The Top Three Mistakes Investors Make in Multifamily

[00:00:00] Hello and welcome. My name is Gino Barbaro, one of the co-founders of Jake and Gino. And in this how-to lesson, I'm going to be experiencing a little bit of pain, a little bit of PTSD, as we like to call it in investing when we think about our mistakes. I'm going to be discussing the top three mistakes. Maybe I want to, you know, stuff in another one because there are a ton of them. But what I've seen over the past, I guess, 15 years of educating and investing in the space, these are the most glaring.

[00:00:29] And these are the ones that I committed early on when I bought my first deal over 20 years ago. So I want you to be aware of what they are and I want you to be sort of steering clear of them or at least being, you know, aware of how to, once you're looking at a deal, am I committing this mistake? And it comes back to the buy right, the manage right, and the finance right. Once you violate one of those three pillars, your deal is going to come into some type of challenges over the next several years.

[00:00:57] So let's jump right into it. I think the very first mistake that most beginning investors make, and even ones that are experienced, they don't respect the market cycle. Where are we in, in the current market cycle? When you first start out investing, I know most beginning investors, all they're looking for is a deal. What's a deal? Let me find a deal. They have no idea where interest rates are.

[00:01:24] They have no idea where they are in the market cycle. There's four parts of the market cycle. There is the recession, there's the recovery, there is the expansion, and there's hyper supply. Now, every market, there's a macro market, one in the entire United States, then there are markets within cities, then sub markets, there could even be sub markets within neighborhoods. So understanding where you are in the market cycle is really, really important.

[00:01:51] I can give you an example for myself. Back in November of 2006, I went out and I invested in a retail center, strip center, mixed use, had some offices upstairs, some retail in the middle, and industrial in the back.

[00:02:06] Now, the deal in and of itself wasn't a bad deal. But the mistake that I made, do you remember what was going on in November of 2006? Yeah, it was at the height of the market, probably hyper supply right before we go into recession. So I overpaid, number one. Number two, not understanding in that part of the market cycle what's going on with debt. It was a lot harder to get debt. So I ended up selling a property to put money into this property.

[00:02:35] Now, if I had waited six months or I had said to myself, hold on, I'm not buying this right. I'm overpaying because there were so many issues with that property that I should have just waited. If I had understood what was going on, cap rates were really compressed, really low. And I'm buying this property and I'm overpaying and I'm buying it as we're going to be entering a recession.

[00:02:59] When, what am I buying? Once again, I'm buying offices and retail. Probably not a very good idea to be buying them at the price that I was paying. If you understand what price you're going into, if you're understanding you're buying a value add, great. I didn't understand that. I was violating what we call at Jake and Gino, the three pillars of real estate. The three pillars are simply the market cycle, the debt, and the exit strategy.

[00:03:28] So in that part of the cycle, what was going on, I just was overpaying and my debt was really bad. I had really bad financing on it. Forget about the manager rate. The manager rate was horrible. But if we go into what happened over the last couple of years in this part of the market cycle, what was going on in 2022? Investors didn't understand where they are, where they were, or where the economy was, or where the market cycle was in real estate.

[00:03:56] We were entering the end of the cycle. Prices really, at some point we knew there was a top. You're never going to be able to say where the high is on the market. The only time you're going to be able to say it is you're going to be able to look back and go, wow, we just passed the top. And we did that in March, probably mid-2022. Prices are down 20-something percent since then. They still need to come down, in my opinion.

[00:04:24] But back then, they were violating the market cycle. They were getting short-term debt when interest rates were really low. Not a very good idea because sooner or later, you're going to go into a recession. As we did six months later, a year later, rates started rising. They did not respect the market cycle, or they didn't understand the market cycle. So that's the very first mistake, focusing on the market cycle, understanding where you are.

[00:04:54] And another thing that you can do when you're thinking about the market cycle, earlier on in 2015, 2016, 2017, 18, and 19, in that part of the market cycle, you're able to buy assets, fix them up, add value, and then flip them. That was the part of the market cycle where it was really hot. It was also refine roll. You're able to buy properties, fix them up, refinance them out, pull the money out, and go on to the next one.

