3 MORE Mistakes Multifamily Beginners Make (And How to Avoid Them)

Wherever the money is coming from is going to be people. The deal is owned by humans. Humans is people. Money is from the humans.

Today we are talking about 3 more mistakes that beginning investors make. This is part 2.

Hello and welcome back to the channel. I'm Christian. This is Cody. Very excited to be sharing with you guys the second part of this series. Every single one of these are extremely important. And we're excited to share with you. If you haven't yet, like and subscribe, and here we go.

All right, so number 1 for part 2 in this series. We're talking about forgetting to network with people. People have the deals you want, people have the money you want. If you're skipping this, you are skipping steps. We have a big rule on our channel, don't add steps, but you cannot skip them. Networking is crucial to be able to progress in this game.

So I'm gonna ask a few questions of Cody. We're gonna do this interview style. This is unscripted, but I'm highly confident he's gonna get these all right. Cody, when you're looking for deals, where do deals come from?

From people.

And people come from networking, right?

Wow.

Wow, crazy. Okay, so now we have a deal. Where does the debt come from?

People.

Oh wait, okay, so money— people have money. Okay, yeah, that's debt. If you have to raise equity, you're looking for partners. What are partners?

People.

Cody got them all right, unscripted, first try. Amazing. Everyone. That you work with is people. You expand with people. If you don't have money, you find someone who does. It could be a bank, could be the seller, it could be another equity partner. Wherever the money is coming from is going to be people. The deal is owned by humans.

I'm going to quote that, put on a shirt. Everyone is people.

Everyone is people. Humans is people. Money is from the humans.

The humans.

The humans.

All right.

Seriously though, this is really, really, really important. You have to build that network. Those are the most common questions I think we get is, once I find the deal, how does the money come together? Well, it's the same way you found the deal. You've networked with people. There's nothing more important, and I think it is the number one people— the number one thing that people skip because they're either shy or nervous, and it's not a skippable step.

Yeah, do it anyways. If you're nervous, go meet with the people because the people got the things and the money and and the deals that you want.

One of the things that I really want to hit on this, Cody, when you started, I love the story about you, but you started, you were really shy and not a people person, right?

Absolutely.

How did you learn how to network with people? What was your first step?

Well, I went to the, I mean, the first thing was over Starbucks. So I would get comfortable talking to people at Starbucks because if I butchered the conversation, I was practicing all the Chris Voss techniques. My thought was if I butcher it, which I did, I'd never see them again and they'd forget about me. And that was true. I butchered it and they never remembered who I was, 'cause I'd go back about a week later and they wouldn't remember me. But I got to practice over and over and over with people that I could feel comfortable talking to and butchering the conversation with.

That's a fantastic way to do it. When I got started, I started in a sales role where I made about 100 calls a day to people. Started out very uncomfortable and I was terrible at it. You keep doing that 100 times a day, you get really good. The next big sales job I got was outside sales, which meant I had to take that skill, and now come directly in front of people and just do it again and again and again. So however you drill it, it could be at your barista, it could be in your job, but you do have to just become comfortable with the fact that this is a contact sport, which means the more contacts you have, the better you can play.

Now let's talk about mistake number 2: overestimating the returns you're going to get on a deal. This will kill any beginning investor.

And every beginning investor does this. Without fail, they always overestimate.

Yeah, they think it's gonna be rosier than it really is, and it's not. And the thing is, roses have thorns. They just forget to look at the thorns. They're everywhere. So when you're getting into your deal, you need to be conservative. Every deal we've ever bought has performed better than we projected. Every single deal, and there's no exception to this on our apartments. Mm-hmm. At all. Because we're super conservative. We look at it in the beginning, okay, these are the rents, these are the expenses. Then we do a property inspection. We say it's gonna need this, this, this, and this. So we have to budget for those items and then we get them knocked out early so we don't have hiccups later down the road. When you're getting started, you have to quantify there is a cost to fix your appliances. There's a cost to fix the roof. Electrical panels are costing us anywhere from $2,500 to $3,500 and we got to do 6 of them right away. So you start adding that up and look at your overall return. That way you don't get on the hook for some debt that you can't afford. You have to pay your bills no matter what, unless you're going to be a slumlord, which we don't recommend you do. So you need to project for all of this so that your returns are reasonable.

On this channel, we're excellent about really pushing the, hey, it has to cash flow day one. What I don't think we say enough is like, you're going to have one-time expenses that will come up that are going to disrupt that. There's going to be a month, right? Example, practical application, you have galvanized steel pipes running through your building. There's going to be a point where either you replace them or they're going to break and you have to replace them. There is no exception to that. At some point they will just corrode and you're going to have to deal with it. If you're buying a deal that cash flows beautifully, but it has these old galvanized steel pipes, that has to be accounted for and it is going to affect your return. Cody's first deal ever was a 12-plex. It is a fantastic deal. It cash flowed for a very long time. Right now you have some projects that are—

it's about $180,000 that I'm in it. Now granted, the deal cash flow is $42,000 a year, but $180,000 is a little higher than $42,000 a year, which makes it a little bit rough.

You have to be able to account for these things because if you just buy a whole bunch of deals like this and all that CapEx comes due at once, you have to have a plan. Out of curiosity, if you guys are doing that math in your head right now, wait a second, you're spending $180,000, $42,000. So you're just not making any money for years. How do you address those problems when they come up?

Well, so what I did is I got something that's called a HELOC. And I use the HELOC to pay for it so that I can pay it down over time and still collect cash flow. And in that part of that process, part of the $180,000, I spent about $73,000. I'm getting a whole other unit that's going to add $1,300 a month in rent, which will pay for my whole HELOC payment. So I get to keep the cash flow. It doesn't cost me a dime out of pocket, and I get to keep collecting checks.

