Apartment Loan Financing: What to Avoid
Steer clear of these potential disasters when shopping for your next multifamily property loan.
New investors see property management as an easy way to cut expenses. “We can avoid the management fees and just do this ourselves, right?” Wrong. Lenders see this as a red flag and know that good management companies can run a property much more effectively than you—and more than make up for the fees. From better benefits to employees and getting more qualified applicants and employees through the door to volume discounts on supplies and handling 2 AM broken toilet calls—property management is a must.
Mixing Personal Assets
If you combine your personal assets with those of the property you allow a creditor to come after you personally. A great first step to separate personal credit from business credit is by incorporating your business as a separate legal entity—most likely a limited liability company (LLC). This shields your business from any personal liabilities and also protects your personal assets from the activities of the business, done and done. Once you have incorporated, you can start building business credit that will be used to determine the creditworthiness of the business—which is separate and distinct from an individual’s personal credit.
Buying based Solely on Future Appreciation
You can’t predict the future—and a prediction of future appreciation (despite what inside knowledge is touted) is still, merely a guess. Smart multifamily investors know to buy based on actual current cash flow. Think about it, if the deal works according to plan, you won’t need any appreciation to make money. Often the ‘appreciation scheme’ is just that—a scheme. You make money in real estate when you buy, not when you sell. Buying solely on the basis of your fantasy of future appreciation is the best way to pay too much and turn a good deal into a sour one.
Underestimating the Effort
Some real estate investors assume commercial property development is something that can be accomplished in their spare time. Often a group of successful professionals will enter into a real estate deal together banking that the majority of the investment will be financial. For many, it’s a harsh wakeup call when they realize the bulk of their investment is reliant upon their money and time.
Upgrade to Your Tastes
This property isn’t your house—so don’t force your lifestyle on your tenants. Adorning high-end amenities in a working-class building will force out tenants who can’t pay the rent increases you’ll need to recoup the money. Obviously, your property is a valuable asset and you need to maintain it properly to get good tenants—but be careful going overboard. It pays to know the median income of the area, what other multifamily properties are charging in the area, and what amenities are provided at properties within a competitive range.
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