[00:05:22] That's been more challenging in this part of the market cycle. So if you're trying to execute a strategy in the part of the market cycle that doesn't align, I'll give you another example. When we started back in 2012 and 2013, seller financing was all the rage. You could seller finance in that part of the market cycle. It was a buyer's market cycle. Well, as you get lengthier into the market cycle, you're going to 17, 2018, 20, 21.

[00:05:52] You can't seller finance, or I should say it's a lot more difficult to seller finance. And now, as debt is becoming more difficult, seller financing is coming back. So understanding the market cycle is really, really important. Now, the second one, this is a challenging one because as beginning investors, we think we may know the market, especially if it's in your backyard, like for myself on that deal in November of 2006.

[00:06:21] Hey, it was only 30 minutes from my house. I know the market. Yeah, but did I really know the market? Was I an expert? Especially in that market niche. I was buying industrial. I was buying retail and office. I didn't know market rents. I didn't know expenses. I didn't know other incomes. I didn't know anything about that. And then also, I didn't understand, was there population growth?

[00:06:51] Density. What was the demographics? The median income? All of these things I didn't know. And that really came back to haunt me. Because when I took the property over, I didn't even understand what rents were supposed to be. I thought office units upstairs, there were literally eight offices upstairs. And out of those offices, there were like far to 500 square feet on average. Some of them were 600. Some of them, you could couple them together and get, you know, 1,100 square feet.

[00:07:20] There were two offices in that building that I owned for 10 years that were never rented. Now, if you go back, I took it over when we went into recession. So there were several years there that were really lean. But that just goes to show you that I thought there was demand. And I'm saying to myself, how can I rent an office space? How can I not rent this office space for 500 bucks a month?

[00:07:46] Who wants to be a CPA working in their basement with having laundry on the floor when I can go into a building and, hey, you know what? I can have an office space for 500 bucks a month. It's 125 bucks a week. That's a home run. Well, guess what? Most people didn't think that way during that part of the market cycle. And those units were empty, vacant for 10 years. Understand the market. Be an expert.

[00:08:12] So when you go into the market, it's really important for one of two reasons. Well, the first reason is obviously you're going to have to be running the business and creating your buy rate criteria. So if you're not an expert and you're looking for six caps, but the market's only four caps, good luck. Or if you're looking for properties built after 1995 and your market has only old properties, good luck.

[00:08:39] But also being an expert is important for one more very crucial reason. You need to be able to speak to brokers and you need to be able to look professional. So when you reach out to a broker, hopefully you have your type of criteria on deals you're trying to buy. You understand the market. So when they talk about a part of the city, you already understand the median income there. You already know what kind of deals there are out there. And the more professional you look, the more credibility you have.

[00:09:09] Guess what? That's how brokers send deals over to you. Now let's take a quick timeout to hear from our sponsors. And I've got two left. I got three and I got 3.1 for you. So we'll see on the other side. Now this third one, Jake and I have been discussing this for the past 10 years plus. It's the framework. When I started, I always say to myself, and I always tell a lot of my friends, family members, and even the Jake and Gino community.

[00:09:39] There's life before Jake and there's life after Jake. Well, life before Jake for me as an investor was really painful. I say to Jake, his education and his tuition, I paid for it because I made so many mistakes. But I'm so thankful that I did. Because when I started investing by myself, I was just doing what other beginning investors were doing. Number one, not respecting the market cycle. Remember, we talked about that in the first one.

[00:10:07] Number two, not being an expert, whether it's in the niche or the market itself. And number three, I didn't have a map. I didn't have a process to start looking at these deals and start investing in these deals. I ended up going into mentorships. I ended up learning the business. But then Jake and I created the buy right, the manage right, and the finance right. For us, it's called wheelbarrow profits. It's really a repeatable process. Every time you're looking at a deal, you look at it through those lens.

[00:10:36] The wheelbarrow has got those three legs. The two in the back, the buy right, and the finance right, those are both fixed. When you buy a deal, bam, it's off the table. You finance the deal properly, it's off the table. The other one is the manage right. It's the wheel of the wheelbarrow. That's in constant motion. If you don't have that process, that framework, those systems to understand that multifamily is a business, you are ultimately going to fail.