However, if you didn't do that due diligence in the front end or didn't account for that, you would be panicking right now.

Absolutely. I knew what I had to budget for, and in the next 5 to 10 years, I'm going to have to replace the plumbing plumbing, which is going to be about $160,000 for all the buildings. So that's going to be a lot of money. However, when it's done, it's done. And that is my favorite part about real estate. Once it's done, it's done. The same with business. You just have to maintain and manage the piece of real estate once you've got it up and above par. Now let's talk about the third piece. It's that due diligence piece. This is a big one that people miss. It's one thing to misrepresent your returns or not project accurately what you expect for a deal because you miss due diligence. People do really bad due diligence when they're getting started. They don't know what to look for. They don't know what a rent roll is. And then you learn about rent roll and you think you know everything, and then you figure out, okay, what's a stop letter? What's a T-12? What's a trial balance? Like, what are all these reports? What do I have to look for? Due diligence is something where a lot of people mess up, and that allows them to think they're getting a phenomenal deal And then they realize, oh, I had to look at deposit reports? Banks hold deposit reports for 3 years, they can send you all the scans? I didn't know that. But they don't ask for it, and then they wonder why they're not collecting any rents on the first month of ownership.

See that very, very, very frequently. It's not that hard to do, but a really common thing that I see is people go, hey, we have X timeline for due diligence, and then the sellers just never provide the docs. And they get to the end, they go, well, are we gonna sign this? And people get emotional. We included that in the last video and they go, you know what, I'm gonna, I'm just gonna commit, I'm gonna do it, I'm not gonna do the due diligence. We've seen, we had a friend who bought, I believe it was a 9-unit, or was it 14? It was the 14-unit out of, I think it was Delaware or New Jersey, somewhere on the other side of the country. But when he purchased it, he was like, look, I trust the owner, I got the information, I didn't need to verify anything because this guy is like, I absolutely trust him. I believe out of 14 units, it was 5 or 6 were just straight not paying, had not paid for a long time. That could have been found out very easily with just the bank reconciliation. If you look, hey, he said he's bringing in this much, that much is not flowing through the bank. That's pretty easy accounting. If you skip these steps, you end up with problems like that. Now, he grabbed that deal, took control of it, and went, you know what, I'm handling this. I've actually seen a bunch of videos of him inside the thing renovating himself. He got through the evictions process. He made that deal work. Super proud of him. Vlad, you're a boss. We've shared your deal on this channel before, so I'm not throwing you under the bus, but skipped some due diligence, made it happen, he's gonna make a lot of money. He's actually doing more deals with that owner, and it's working out 'cause he's added the due diligence to what he's doing. When you get started, if you skip this, you might survive it like Vlad, or you could get totally wiped out.

I'm not a proponent or a fan of getting wiped out. That doesn't sound like fun. Mm-hmm. Let's skip that step.

Yes. Last thing I want to add on the due diligence. Even when you do it perfectly, there are variables that you cannot account for that will hit you. All you're doing in due diligence is limiting all the things that you know so that you don't have just avoidable mistakes on top of the things that just happen. Perfect example, we have never had a problem with the due diligence where like we went through everything and then the deal did something totally different immediately until the 12-plex we just bought.

We bought a 12-plex and it was just about fully occupied. There was one vacancy. And then right before closing, a couple of people left. We're like, yay, we'll get to re-rent it at market rent. And then the first week we had 3 more people leave. And then within the first month we had 9 vacancies out of 12. Now we did the due diligence. Everybody was paying and people were in month-to-month leases. We thought we were going to go in and do some modest rent bumps as we cleaned up the campus. And all of a sudden we have 3 people living there and paying. Oops. But how do you project that? You can't. So even if you do everything right, understand that when you're getting started, there is a risk. And we have a saying: Don't rock the boat if you can't afford to get wet. Sometimes you will get wet no matter what. There are big waves. So as you're going out and getting into your deals, do the best you can to control the variables. But understand stuff can still happen and you have to be conservative. So that you can survive the waves and you can get through your deals.

Imagine on this one, like we did a full inspection. Imagine if we found out that the roofs on all 3 buildings were bad and we didn't do the due diligence. Now we'd be stuck with 9 vacancies and 3 roofs that need to be repaired. Where's that money coming from? Try to raise money for that deal? Hey, the deal loses money every month by a lot and we need to raise money for a huge capital expenditure. That's going to be a real tough conversation. If you have no other assets to bring in money for that, that's going to be rough because we don't have all these other variables. We have enough in the account to go like, okay, we can realistically— we have enough today to fix 6 of the 9 units, completely deck them out, lease them up, and we either earn through the rest or we just—

we will do. Yeah.

Or we just wait for the cash flow from leasing them up. But there's a plan in place to knock this out. It's a bummer we don't get to use the money to make the outside beautiful. But the money is set aside because we did our due diligence on the front end and said, hey, we need to have a little extra in reserve. This deal looks like this, and let's hope everyone doesn't move out at once. Because we planned correctly, instead of waiting a couple years to raise the rents to market rent, we're going to get this whole thing leased at market rent in about 3 months, which is going to bring the asset value up 40%, allowing us to refinance.

Yep.

If you plan correctly, even when things go wrong, you can still make more money.

Now that is it for today's video. Don't make these 3 mistakes. We are super stoked to have you following along on the channel, and if you're new to the channel, make sure to hit the subscribe button so you can see all of our future videos and past videos. We appreciate you following along, and we'll see you next time.