How to avoid potential missteps in multifamily loans

This article was provided by Nate Zielinski of RCN Capital.

In today’s real estate industry, there are numerous avenues when it comes to finding success. Short-term or long-term loans, fix and flip or long-term rental, single-family homes or multifamily properties and even ground-up construction have a niche in the industry. With all these paths to success, there are also plenty of mistakes and missteps to avoid while navigating these deals and managing these properties.

With this article, I want to talk specifically about multifamily loans. They can seem daunting to newer investors as these properties have a lot of factors to consider before an investor should want to own one or a lender will want to approve a loan for a particular multifamily property.

Calculating Cash Flow

Cash flow is often one of the first things an investor looks at for a reason. Multifamily properties can be a massive undertaking depending on the unit count so the onus is on you as the investor to thoroughly research the market, find comparable properties in the area, determine the status of the tenants and vacant units and be certain that this property will cash flow the way you want it to.

Doing these calculations prior to the purchase of multifamily property is crucial to success. Checking in with mentors or a helpful lender is a must in this scenario. They will be able to take a look at some of the numbers with you to ensure that the deal makes sense and will work for everyone involved.

There can also be situations where even if a multifamily is completely rented out it might not be the smartest purchase. Older properties might have long-term tenants that expect rent at a certain dollar amount even though the market demands that you can charge more. Owning that property and raising the rent could cause a rift between you and the tenants potentially making them want to leave and cutting into your cash flow. On the flip side, a completely empty multifamily property could be even more desirable if you know that filling out these units would not be an issue. Cities in desirable markets are ripe with properties such as these and securing them as early as possible could lead to significant profit due to what you would be able to charge for rent. Situations such as these are why research and due diligence is critical in the multifamily industry.

Rehab Risk vs. Reward

Another potential pitfall in the multifamily investment space is taking on a project in which the investor doesn’t properly calculate or comprehend the rehab work they are about to perform on a property. Sometimes not messing with a good thing is one of the best lessons an investor needs to hear in the real estate investment industry. Finding the right multifamily property for your portfolio is tough, to begin with but bringing in the component of rehab work is adding a complex layer as well. This is where experience and networking come into play and why it is so crucial in the industry.

If the current multifamily property is rented out and cash flowing well, the best plan may be to avoid a rehab project altogether. It is important to run analysis, perform market research and run these major projects by a lender or a trusted partner or mentor in the industry. Ruining a good thing in this industry is a hard misstep to come back from and can hinder an investor’s confidence. As I mentioned, looking for comparable properties and assessing where your multifamily property is regarding the surrounding area can tell you all you need to know about the rehab work you need to do. Having a property that already cash flows and is rented out puts you in a great position already. Jeopardizing that by assuming you need renovations to compete in the industry or have a sparkling multifamily property can greatly affect your bottom line.

On the other hand, sometimes rehab is essential to keeping the multifamily property headed in the right direction. Taking the property on a unit-by-unit basis could be a great way to save time and money. Check every inch of the property you own or are thinking about owning and develop a specific rehab plan and stick to a budget. This way you can have the best of both worlds. You can make improvements that increase value while not totally renovating a multifamily property.

Projects like this could take months or years depending on the contractors and the scope of the work you want completed. You could lose tenants and doom the property. Smaller changes may even allow the tenants to stay in place or only leave their unit for a few days or a week at most. Take everything into consideration when you are trying to figure out what your multifamily property needs in terms of rehab. Maybe the best thing is to leave the property exactly the way it is so it can continue to properly cash flow and make you money.

Don’t Be Afraid to Ask for Help

Having partners, companies, and contractors you can rely on in the real estate investment space is a game-changer. When it comes to multifamily properties you may find yourself relying on these relationships more often until you get more comfortable with managing these larger properties. A potential misstep can be when investors think they must do all this work alone.

First, partners are huge in this business. More capital, more experience, and more resources are just some of the reasons partners can make a difference in the industry, especially when considering multifamily properties. An extra set of eyes to find more properties is a big advantage as well. Experience in the industry to deal with any potential issues that arise during the buying process or while overseeing the property is big too. An infusion of money from a partner at just the right time can secure a multifamily property with bidders swarming when the property goes on the market. No partner? Good business relationships will come in handy then.

Property management companies are the first in line when it comes to important business relationships in the multifamily investment space. They have expertise when it comes to handling rent payments, overseeing maintenance projects, and resolving tenant disputes. These companies can be a lifesaver if your ambition as an investor includes multiple multifamily properties. You will have a lot on your plate on a day-to-day basis so having that company in place will help you feel less stressed as you look toward other investor-specific duties.

Lastly, the contractors in your contact book need to be reliable to avoid any missteps in the multifamily investment space. When there are major renovations to properties with many units, having those contractors that you know you can rely on to be timely and thorough makes a big difference. With a quality company, you know you’re getting good management to oversee the projects and quality materials to complete them.

There are several potential missteps in the process of purchasing, renovating, and owning a multifamily property but now that you can be on the lookout for a few of them, you can plan on how to avoid them. It is never a perfect science in the real estate investment property industry but being prepared for the worst-case scenario and handling it accordingly is one of the biggest skills an investor can have. Running a successful multifamily property can take a village, some good luck, and hard work, but most importantly avoiding some of these missteps to stay on the path to success can make all the difference. If you have any questions regarding your next or current multifamily property never hesitate to reach out to us at RCN Capital.