[00:11:06] You remember that deal back in November of 2006 that I bought? I sold it in July of 2017. 11 years of a lot of pain, learning lessons. I could say regrets, but it really made me the investor that I am. And my mantra is no deal is better than a bad deal. That's where that came from. I'd rather pass in a deal.

[00:11:34] I'd rather not do short-term bridge debt on a stabilized asset like a lot of investors were doing a couple of years ago because I know the pain of a bad deal. I know the pain that when you violate that finance right leg, what happens to the wheelbarrow? It tips over. So understanding the process, buy right, manage right, finance right, is crucial to becoming a really good and excellent multifamily investor.

[00:12:02] If you want to learn more about the framework, just hit me up. My email is gino at jakeandgino.com. I'll send you a free PDF copy of our Wheelbar Profits book. It dives into all three pillars. But for this conversation, let's focus on the buy right. Most investors, and it's shocking, Jake and I were at a conference a little over two years ago. It was a syndicators conference.

[00:12:26] And we said, by a show of hands, how many of you out there have a buy right criteria? It was crickets. I was shocked by how no one had their criteria laid out on a deal that they wanted to buy. This is a really huge mistake. We're going to segregate this out. We're not going to talk about finance right and manage right. There's a ton of other how-to videos on this. But the buy right, when you're starting out as an investor,

[00:12:56] and even when you become experienced, understanding your criteria as far as median income, as far as do you want it in a flood zone, as far as number of units, as far as demographics, location, unit mix, amenities. You need to be crystal clear on that. And once you're clear on that, all of a sudden, the clarity comes. You have the motivation now because you know what you're looking for.

[00:13:25] Your investors know what you're looking for. And brokers know what you're looking for. So understanding that three-step framework of buy right, manage right, finance right, it's repeatable. So when you do your first deal, you just can continue to repeat it. And I like to call this 3.1. I'm going to give you an extra one. Because for me and Jake, this almost came back to haunt us when we started investing. And it's going it alone. The I'm a mentality.

[00:13:54] How many of you out there listening to this have the I'm a mentality? I'm a do this. I'm a do that. I'm a gets burned out. Especially if you've got three or four deals and you're closing another one and you're approaching 100 units. Man, you need to build a team. I think in any business. But especially multifamily. And even if you're doing a few single family homes, if you want to scale

[00:14:23] and add more units, you're going to have to build a team. A team in multifamily. You're going to need contractors. You're going to need inspectors, appraisers, real estate brokers, which are probably one of the most important, property managers, a CPA, other investors, other partners. The list goes on and on. If you try to do everything by yourself, if you're trying to hang sheetrock,

[00:14:52] and if you're trying to change toilets, and you're trying to fix roofs, and going out there, raising money, and going out there, and underwriting deals, you are going to burn out. Now, it's okay in your first or second deal. Listen, I even think it's a great idea to try it out. To see what you really like and what you don't like. But if you're going to expand your portfolio, you have to build a team.

[00:15:21] And that's where the process that Manage Right comes into play. Learning all the management systems. We really call it in multifamily. There's three. It's people, systems, and culture. You need to start building out an organization. If you haven't done that yet, or you're planning on doing it, or you're looking to expand, go check out the podcast that we did with Gino Wickman. Gino Wickman wrote the book, Traction. He's got that EOS system. Phenomenal system. If you're starting to scale, you're going to need to be able to do that

[00:15:50] because I don't want you to be the I'm a king. Not a good title to have. I'm going to do this. I'm going to do that. I'm a becomes a mom and pop that Jake and Gino will buy that property from. Once again, let me recap these really quick because I want you to really reflect upon are you making these mistakes? Have you made these mistakes? And if so, how do you avoid them? Number one, not respecting the market cycle. Number two,

[00:16:20] not being an expert. Become an expert in that market. The third one is not using our framework of buy right, manage right, and finance right. And the fourth one, build a multifamily team. Now, as Jake and I like to say, listen, we have real students doing real deals. If you want to learn more, go to jakeandgino.com forward slash apply. Become the next Jake and Gino community member. I want to thank you

[00:16:49] for listening to me today, for spending part of your day with me, and I will see you on next week's How To. Take care.