5 Challenges to Overcome When Investing in Multi-Family

When we consider multi-family real estate investing, we frequently consider all the “shiny” parts of it, like its scalability, the capacity for sizable investments, the potential to force an asset to appreciate, and a host of other advantages. All of this is in fact feasible, and the best part for us as investors is the opportunity to amass enormous wealth while enjoying favorable tax treatment. 

I would be lying if I said I had fully reaped the rewards of this asset class, but I can say with 100% certainty that there are many obstacles involved with this investment because of my first-hand experience and witnessing what some of my closest peers have been able to do.

1. Time Commitment: Multifamily investing is not passive like other types of habitational real estate (well, it can be). Many people, like myself, started off investing in single-family homes. There is definitely an overlap between investing in these two assets, but managing an asset well in the multifamily sector requires a lot more strategy and control. 

To be a successful owner/operator, you still need to put in a good amount of labor, even if you have a third-party manager handling the day-to-day operations. You’ll have to supervise the manager and participate in vital choices (rental rates, unit turns, when to evict, when to fine residents, major capex, and most importantly building a sustainable culture within the apartment complex).

2. Finding Deals: If only making an offer and contacting the listing agent were as simple as searching for a home on Zillow. Although technically conceivable, it is extremely unlikely. There are a limited number of brokers who handle the vast bulk of apartment deals in any given market. Building trust and credibility take time—months or even years. It takes time for a seed to grow into a plant, and in this case, good bargains need to come along. It took an entire year and a half for me. Some people can need six months.

Deals can also be found by speaking directly to owners; I’ve had good luck doing this, although from my perspective, it seems more like an art than a science to carry out this strategy. You can determine what works best for contacting owners by experimenting with various calling scripts, letter-writing styles, and text message templates. All of this is to suggest that understanding it requires time and cannot be acquired quickly.

3. Funding Acquisitions: I don’t have $10M, though. The good news is that the capital stack can be arranged for a deal of that magnitude, or really any size for that matter, in a way that makes it possible to spearhead a deal for little to no capital exposure using techniques like seller financing and master lease options. However, owners aren’t as inclined to structure sales in this way in the current seller’s market. As a result, a lot of buyers employ Freddie Mac and Fannie Mae agency products as well as bank debt, bridge loans, hard money, and other sources.

4. Selecting the Right Market(s): Keeping an eye on multiple “hot” lucrative markets is fairly simple. But it’s important to decide which market(s) you’re going to target. What links do you have to a certain market? Do you call it home? Is it simple to get to? If you don’t currently live there, do you want to move there? Are jobs being produced? What are the local demographics? Is the area prone to flooding?

How does crime appear? The list continues on and on, but hopefully, it is evident that there are many factors to take into account and that it’s crucial to identify which of them are crucial when assessing your investment requirements. There is nothing wrong with considering several markets at once, but without the correct team, doing so will be difficult. Starting with 1-2 could end up being a far better use of time than trying to cover too much ground too quickly in a particular industry.

5. You Don’t Always Win/ Make Money: This applies to all investments, not just multifamily ones. When it comes to apartment sales, you frequently hear about all the successes, but what about the losses? They must also happen, right? It is difficult to lose in the current market given the low borrowing rates, ongoing cap rate compression, and enormous rent increases (which have increased valuations). Due to the stage of the market cycle, we are in right now, investors have gained millions on investments that have paid off. Despite this, we don’t hear a lot about those who made investments between 2005 and 2010. 

This is because it’s more probable than not that those who made investments at that time lost part or all of their capital. Interest rates will inevitably rise, which will impact how agreements are traded. Even though it seems unlikely that a financial collapse like the one that occurred in 2007–2008 will happen again anytime soon, there are a number of factors that could force owners to sell their properties—possibly at a loss—in the future, including changes in interest rates, increases in operating costs, difficulty finding qualified workers, and significant capital expenditures (such as those for HVAC systems, plumbing, roofs, and electrical systems). 

Conclusion: Even though learning from your own mistakes is important, it’s also beneficial to study those of others. This blog post discussed 5 difficulties real estate investors may encounter when investing in multifamily properties. As you can see, avoiding them is not that difficult. All you need to do to get good returns on your investment is to execute your due diligence.