Real Estate Investing – 5 Ways to Protect Your Investment & Lower Risk
One of the most important aspects of investing is to lower your risk and protect your investment. By investing in multifamily real estate instead of other types of real estate, you’re already taking the first step to protect your investment. Historically, multifamily real estate has been much more stable than other commercial real estate investments. It spreads your risk across many different tenants in a single location. This allows for the investment to stay stable as tenants come and go. Multifamily real estate also fills a basic human need. Everyone has to have a place to live and apartments are the preferred choice of millions of Americans.
All investments have risks, even multifamily real estate. As an astute investor, one of your biggest jobs is to manage and lower your risk by making smart choices and doing your research. In multifamily real estate investments, there are five ways you can lower your risk and protect your investment. By using conservative financial analysis, performing thorough due diligence, and by having an experienced team, you can greatly lower your risk and protect your investment.
5 Ways to Protect Your Multifamily Real Estate Investment & Lower Your Risk
- Base the Purchase Price on Historical Performance.
- This one might sound like a “no brainer” but you would be surprised at how many investors over pay for a property based on a broker’s “proforma” (another word for “fairy-tale”) financial performance. We highly recommend basing your purchase price on the property’s historical financial performance, not proforma numbers. Sure, the broker’s “proforma” might be possible, but why pay the current owner for the potential upside up front since you are the one who is going to have to work hard to get it. Shouldn’t you get paid for the upside if you perform better than the current owner? Before putting in your offers, make sure you see the historical performance of the property. We recommend getting at least the trailing 12 month’s income and expenses at a minimum. If you can get multiple year’s financial performance you should. If you are getting financing for the purchase of the property, you’ll need the historical financials for the lending institutions anyway. Might as well get it up front and use them for your offer.
- Perform Thorough Due Diligence.
- In multifamily real estate investing, once you get an offer accepted you normally have at least 30 days to do your “due diligence” on the investment. This is a time to go through all of your financial and physical inspections of the property to make sure the investment is what you thought it was. We suggest you use the time given to do your inspections and bring in professionals when needed. You need to focus on confirming the financial performance of the asset as well as determining the physical condition. You need to go through and audit every lease, bank statement, bill, and any other relevant financial information you can get your hands on. During the physical inspections, we suggest walking through every single apartment, doing a physical condition report, inspecting the roofs, foundations, and mechanical systems. The more research you do up front, the less surprises you’ll have later lowering your risk.
- Buy Comprehensive Property Insurance.
- One of the smartest ways to protect your investment from disaster is with comprehensive property insurance. The property’s operations will pay for the insurance policy through it’s operations. The insurance policy should cover for losses due to fire, flood, hail, wind, and other threats to your property. Insurance should help you replace your income and physical property if the unexpected happens. Property insurance will lower your risk and help you sleep better at night.
- Do Not Over-Leverage Your Asset.
- A smart older investor once told me “If you over-leverage your investment, you will lose it. If you don’t, it will make you rich.” This is very wise advice. Be careful when financing your investment to make sure the property’s income can support the added debt payments without risk of default if you have a few down month’s. Sometimes the maximum loan amount is not the best thing for the property or your pocket book. We recommend being conservative when financing your investment and making sure you bring in significant equity and have cash reserves in case you have a dip in the property’s performance temporarily.
- Assemble a Knowledgeable Team.
- Multifamily real estate investing is much more than putting your money in a bank CD and getting paid each month. When you invest in real estate, you are running a business with a lot of moving parts. Multifamily real estate is a business that can make you a lot of money, but that needs to be operated like a business. Just like you wouldn’t want to go into business without knowledge and experience, you don’t want to invest without an experienced team either. Multifamily property’s with experienced owners, managing members (if you are a part of an investment group), and on site management are essential. They can foresee potential problems, identify risks, and help lower your risk when investing. They can help you avoid making the big mistake when you don’t know what you don’t know.
Multifamily real estate is a great place to invest your money. As a knowledgeable investor, your job is to do your homework and lower your risk whenever possible. When investing in real estate, remember to base your purchase price on historical financial performance. Perform thorough due diligence. Do not over-leveraging your investment property when using financing. Buy comprehensive property insurance, and assemble an experienced and knowledgeable team. By doing these 5 things you can lower your risk and greatly increase your odds of success.