Top 5 Mistakes Investors Make When Entering the Multi-Family Lending Space

Here’s a trick question: What’s the hardest real estate deal to close? The simple answer: your very first one as an investor. If you think about it, it makes sense – inexperienced real estate investors don’t yet have the requisite experience and knowledge to avoid the most common pitfalls and mistakes that tend to come back and haunt new property owners.

On the bright side, the multifamily residential market is remarkably strong. Vacancy rates have plummeted as of late due in large part to the exponential growth of the baby boomer generation. Many of these individuals are opting to sell their homes and rent instead, choosing to pass on the work and costs associated with maintaining their single-family homes. Millennials are also contributing to the surge in multifamily demand, as the generation prioritizes flexibility and mobility overstaying put in one geographic area – making apartment rentals the perfect option for their lifestyle. Another positive factor in the multifamily sector is that rents are up, mainly because intuitive property managers and landlords are taking advantage of the increased tenant demand for cutting-edge technology that can justify the additional payments.

What is Multi-family Finance?

Multi-family finance refers to the process of obtaining financing for properties that have multiple residential units, such as apartment complexes or condominiums. This type of lending is specifically tailored for real estate investors and developers who are looking to purchase, refinance, or renovate multi-family properties.

There are several different types of multi-family financing options available, including traditional bank loans, government-backed loans and private lender loans. Each type of financing has its own set of terms, requirements, and benefits, so it’s essential for investors to carefully consider their options before moving forward with a multi-family loan. Let’s take a closer look at some options multi-family investors have when it comes to financing.

What are My Options for Multi-family Financing?

When it comes to multi-family property, there is a wide range of financing options available to investors. These options include traditional bank loans and other commercial lenders, government-backed loans, and private lenders.

One common option for multi-family financing is a conventional loan from a traditional financial institution. Banks offer competitive interest rates and terms for investors looking to purchase or refinance a multi-family property. To qualify for multi-family financing, borrowers must typically meet certain qualifications, including having a strong credit history, a sufficient amount of liquid assets, and a debt-to-income ratio that is within the lender’s guidelines. 

Government-backed loans, such as those offered by the Federal Housing Administration (FHA) or Fannie Mae, are another popular financing type. These loans typically have more flexible eligibility requirements and lower down payment options than traditional bank loans. However, they may come with additional fees and restrictions.

Private lenders are also an option for investors looking to finance a multi-family property. Private lenders offer more flexibility in terms of eligibility requirements and loan terms, making them a popular choice for investors with unique financing needs. However, private loans may come with higher interest rates and fees compared to traditional bank loans or government-backed real estate loans.

With lower barriers to entry than other property types, now is the perfect time to invest in the multi-family property sector, but there are some potential missteps first-time investors can get caught up in that can have negative financial impacts. With that being said, simply waiting around until you feel like you know every single detail of the investment industry isn’t an option. So here are five mistakes to avoid making as a multi-family investor.

Going Solo

Deciding to invest in multi-family residences is a big step, but the long-term return on investment makes it one worth taking. Just don’t try to do it all on your own the first time. Rookie investors often think that if they do all the work, they’ll get a bigger payoff at the end of the day. Unfortunately, that’s not the case. Investing in multi-family properties requires some degree of teamwork. As a first-time investor, you probably don’t have an extensive knowledge or sufficient time to complete all the steps a transaction entails on your own. Evaluating, negotiating and eventually managing the property all require specialized skillsets that come with experience. Another concern is having enough funds or borrowing power to acquire a property by yourself. 

A straightforward way to avoid this common pitfall is to seek out a trustworthy multi-family lender with a track record of successful investments. These individuals know how to locate good properties and vet the numbers to make sure the deal makes sense and talk banks into loaning you the money you need. They can also help educate you throughout the process. They earn fees and take a cut of the equity, but this expense is well worth it to tap into their experience.

Undisciplined Budget

New investors often can’t control their emotions when they get presented with what appears to be a great deal. They subsequently cut corners during due diligence in a rush to get started on what they believe will be a lucrative venture. Don’t fall into this trap. Take the time to thoroughly analyze the deal, crunch the numbers and make an informed decision. A cautious approach is often better than being overly aggressive, and you may find you have to turn away several promising deals because they just don’t make economic or logistical sense for your real estate portfolio. Partnering with an experienced hard money lender who can help guide you throughout this process is also a great option.

Appreciation Dependency

Hypothesizing how much and when a property’s value will increase is a risky game that could land you in financial trouble. Experienced investors know that the most reliable approach is to purchase under-valued property, hold on to it for a while, and sell it years down the road after the market value has appreciated. The tricky part is that no one can accurately predict the rate a given property will appreciate. When the market is active and values are rising, you may be able to get away with attempting to buy and sell immediately. 

We’re not saying you shouldn’t take appreciation into account when deciding on an investment, but you should adopt a conservative approach and anticipate selling the property in a down market that could be a long way off so budget accordingly with the comfort of knowing that one day in the future the market will fluctuate in your favor and you’ll enjoy a great payday.

Accurate Expenditure Projections

While hard money lenders can help you determine the costs and expenses related to your multi-family investment, you should still take the time to personally verify if these projections are accurate. The mistake a lot of new investors make is that they overlook the amount of money they will have to pay for rental expenses from the very first day they take ownership. 

When the market is slow, tenants may start demanding upgraded units and amenities. That means your budget may increase to keep up with market standards and attract a steady flow of new tenants. To avoid this financial trap, be sure to analyze the property and compare it to similar properties that are being offered in your market. Then determine what upgrades, if any, are necessary to make your property competitive on the market.

Selecting the Wrong Market

The majority of first-time investors believe that investing in a local property is a safer play because they have more first-hand knowledge of the area. This is a big mistake. Just remember the classic real estate saying: “Location, location, location!” You could be losing out on tons of profit because the ideal investment location could be hundreds or thousands of miles away. Don’t let the distance scare you. As long as you analyze the cap rate, area job growth, employment stats, and other variables, you have all the information you need to know to make an investment decision.

The financial experts at Express Capital Financing can tailor a multi-family loan to suit your unique set of needs in a fraction of the time that it takes to obtain a conventional financing solution. Contact us today to learn more about how we can assist you in achieving your real estate investing goals.