Even though investing in investment real estate is becoming more and more commonplace, finding a project is like finding an honest politician. Plus, when you find a project that you think may be “the one” you're still subject to those SURPRISES once you take ownership that can cost thousands and make that “great investment” a real loser.
You can prevent your next project from being a loser by avoiding the following mistakes:
1. Not Putting Yourself in the Buyers Shoes 5, 10, 20 years from when you buy the project .
You almost want to buy the project over again in your mind 10 years down the road and ask yourself, “Based on the future of the location and condition of the property will a buyer find the project attractive?” If you hesitate in saying “yes” you must definitely do more analysis as to the saleability of the project and the area.
2. Not inspecting entire property prior to closing.
Most Apartment you buy you will initially look at the building before you release all contingencies in the offer and then take over after 30 – 90 days. Be sure that prior to closing you go through the building AGAIN to make sure that you will not have any surprise repairs (that may have happened between the escrow period) once you take over.
3. Work only with an experienced Apartment property lender.
Save yourself a ton of time and money by working with a banker that truly understands Apartment. This, almost more than anything can make or break a good deal for you. Work with a banker with no real experience at your own risk.
4. Do not buy on the assumptions you will raise rents – only under special circumstances.
Do not buy on the word of a broker or owner that all you have to do is raise rents and it will work wonderfully. Make sure you do your homework as to the validity of this claim. Almost ALL owners say that their rents are too low.
5. Work with an experienced broker to find a property that will work and protect your interests at the same time.
The best brokers specialize in Apartment and have a designation such as CCIM or SIOR. Do not work with a Realtor that has open houses on Sundays and expect them to know how to assist you in a profitable analysis of a project. Prior to working with them be sure to ask how many properties they have sold!
6. Not examining income and expenses CLOSELY.
Before you say YES to the project ask to see the sellers last two years of “Schedule E” or partnership/corporation return for the property. This, more than anything will give an accurate reading to you on the performance of the property. Compare this to the figures the owner gave you.
7. Not factoring in enough vacancy and reserves.
During your ownership you will manage the building, have empty space and a building (s) needing capital improvements and leasing. Factor these costs in to your operating statements to give you a TRUE idea of how the property will cash flow. The lenders and appraisers will do this – why shouldn't you?