Avoiding the Most Common Mistakes
It is easy to get caught in the trap of mistakes as a new investor. Take if from me, I’m David Lindahl and I’ve learned many many lessons along the way. Over the past 15 years as an investor. See the top mistakes and how to avoid them.
THE TOP MISTAKES MOST MULTI FAMILY INVESTORS MAKE AND HOW TO AVOID THEM
Number one, not understanding the numbers. Investing in multi-family properties isn’t taking a look at what else is on the market and seeing what it sold for, and then buying. That’s called getting value from the comparable method. Multi-family investing is based on income, and it’s based on ratios. It’s based on value add, so when we’re buying properties, especially if they’re 10 units and more, now with 10 units or less, it’s okay to use the comparable numbers, comparing it to what else is sold to get an idea of value, but you want to have a certain cash flow figure. For three to 10 units it’s anywhere from $600 to $1,000 a month net net, so you want to write that down. When I say net net I mean net to the renter or taking in, the mortgage is paid, all the expenses are paid. That’s what you have in your pocket at the end of the month for that particular property. 10 units will be closer to $1,000, three units, it would be $600. As long as you have that net net, then that deal will probably work for you.
When you get 10 units and above, now we’re taking a look at the three most important ratios in multi-family investing, and they are the capitalization rate, the cash on cash return and the debt coverage ratio. Why are they the three most important ratios in investing in multi-family real estate? Because they cover the three most important people in every deal, or the three people that take part in every deal, the first person being you. The capitalization rate tells you what the unlevered, and unlevered means not taking into consideration any debt or mortgage, what the unlevered return that you’re going to get on your investment. That’s what the cap rate tells you. It tells you the return as an investor on what you’re going to get on that particular property.
Now the cash on cash return, that tells you how fast you’re going to get your money back. Now a lot of times you’re going to be using other people’s money, so it’s not you that want to know how fast you’re going to get your money back. It’s going to be your investors, your private money investors that are going to want to know how fast they’re going to get their money back. The cash on cash return will cover them, and investors are typically looking for a cash on cash return that’s anywhere of an eight plus, 8% plus.
The third ratio is the debt coverage ratio. The debt coverage ratio tells you how many times your cash flow covers your mortgage payment. Typically, that should be a 1.2% or 1.25%. What that is saying is that for every dollar you’re paying out in debt, you’re getting $1.25 back to cover that debt and to cover your other expenses and the money that you want to put in your pocket. The three most important ratios are the cap rate, the cash on cash return and the debt coverage ratio. Knowing where they are and where they should be, and if you’re an investor looking to invest in a deal, and you’re looking to get outside investors to give you the money to fund that deal entirely, not including the senior debt, which is the bank debt.
Typically, an investor will fund you closing cost, the down payment and the acquisition fee. Those three things will be covered by your private money investors. You don’t put any money up, yet you get anywhere from 25% to 50% of the cash flow and 25% to 50% of the deal. That’s a pretty sweet thing for not putting any money up once you learn how to do this business. For a deal like that you, you want a capitalization rate of 8% or more, a cash on cash return of 12 or more, and a debt coverage ratio of 1.6% or more. If you come to our live event, Multi-Family Millions, you will hear us talk about the Holy Trinity and the Holy Trinity is when each of those ratios meets that level or higher together, and then you get a deal that you know that will work with private money investors, so know your numbers going into the deal.
Number two, find the wrong property in the wrong area. Let me tell you a little story. When I first started investing, like I said, there wasn’t a lot of people teaching how to invest in multi-family properties. On my fifth or sixth property, I was at the closing table. I had run out of credit card money. I started to flip some single-family houses to get more money to buy multi-family properties. I had two more deals that I had to close because once I started buying it started happening fast. We actually see that with our students a lot as well. Once you get your first deal done, it’s like you blossom. Everything opens up. More deals start coming in quickly afterwards.
Real Estate Investing is not for everyone. If you’re ready to learn more and want to see a step by step program that was created from years of experience, then we should talk. With a few smart decisions, your life can forever be changed.