In my first post on multi-family investing, I explained how many investors’ inherent biases can inhibit their ability to find a good deal. However, there are similar biases that can continue to affect investors once they have purchased a multi-family property.
One of the biggest multi-family investment mistakes I see owners making is trying to save pennies, at the expense of dollars. It is understandable to want to save money; after all, you just spent a good deal of money making the investment! However, there are certain cost-cutting measures that may end up costing more in the long-term. Below are a few areas of multi-family investment expenditures that I have found to be worth their added cost up front.
When it comes to apartments, I usually opt for high quality luxury vinyl tile (LVT) flooring instead of carpet. This may cost two to three times more on the front end, but I have found that no matter what tenant you have, you will almost always replace carpet every time you turn a unit. I have found that LVT flooring, however, will usually last for multiple tenants, making leasing easier and generally commanding a higher price point than your competitors. These two factors are important because they both contribute to a greater return on investment (ROI). As I mentioned in the previous post, the biggest factor in your overall ROI is the unit turnover time. Therefore, the time saved by not having to replace carpeting and the added appeal to future tenants may decrease the turnover time, ultimately increasing your ROI. Additionally, anything you can do to differentiate yourself from competitors will pay long-term dividends by providing better tenants who will have a higher level of pride of ownership.
Another area I see investors trying to save money in, at their own detriment, is with property management. When it comes to class C apartment complexes, many people are hesitant to engage third-party property management companies that charge a minimum fee per unit. Some will charge leasing fees and marketing fees in addition to the percentage they charge for collecting rent. Although you can find property management companies with fewer of these types of fees, I have rarely (if ever!) found it to be productive to go “cheap” when it comes to third-party management. Keep in mind that fees vary from market to market, but generally speaking, a company that is collecting $36-$45 per unit on your $450/mo apartments is only going to do so much to help you achieve your long-term goals. This is an area where I want to ensure I am always at the top of the priority list for the management company and where I am continually rewarding them for a job well done. This added expense helps ensure that, in the long run, I am achieving a higher ROI. As a rule of thumb, unless you have on-site management, it is usually never a good idea to go with the least expensive management company, as it will oftentimes result in the least profitable results.
"Remember that just because you are saving money up front does not mean that you are getting the greatest ROI. In all of your investing make sure to closely examine your decisions with your long-term goals in mind."
One last area of multi-family expenses is utility costs. In this region, many complexes include water in the rent. This is oftentimes a significant cost, especially when not monitored correctly. In the past, I have seen investors resist this significant cost by separately metering the water to have the tenants pay individually. Although this may seem like a simple solution to the problem, I have found that for many complexes having the water included is a valuable leasing tool without which they have a harder time retaining and finding tenants. Instead of separately metered water, I have had success with investors putting forth a one-time expense to replace all of their showerheads and toilets/flappers with low-flow efficient products. Oftentimes this change can reduce the total water bill by as much as 50% without compromising the rental rates or effecting how your property competes against others in the marketplace.
I hope that my experiences with multi-family investing can help you take another look at your own investments. Remember that just because you are saving money up front does not mean that you are getting the greatest ROI. In all of your investing make sure to closely examine your decisions with your long-term goals in mind. Smart multi-family investments can pay dividends for years to come.