I’m generally not a procrastinator, but I have a folder on my desk that I just keep shoving aside. I’d really rather not deal with it. When an apartment building evaluation comes my way and I dig into it only to find major internal bleeding, I suddenly become a procrastinator. The owner usually knows it’s bad news, which is why he’s called me in the first place. He knows it’s losing money, and he wants to know how much someone will pay him to take his dying cash flow off his hands. Unfortunately, the answer is almost always not as much as the owner thinks, and frequently less than he paid for it himself.
A good multi-family investment should be making money, not losing it. And yet, too many times, I wind up with an evaluation on my desk for a property at the bottom of a downward spiral, one that costing more and more each year just to keep it afloat.
Typically, there are a number of factors that drive a loss, but when an investment starts off well and then starts to lose ground, it’s often because the owner is failing to set aside enough money for maintenance, repairs and upgrades. You (hopefully!) wouldn’t live in your house for five years without making any repairs, so your apartment buildings shouldn’t be any different. You can’t continually take the income out of the property without putting money back into it and expect not to see consequences. Once there is significant deferred maintenance, it’s really difficult to play catch up. The building starts to look run down, so the rents start dropping and the vacancies increase, which means there is less money to make repairs and upgrades, which means the rents drop and the vacancies increase, and so it goes.
Sometimes, though, a downturn is no fault of the owner’s. Significant changes in the market can be caused by increasing or decreasing interest rates, employment shifts by major employers, or other factors outside the owner’s control. Savvy investors will be watching market trends and taking proactive steps to counter any possible down-turns in the market, such as locking in longer term leases with good tenants, even if it means enticing them with free cable, free rent, or other incentives.
Before buying a multi-family property do your research, and make sure to track down all the expenses, not just the ones on the listing sheet. Ask questions, do inspections, and surround yourself with professionals who know the local market.
If you already own multifamily units, make sure to keep up with improvements both outside and inside (retro is not a good look for keeping apartments rented!), keep the common areas clean and in good repair, carefully screen tenants, and set aside money for replacements and emergencies.
Whatever the case, the most important part of real estate investing is to know your limits. Know when you need to hire a professional property manager, maintenance staff, attorney, accountant, or whatever help you need to do it right, and then listen to and follow their advice. I want to be your real estate broker, but it’s a lot more fun when we’re growing your portfolio due to your success.