5 Mistakes Apartment Investors Make
For investors to be successful with their apartment investments, it’s necessary to buy right and manage right. An easy way to increase your chances of success is to learn from mistakes apartment investors make and avoid them.
I’ve always enjoyed learning from others. Most experienced investors talk about what went right. I’ve always been more interested in knowing what went wrong and mistakes apartment investors make. I believed that this way I can avoid their mistakes and improve my chances of success. This article is about the 5 mistakes apartment investors make.
Mistake #1: Not Having a Plan
Investors need a plan describing the goals they want to accomplish with the property. This includes the expectations for operations and the end goal (exit plan). If you want to increase the value, what are your plans to do that. What are you forecasting future income or value to be? Planning this provides a target to measure progress.
If you want to sell in 5 years or longer, will improvements need to be made? If you plan to hold long-term for cashflow or retirement, what will operations look like and will you need to spend on major capital improvements in the future. What budgets are necessary to make improvements?
It’s important to start with a plan that guides you forward. Circumstances change and plans can always adjust. Plans are commonly adjusted and even entirely changed. New and unforeseen situations and challenges occur requiring change. Not having a plan is to move without direction and a mistake apartment investors make.
Mistake #2: Weak Financial Analysis
The value of an apartment is derived from its operations and performance documented on the financial statements and rent roll. The financial statements tell the story of how healthy the property operates. The rent rolls show you how occupancy is performing and the reliability of income in the future. Investors need to be skilled in reading these financial documents to discover where improvements can be made. Maybe more important is to find possible problems that can create value or turn it into a bad investment and stop you from buying a headache. Simply glancing through financials without scrutinizing abnormalities or inconsistencies can set you up for disaster.
Mistake #3: Poor Due Diligence
In this section we’re talking about building inspections and due diligence related to the physical property. A mistake apartment investors make is not having a good team to help evaluate the building and mechanical systems of a property.
The mechanical systems are usually the most costly items to repair or replace. Overlooking existing or potential problems can lead to costly repairs that can ruin your investment. It takes a solid team comprised of a building inspector, roof inspector, structural engineer, plumber, electrician and others to confidently inspect and identify any issues with a property.
Mistake #4: Hiring the Wrong Property Manager
Your property management team is the heart of your operations. Having bad property management run your property is a big mistake apartment investors make. It’s important that you choose a capable company or if it’s not a match that your fire them quickly and find a better company.
Different property management companies have experience running different classes of properties. Some management companies are better with certain types of properties, locations and tenants. Having a mismatch between the management company and property type can be a disaster that harms the operations. If you don’t change management soon enough it can ruin your investment. You can mitigate this risk by knowing if the property management company you’re interviewing has experience with similar types of properties or tenants at your property.
Mistake #5: Not Managing the Asset
The investor’s job is to make sure the apartment asset does well and performs as planned. Having competent property management still requires oversight of their performance. Supervision helps address issues quickly before they become bigger problems.
Overseeing the asset includes review of financial statements and rent rolls periodically. This makes sure the operational plans are being followed. It’s also important to periodically visit the property and inspect major repairs or improvements. While on-site it’s good to inspect vacant units and audit the tenant files to make sure good lease-up practices are in place. Some owners prefer to be completely hands-off once a good property manager is hired; however, this is a mistake apartment investors make. It sends a bad message to the on-site staff that no one is watching and they can do as they please. Over time the onsite management becomes relaxed and can over spend, over look expenses or treat tenants badly affecting rents. They become more comfortable doing what they want because the investor is considered and absentee owners.
Learn and Avoid The Mistakes Apartment Investors Make
Becoming a successful apartment investor takes knowledge and experience. Experience you get over time, but learning from others allows you to shorten your time span of reaching your goals. In this article you learned about 5 mistakes apartment investors make and avoiding them will make you a better, successful investor.
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