Apartment Investing: When Sharks Stop Swimming
In 1975 a young man from Cincinnati Ohio worked hard to keep his latest project afloat. He was over budget and late despite the fact that the new film would set the domestic record for box office gross sales of over 470000000 and win three Academy Awards. The movie was Jaws and the director was Steven Spielberg one of America’s youngest multimillionaires.
Jaws a 25foot great white shark reminds me of some investors in this business. But not for the reasons you might think. Most people would think of the word shark as someone who is ruthless and crooked. That’s not what I’m talking about.
For a shark to survive it must continue to swim. If it stops swimming it dies. And that’s what happens to most investors in real estate. What would happen if you stopped? What would happen if you decided not to work for a year? Most investors are like sharks their business would die.
That’s why apartment buildings make more sense. You can buy and sell multifamily properties without spending an extraordinary amount of time doing it. And if you stop your investment continues to flourishif you know what to do.
That doesn’t mean you don’t need to go fishing first. You won’t do yourself any favors if you stop swimming before you’ve caught a fish. To that end what are the biggest mistakes investors make when finding and analyzing properties? How do successful investors “fish” for the right opportunities? They start by avoiding these common mistakes:
It’s a marathon not a sprint
The investment firm Edward Jones airs a commercial where a man wins an auction on a painting. He paid 50000 for it and when the auctioneer said “Sold!” the man stood up and announced that he was ready to sell it. Stunned and speechless the auctioneer glanced around the room as though the buyer were crazy. The commercial continues explaining that the firm takes a longterm approach to investing.
Buying real estate is very similar. There’s nothing wrong with making a quick profit but the fastest way to making millions of dollars in this business is taxdeferred asset accumulation of capital. Investing is like running a marathon think longterm. Marathon runners train differently than those running a sprint. Be cautious of why and how you’re running the race. Those who think longterm last a lot longer and usually make millions more than those who do not.
Smart warriors put on their armor
Buying apartment buildings is exciting. I get energized when I find a property I really like. But we have to be careful to make sure the numbers make sense. Verifying and properly projecting operating expenses are to your investment what armor is to a warrioryou just need to do it right. Too often investors let emotion get the best of them and they begin to justify questionable numbers. Don’t let that happen to you.
Thanksgiving feast
My wife makes a mean turkey. I’m really not a big turkey fan but when she cooks one up that’s all she wrote. And although Thanksgiving meals include many other dishes the main dish is always the turkey.
The same thing is true with apartments. Start by preanalyzing the property. Does it fit into your investment plan? Don’t worry about the stuffing. Don’t worry about the corn and potatoes. They’re all part of the meal yes but put first things first. When you look at apartment buildings there should be three questions you ask yourself first:
- Why is the seller selling?
- Do the preliminary numbers make sense? If not why not? Is there a genuinely justifiable reason?
- If you had to sell the building tomorrow would you get your money back?
Of course the other dishes are important but the first dish is what holds them all together. Start by doing a quick analysis on the property and then move into the other ingredients. You’ll save yourself a lot of time and mental energy.
Overly optimistic
There’s nothing fun about being negative. Most buyers invest in real estate because it’s not only fun but it also provides for all the other benefits we look forward to enjoying such as financial security. Because of that we tend to be optimists. I encourage people to be a negative optimist. Again there’s nothing fun about being negative but you don’t want to be overly optimistic either.
Many investors push expected operating expenses down as discussed above to turn a marginal opportunity into something it’s not. They do the same thing when they project rental income. Be careful of accepting any “market rent” an agent or seller claims you can attain. Do your own rent study and understand where the property is really positioned in the market.
Indecision
Good opportunities don’t stay good opportunities for long. Somebody else is looking for property just like you. If you find a building that makes sensesomething you’d like to owndon’t wait. The Purchase and Sale Agreement PSA gives you plenty of provisions to back out if things are not what they seem. Some investors sit on the sidelines for years waiting for that one property that will make them a million dollars. Meanwhile the two dozen they rejected are making someone else 10 times that. Don’t be afraid to pull the trigger. You have plenty of outs if you need them.
No analysis
Some gurus teach that longterm you can’t lose when you buy real estate. That’s why some investors buy property without analyzing anything. They don’t do an effective due diligence. They pay little attention to the numbers. The best way to get run over by a steel ball is to try pushing one up a steep hill. If your goal is to lose a lot of money buy real estate without analyzing the numbers or the property. If on the other hand you want to make money in this business take the time and energy needed to properly analyze the opportunity.
About the writer: Steve Steadele author of the book Multifamily Millionaire is a successful Real Estate Investor Broker Entrepreneur and selfmade millionaire. He is a featured speaker at Real Estate Investment Associations across the country where he shares his wealth of knowledge experience and enthusiasm for the real estate industry. Today Steve specializes in the acquisition and disposition of investment real estate throughout the United States. To learn more about his products and services visit his Web site at www.SteveSteadele.com. To receive free tips go to www.MultifamilyStrategies.com.
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