7 Major Pitfalls to Avoid When Investing Passively in Multifamily Syndication

Are you considering investing in a multifamily syndication? The initial thought can be quite overwhelming. How can one ensure the right path is being taken? How can mistakes be avoided?

Much like any journey, multifamily real estate investment comes with its fair share of risks and challenges. This blog will delve into seven major mistakes often made by new investors when investing passively in multifamily syndications, so you do not repeat them when starting out on yours.

Mistake No. 1 Not Having a Plan (in this Case Investment Goals)

Imagine going on a road trip without a map or GPS. It might sound exciting, but you’ll probably end up lost and frustrated. Investing in real estate without a plan is similar. You need a clear strategy.

Knowing your investment goals helps you choose the best opportunity that fits them. Think about how long you want your money to be invested; what is your main goal, cash flow or appreciation; what is your risk tolerance, and so on.

Knowing these basics helps you pick the right investments. Here are the 3 questions you need to ask yourself before investing in multifamily:

•  Am I looking for short-term gains or long-term wealth accumulation?
• What are my multifamily investment goals: wealth accumulation, cash flow, or a combination?
• What is my risk tolerance: higher risk/higher reward or more conservative?

Take the time to reflect on these questions and set a solid foundation for your investment journey. Your answers will guide you toward making informed and successful decisions.

Mistake 2: Investing Out of FOMO – Fear of Missing Out

Missing out on investment opportunities early in your journey can be frustrating. It often happens when we don’t get the information we need in time. We get so eager to jump into the next opportunity that we skip the necessary research. This can lead to significant losses that could have been avoided with basic due diligence.

Here’s some advice: before investing your hard-earned money, make sure to do your due diligence. Research the market thoroughly and see if the opportunity aligns with your investment goals. It’s also a good idea to talk to the sponsor or the people behind the deal. Taking these steps can save you from the discomfort of being stuck in an investment you’re not comfortable with. Remember, most investments are long-term commitments, so take your time and make informed choices.

Mistake No. 3 Ignoring Market Knowledge

Prior to investing in any property, in addition to assessing the property’s condition and financials, it’s important to scrutinize the demographics and trends in that location. A property with a low cap rate compared to the market may present a value-add opportunity, where the net operating income can be considerably increased through some renovations and enhancements.

Beyond cap rates, here are other crucial considerations for the location:

• Robust job growth
• Increasing population
• Low to negligible crime rates
• A balanced supply-demand ratio
• Proximity to employment hubs, educational institutions, public transportation, and amenities.

Mistake No. 4 Neglecting an Exit Strategy

An exit strategy is a plan that outlines how an investor intends to sell or transition out of their investment to maximize returns. The exit strategy takes into account both short-term requirements and long-term investment objectives. The key is to align your chosen strategy with your investment objectives, risk tolerance, and market conditions. For instance, if you are looking for long-term wealth, you can opt for a buy-and-hold strategy. Conversely, value-added opportunities are more suitable for meeting short-term goals. Similarly, the 1031 strategy helps you build a portfolio and compound your wealth in a tax-deferred manner.

Hence, a well-defined exit strategy aids in identifying investments that align with your investment criteria.

Mistake No. 5 Insufficient Understanding of Underwriting

As a beginner, you don’t have to master spreadsheets, but grasping the basics of the business plan is crucial for evaluating property financials. Falling for attractive numbers without assessing their feasibility could pave the way for failure. A high internal rate of return (IRR) should be supported by a sound business plan. Take the time to understand market dynamics and how the sponsor intends to achieve those figures. Emphasizing a conservative underwriting approach provides a safety net against fluctuating economic trends such as inflation.

Mistake No. 6 Neglecting Diversification

When constructing your portfolio, aim for diversification across geographical regions and commercial real estate assets. This strategy spreads risk, allowing you to overcome challenging times safely. Diversification safeguards investments against economic fluctuations and location-specific challenges.

Mistake No. 7 Attempting Everything Independently

To maximize your investment potential, leverage the knowledge and experience of other real estate professionals. Collaborating with experts, such as real estate agents, property managers, and financial advisors, yields valuable insights and support throughout your investment journey. Establishing a network of trusted professionals enables access to their expertise, minimizing costly errors and facilitating informed investment decisions.

Conclusion

Success takes time. When considering investing in multifamily syndications, it’s essential to carefully evaluate various aspects of the opportunity to make an informed decision. By making a solid plan, learning about the market, taking smart risks, having an exit strategy, and getting advice from professionals, you can make better investment decisions and increase your chances of success.

At Crown Capital, we believe in empowering our investors with the necessary knowledge to make the best decisions for their financial freedom. If you’re keen to delve deeper into multifamily real estate investment and harness its potential for long-term generational wealth, feel free to reach out.

We hope you find these tips useful. If you have any questions or wish to discuss further, Schedule A Call with us.