Avoid These 4 Multifamily Investment Mistakes

Karlin Conklin

Every multifamily owner accumulates learning experiences that pave the way for smarter decisions and more successful ventures ahead. Here are some of the most common investing mistakes and the lessons learned by those who’ve navigated the ups and downs of many market cycles.

1. You Made Emotional Transaction Decisions

 One of the most significant pitfalls in real estate investing is letting emotions dictate your acquisition decisions. Falling in love with a property is easy, but it’s crucial to remember you’re not buying your dream home—you’re making an investment. Properties with the greatest appeal aren’t necessarily the reliable money makers or best positioned when the market takes a downturn.

Lesson Learned: Multifamily investment decisions should be driven by credible research and supportive, local demographics and economic data. Third-party experts including local advisors will add perspective you may not have. Avoid following the investing crowd into trendy cities or submarkets if the fundamentals don’t justify it. Data-driven investors find deals based on the merits of the real estate, sometimes counter to trend. Solid deals will prove themselves out regardless of emotional attachment or popularity contest.

2. You Took on Excessive Debt

Leverage can be a powerful tool in real estate, producing outsized gains when appreciation is strong. But, as a double-edged sword, too much debt leaves an investor vulnerable when market conditions change. Common mistakes are over-leveraging or timing maturity dates without backup financing or hold options.

Lesson Learned: Maintaining reasonable debt levels with backup plans is essential for long-term stability. Experienced owners often downshift into fixed rates, low leverage, and long maturities during challenging periods of the real estate cycle.

For example, a practical loan structure may look like a seven-year term with a two-year window in which the prepayment fee is reduced. This window allows an owner some flexibility to time a sale or refinance in a distant future when conditions are unknown. Imagine if you were forced to sell within a short three-month window (as is common) that opened in 2023. A cushion like this can be a lifesaver in a downturn by reducing the risk of being forced to sell into a depressed market.

It’s worth noting that our environment today is different from the dynamics that caused the 2008 housing crisis and subsequent Great Recession. If you lived it like I did, you’ll remember the issues back then were a result of overleverage and predatory lending, mostly in SFR. Today’s market, on the other hand, is both underlevered and undersupplied. In fact, forecasted demand for rental housing remains strong and sponsors’ underwriting has never been more disciplined. Multifamily is one of the few investment assets able to hold its value during economic periods of uncertainty like the one we’re in.

3. You Got Too Comfortable

Comfort can lead to complacency, and, in the case of multifamily investing, it’s crucial to remain vigilant. Investors can make the mistake of sticking to their comfort zone and concentrating their entire portfolio in one area, only to see their investments severely impacted by a natural disaster or economic downturn. Insurance costs in Florida are a real-life example of this point. Expenses to insure property in the state have skyrocketed due to insured losses from recent storms. Higher insurance expenses can materially impact the cash flow and value of a property.

Lesson Learned: Expand your horizons. Don’t hold too much equity in a single asset, specific region, or sole relationship. Networking and building relationships nationally can provide opportunities for portfolio expansion into other states and metros. Today’s relationship seeds could be tomorrow’s thriving investments.

4. You Neglected Professional Guidance

To cut costs, some real estate investors skip professional guidance, believing they can handle everything themselves. A DIY approach can backfire, leading to costly mistakes and missed opportunities.

Examples are numerous, such as selling a property yourself to save on a real estate commission and finding out after the fact that the property was worth several million more, or acting as your own attorney in a purchase and finding out years later an easement on title will cost you significant time and money to clean up.

Lesson Learned: Building a team of trusted advisors is worth every penny. Gather advice from accountants, attorneys, brokers, lenders, insurance agents, exchange accommodators, and construction specialists. Their deep experience and guidance can help you navigate complex issues and lessen risks.

In the dynamic world of multifamily real estate, mistakes can be stepping stones to success. Learning from these common investment missteps and implementing a more data-driven, cautious, and professional approach can lead to a more resilient and prosperous multifamily investment portfolio over time. Remember, the road to success often has a few potholes along the way.

Karlin Conklin is co-president & COO, Investors Management Group.