If you’re thinking about putting your money into a real estate syndication, it might seem a bit overwhelming at first. How can you make sure you’re on the right track? How do you avoid the mistakes? 

Like any adventure, multifamily real estate investing comes with its fair share of risks and challenges. As I embarked on my own investment journey, I discovered that avoiding certain mistakes could make all the difference between success and failure. In this blog, I’ll take you through the six major slip-ups that new investors often make when they’re getting started with passive investments in multifamily real estate. Let’s get right into it.

Mistake No. 1# Having No Plan

Picture this: you decide to take a spontaneous road trip without a map, GPS, or even a clue about where you’re headed. Sure, it might sound exciting at first, but chances are you’ll end up lost, frustrated, and possibly stranded in the middle of nowhere.

Multifamily real estate investing without an investment plan is pretty much the same deal. It’s like blindly throwing your hard-earned cash into the market without a clear direction or strategy. 

Building a strong investment plan is the first step to any successful investment. Once you have your investment goals, you will know what you are looking for. The three important things to consider are:

1. What kind of Returns will the asset provide
2. Business Plan – hold period, exit plan, etc.
3. Asset Class you want to invest in
4. Value add play 

As there are many investment options available when it comes to real estate, like single-family homes, multifamily properties, lease to own, fix and flip, commercial, retail, land development, etc. knowing these 3 fundamentals will help you opt for investments that can better match your investment expectations.

Mistake No. 2# Not Knowing the Market

To put it simply, what is good in Texas, may not be good in California. Before investing in any property, along with betting on the property’s condition and financials, it is crucial to check the demographics and trends in that location. A low cap rate of the property compared with the market may present a value-add opportunity where with some renovations and upgrades the net operating income can be increased. 

Along with the cap rates, here are the other crucial checks you need to do on the location:

1. High job growth
2. Growing population rate
3. Low to no crime rates
4. Supply-demand balance
5. Proximity to employment centers, schools, public transportation, and other amenities
   
   

Mistake No. 3# Not Having an Exit Strategy

Having an exit strategy planned before getting into multifamily real estate investing will help you maximize the profits when you eventually decide to sell. Exit strategy takes into account both your short-term needs and long-term investment goals. For example, if your long-term needs are more urgent, you will select buy-and-hold properties, whereas to meet your short-term goals, value-add opportunities present a better option. Similarly, if you are looking for building long-term generational wealth, opting for the 1031 strategy will offer a tax-free way to keep building your portfolio and multiply your wealth.

Thus, having a defined exit strategy helps in grabbing the right deals that fit your investment’s checkbox.

Mistake No. 4# Not Knowing the Underwriting Process

Now as a beginner you don’t have to be the spreadsheet wizard, but to evaluate the property financials, you have to have an understanding of the basics of the business plan. If you fall for the shiny numbers, without understanding whether it is feasible or not, you might just be setting yourself up for failure. A high IRR should be supported by a sound business plan. Take time to understand the market dynamics and how the sponsor plans to achieve that number. Emphasize on a more conservative underwriting approach that keeps a safety net for changing economic trends like inflation.

Mistake No. 5# Failing to Diversify

When choosing a portfolio, look for diversification across geographies and commercial real estate properties. This helps you spread risk and ride out the bad as well as good times safely. With diversification, you can protect your investment from changes in the economy or area-specific challenges. 

Mistake No. 6# Doing everything yourself

To make the maximum of your investment, leverage the knowledge and experience of other real estate professionals. Collaborating with experts, such as real estate agents, property managers, and financial advisors, can provide valuable insights and support throughout your investment journey. By building a network of trusted professionals, you can tap into their expertise, avoid costly mistakes, and make more informed investment decisions.  Investing in yourself by getting a coach or a mentor is a great way to learn quickly, avoid pitfalls, short cut the process, and have the expertise when you need it.

The Bottom Line

Remember, success does not happen overnight. By creating a solid plan, learning the market, taking calculated risks, establishing an exit strategy, and leveraging professional expertise, you can make smart investment decisions and increase your chances of success.

Multifamily syndications are a great way for passive investors to diversify their portfolio while leveraging the expertise of real estate investors who have been doing it for years. If you want to learn more about multifamily real estate investing and how you can leverage its power to build long-term generational wealth, get in touch with me.