Investing in an apartment building typically provides a strong, stable cash flow along with a slow and steady appreciation. However, if you rush in too quickly without taking proper considerations with corresponding actions, you can quickly drain your pocket book and minimize your profits. Keep reading to find out what I have seen to be the five biggest mistakes apartment buyers can make. 

1.Not Fully Doing Your Due Diligence

Sometimes investors get so excited to make a deal happen, they unintentionally look past red flags standing in their way. You need to be sure this is the right deal for you and your investment group before you move forward. Before you make an offer on any investment property, an in-depth analysis of the deal needs to be performed. You’ll need to consider the location, number of units, amenities, deferred maintenance and the overall condition of the building. 

Leave no stone unturned!  Cover everything from lease audits to bank reconciliation to breaker boxes. Obtain copies of all of the legal documents you can from the previous owner so you can have a good sense of what you’re stepping into. Not only will these things help you determine your profit margin, but doing your due diligence can protect your reputation. One bad deal can easily ruin a good reputation you have worked hard to build. Consider what my mom used to always say from Proverbs 22, “a good name is to be valued more than great riches.” 

2.Not Choosing a Locally Based Management Company

A good investment property requires excellent management. And one of the most important factors in choosing a management company is making sure they are local. You’ll want to make sure the company you choose is able to sufficiently handle any surprises that might pop up so you’re not left short-handed and your tenants are cared for. This usually means they are managing multiple deals in town and therefore have the amount of staff needed for sufficient availability. Make sure they have the back office support you need for your reporting requirements and don’t forget to make sure you know how you’ll get paid! Processing draws can be a very painful process with the wrong management company.

With any management company, as the owner, you will still be involved in the oversight of your property. For example, a lot of times investors must be asked to authorize certain repairs needed. Not only is it best for your tenants to have a locally based management company, but it’s best and easiest for you as an investor to ensure excellent communication with a local management company.

3.Underwriting Too Aggressively

Don’t bite off more than you can chew! Investors who underwrite too aggressively make assumptions that hope for the best with a detachment from reality. The underwriting process makes or breaks the deal. To keep yourself grounded and set up well for success, here are the things you’ll want to make sure you do in the underwriting process:

• Cap rates from past similar economic environments
  • This will give you a good idea of what to expect on your return on investment (ROI)
• Consider the political environment of the city, state, and nation
  • Politics affect our economy and therefore our profit margin as investors! 
• Pay attention to what the federal reserve says while watching how the market reacts to predictions
  • As we’ve seen over the past couple years, you never know what the market is going to do. It’s important to keep a close eye on what’s happening in the market while you listen to what the Fed predicts. 

4.Being Unprepared for the Taxes

Don’t forget about your taxes! Expect the IRS to take their share of your profits. The IRS classifies rental income as regular income, therefore charging you tax at the same rate of your regular wages. Also, appraisal districts have gotten very aggressive in raising property taxes to squeeze property owners for every dime. You also need to assume your sales price will be figured out and you will pay what you owe in property taxes. Be ready to pay for it! Even though there are many deductible expenses involved with owning rental property, your rental income still must be reported to the IRS and you will pay what you are required to. If you’re not prepared to pay for it, you might want to rethink your investment. 

5.Not Getting Properly Insured 

It’s important to protect yourself with the right insurance. That means you’ll want to get a master policy. With a master policy, your property will be bundled with many other assets. Think about it like an insurance co-op. This will spread out the liability over numerous assets and greatly reduce your cost per door. With good insurance you will be protected from being held liable for any personal or property damages that occur at the building’s exterior or common areas within it. Talk to your broker about any additional coverage you might need to cover any gaps. 

Your broker can help you choose the best insurance policy for you and your investment group on a particular property. When you have a trusting relationship with one broker, they are able to assess your unique needs and risks and develop a matching coverage plan. Quoting multiple brokers is not recommended unless you are not in that trusted relationship with one broker. Insurance brokers can trip one another up if they are both shopping your policy and it will frustrate them and won’t get you much of a comparison.

 As the adage in real estate goes, you make your money when you buy it…so you have to buy them right! We love helping our investors buy them right or join us when we buy them right! To see more of my real estate content, check out my Instagram here. I would love to connect with you and help you achieve success in your real estate journey!