Multifamily investing will allow you to scale quickly, generate consistent cash flow, and build generational wealth. However, success in this area depends on taking the right approach. Discover 5 crucial tips for multifamily investing to help you avoid costly beginner mistakes and create a profitable, long-term portfolio.
Tip #1: You Can Fix a Property, but You Can’t Fix a Location
Avoiding costly mistakes is crucial when investing in multifamily real estate. One of the most common errors beginners make is focusing solely on the property’s features without considering its location. A great property in a bad location is a bad investment. High cash flow, ROI, or cap rate on paper can be misleading if the property is in a poor location. Rookies or beginners are often attracted to these deals; however, a property in a bad location means you won’t attract the attract quality tenants, resulting in poor cash flow, diminished ROI, and an erased high cap rate. Therefore, it’s essential to prioritize buying good properties in good areas.
Focus on buying in good areas with low crime rates, job growth, positive population trends, and high rental demand. These factors are critical in ensuring a good return on your investment. Thorough research on these is readily available online, so there are no excuses for overlooking them. Research these factors, and you won’t make this rookie mistake.
Tip #2: Buying Right is More Important Than Selling Right
The key to making money in multifamily investing is not how much you buy it for, but how much you pay for it. If you overpay, even the best location won’t save you! Buying right means having a well-thought-out exit strategy even before making an offer. For instance, you might want to buy and hold the property long-term for retirement, which would require a long-term loan. Or you might plan to buy, fix, cash out refinance, and cash flow long-term. You would need to plan for this strategy from the start. Another exit strategy could involve buying and holding the property for five years, then using a 1031 exchange to upgrade to a larger property. Again, this exit strategy requires planning early on.
Stress Testing Your Deal
Moreover, every deal should be stress tested for viability under different conditions. For example, assess how your investment would perform if interest rates rose or if rent projections remain flat for an extended period. These stress tests help you make informed decisions and protect your investment from unforeseen challenges. For more on how to stress test your deal, watch Stress Test Your Deal Before You Buy. Remember, buying right is crucial for long-term success.
Tip #3: Income Follows Assets
Income follows assets, especially passive income. The reason broke people are broke is that they are their own income-producing asset. They rely solely on their labor, while rich people accumulate income-producing assets. The more assets you have, the more income you get. So, don’t wait to buy real estate! Buy real estate now and passive income will follow.
Tip #4: It’s Okay to Start Small
Starting with small multi-family properties instead of aiming for a 70 or 100-unit property right away is absolutely fine. In fact, it is especially recommended for beginners. Starting small not only allows you to gain valuable experience but also helps you build a solid foundation for future investments. Let me provide two clear examples to illustrate this point.
Example #1: One of our students, Ivan, made a $750,000 profit from two 6-unit multi-family properties. The first six-unit property was acquired through seller financing. Learning seller financing is crucial in small multifamily properties as it allows for more creative financing options. The second property was financed through a bank, but both deals were value-add investments. We purchased, renovated, increased the income, and raised the Net Operating Income (NOI), thereby forcing appreciation. It required four years of coaching to achieve this success because multifamily investments take time. It is a long-term endeavor. Don’t expect to get rich in one year; it requires patience and consistent effort.
Example #2: Another student, Dave, built a portfolio valued at $6 million across six or seven small multifamily properties in California; all while working as a truck driver, with the goal of achieving financial independence. It took him three years of coaching to reach this level. Again, multifamily investments take time.
Following this tip for multifamily investing provides you with valuable hands-on experience and lays the groundwork for a strong foundation in future investments.
Tip #5: Cost Segregation and Bonus Depreciation
Cost segregation and bonus depreciation are powerful tax strategies that can significantly reduce your taxable income. Cost segregation involves breaking down the property’s components and accelerating depreciation. In a typical multifamily property, you can depreciate the property over 27.5 years. However, with a cost segregation study, you can write off components like appliances, flooring, electrical, and plumbing over 5, 7, or 15 years. For example, in a 44-unit apartment building, it is possible to start writing off 44 sets of appliances, 44 sets of floors, as well as carpet, electrical, and plumbing systems.
Bonus depreciation allows you to write off these components in one year and while bonus depreciation phases out soon, cross your fingers for legislative changes that could reintroduce it. Either way, cost segregation can result in substantial tax write-offs, making it a game-changer for real estate investors. For a more in-depth training on cost segregation, check out Cost Segregation Made Simple.
If you have any questions about these 5 tips for multifamily investing, post a comment below or text PETER to 833-942-4516.
Every Successful Multifamily Investor Has a Mentor
Investing in multifamily real estate can be a fantastic way to build wealth, but it’s essential to approach it with the right strategies. By focusing on location, having a clear exit strategy, stress-testing your deals, accumulating income-producing assets, starting small, and utilizing cost segregation and bonus depreciation, you can avoid costly mistakes and build a profitable portfolio. These 5 tips for multifamily investing, along with the right mentorship, will help you achieve your financial goals! Get your mentor here: Commercial Property Advisors Protege Program
Leave a Reply