Here are the three most common misconceptions I have encountered in my 20 years of being an owner/operator of multifamily real estate.
1. You make money when you buy.
This is one of the most commonly repeated mantras I hear in this business and its total crap. You may create an opportunity to make money when you buy. You may create value when you buy but let me be very clear on this point- you don’t make MONEY until you exit the deal, and the closing check clears the bank account. Not a second before that.
If you believe you “make money” when you buy real estate, then you don’t ever have to worry about exit strategies. You don’t ever have to worry about market cycles or loans coming due. You don’t have to worry about interest rates or operating the property successfully; you just buy real estate and make money! It’s just that easy!
B.S.
Operations, management, and the exit will have way more to do with you making money than the purchase will. Don’t get me wrong, I am not saying that buying the deal correctly is not extremely important (it is), but if you can’t operate and exit, the purchase was a bad idea to begin with. You didn’t just “make money.”
2. If you find a deal, the money will come.
Ok so let me get this right…if I find a “good deal” total strangers will just show up out of nowhere to shower me with their investment dollars. Relationships don’t matter? People won’t have to “know, like, and trust me”? They will just invest because I put some nice pictures and great projections on a slide deck?
The short answer is- yes, investors might do all those things. The problem is they don’t do it for long. I have noticed that investors are overly willing to invest in real estate deals when the times are very good but when times toughen up, so do the investment dollars.
To be able to fund deals in all market cycles you will never get away from the need to build solid relationships with real equity partners. I can’t stress this enough.
Long story for another day but I lost $150,000 in earnest money on a large apartment complex deal I was trying to syndicate. I didn’t have the relationships and the money did not come. I lost.
Always be networking and never take raising money lightly.
3. Cashflow is the most important thing in the apartment business.
It’s not. It is pretty important but it’s not the most important thing. The most important thing is to have cash flow AND appreciation. If you don’t have appreciation you are going to have a distressed exit from that property. You could cashflow straight into foreclosure if the value of your asset was less than the loan amount at time of the loan maturity.
You definitely need to create cash flow but thinking of the appreciation as a “nice to have” is an extremely risky business model. If you believe that the appreciation is arbitrary then I would make the comment that your analysis of the deal to begin with was seriously lacking.
Why is the old saying “location, location, location” not “cashflow, cashflow, cashflow”?
Because location equals appreciation! Appreciation equals a profitable exit.
For more information like this check the free resources on my site www.realestateraw.com.
Best of luck!
Bill Ham
