of investors where emotion and over enthusiasm lead to high real estate prices. Become an independent thinker doing your own research making your own decisions.
Research the local market that you decide has good market timing opportunities. Hire the best local guides to give you advice and direction on the best locations to purchase rental property. If you decide to purchase outside your local area, then hook-up with a local partner that knows the area to help reduce possible risks and surprises.
Look at many properties for sale before deciding on a property to buy. The more properties you look at, the better understanding of the real estate values in the market you will have.
You need to put enough equity into the purchase so you don't put too much pressure on the property to cash flow. If you don't have the equity, find a partner that does. Usually 20% or more cash down payment will allow for the property to cover all the monthly bills including cash reserves and a very small net positive cash flow. Put together a financial model that includes your realistic breakeven point to give you a good indication of the amount of equity you'll safely need.
Create a business plan that realistically forecasts the goals and objectives of the investment property. Make sure this plan outlines what you are investing in and why. This detailed plan will help you stay focused and eliminate many surprises.
Finally, hire a top-notch local property management company. Make sure the property management company is one of the best at managing your type of property, and has proven results doing so. You could have a great property with a good business plan, but if you have a poor management company your investment will be doomed.
Here's an Apartment Investor's Mistakes to avoid summary:
- Make sure you find a good deal
- Find a property where you can add value
- Crunch all the numbers using a realistic financial model
- Execute full due diligence on the property and local trade area
- Purchase with enough equity in the deal so that your debt burden is not too risky
- Create a viable business plan with investment goals
- Maintain comfortable cash reserves
- Hire a top notch local management team
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