5 Ways To Fail When Investing in Multifamily! Avoid these mistakes!

You don't have to start with a single-family house. You want to buy multifamily, start buying multifamily. You will instantly fail if you don't buy it. Here's 5 ways that you fail when buying multifamily real estate.

I'm Christian, this is Cody. Welcome back to the channel. If you haven't yet, hit the like button and subscribe. We're going to roll into today's video. These are the 5 ways that you will fail in real estate if you violate any of these principles. The first one sounds super obvious. However, Stay with us because these get better and better. You have to actually buy real estate. So many people decide, "I'm going to be an investor." They spend half their life watching BiggerPockets.

Then they add steps and they buy too small. You don't have to start with a single-family house. If you want to buy multifamily, start buying multifamily. You will instantly fail if you don't buy it. If you buy a different type of product, you buy office, you buy industrial, you buy single-family, if you set out to buy multifamily, you will fail instantly if you do not do that.

Yep, set your target. What do you actually want to own? I talk to so many people who go, hey, I want to get into multifamily. They don't even start with the house. They start with not buying real estate. Like, step one is you actually have to buy real estate. They'll become a broker or they'll work for CoStar like I did. And they'll add the steps of, hey, I'm going to get into real estate because I'm going to be an investor in multifamily. And then 5 years later, they buy that house and then they buy a second house and here they are 10 years after they set a goal with 2 houses.

Now, number 2, and this is really the killer for most people's portfolios, they don't buy based on cash flow. If you buy based on appreciation, you don't buy a bunch of cash flow, you may be able to float it for a little bit, but you will not be able to scale. This is where a lot of people end up failing. They lose their portfolios. Terrible place to be when you have to write a check every single month. I like getting written checks that I can then pay my bills and keep a little bit extra every month. But if you want to fail as a multi-family investor, you will buy a whole bunch of projects that do not cash flow.

Mm-hmm. Absolute killer. We've done it a few times after we had bought a bunch of properties that are cash flowing. We've used that to justify a couple of small deals. When we were close to 100 units, we got a 6-plex that makes negative cash flow. We're like, okay, well, we have this huge land lot on it. We're going to make money on that. It will turn around really quickly. Turns out there were some troubles getting it all permitted with the city, which means we're just negatively cash flowing. Not a fun way to scale your business. Could we afford it? Yes. Do we afford it? Yes. Do I wish that we bought a deal that negative cash flows like that? Absolutely not. If you just buy deals that cash flow, you make more every single time you buy a deal.

Now, a third way that you can absolutely just fail in this business is you buy too much real estate without building your systems. It's great to buy a bunch of properties. It's cool to be be a property owner, have 100 units, 200 units. However, if you don't build the systems, it's one thing to buy real estate, it's another thing to never lose it. If you can actually own it and then never lose it, it's way cooler than building a huge portfolio and jeopardizing a part of it. You may not lose it all, but if you lose some of it, that's not very great. Figure out how to succeed in multifamily, and that is, number one, you actually buy multifamily, you figure out how to cash flow it, And on the backend, you just build your systems. You may have to build some teams so that you don't have to do all the day-to-day.

This is why I don't like people's goals being unit count. I hear people talk all the time talking about, okay, I want to get to 100 units, I want to get to 200 units, I want to scale to 300 units. They're not focused on how much cash flow do I need to actually reach my goal. Your goal has to be something beyond just buying real estate. What's the real estate actually for? When you identify that, then go, okay, what does it cost on a monthly basis to live the life I want to live? Actually quantify what that looks like on a monthly cash flow basis. Then write your plan to that. Don't write it on, I need 300 doors, or I need 10,000 doors to try to compete with Grant Cardone, or whatever your thing is. Don't focus on the wrong things. Put the cash flow first and match that cash flow to your actual goals.

And now it comes down to stability. If you don't build in constants into your business, you will fail. We do long-term fixed rate debt. If you do variable short-term debt, rates can change. Maybe you think you can get a lower rate because you do a variable. It's great till it's not. And then maybe do some short-term balloons where your real estate loans come due in a few years because you get a little better rate and it makes it just squeak by on cash flow. That's a great way to fail. If you can't have long-term fixed rate debt where you know I just make my payment and I'm good, My payment's not going up. I've seen people where their mortgage payments go up over $100,000 a month. They're big assets, but six figures a month because they did variable rate short-term debt and it went way up. It spiked. They did not lock in their variables. They were no longer controllables. And did they lose the asset? No, but they had a whole bunch of other assets which also went up, by the way. They would have been sitting really pretty if they locked those in. So one way to lose real estate, especially multifamily, a way to fail in this business is to have short-term variable debt. Mm-hmm.

Anything that is out of control— it's not just the variability of the debt, it's any variable that you could have controlled that you didn't, be that even just a partnership agreement, putting a fixed rate on a buyout. The more constants you put in the business, the less things you have to adjust for, the more stable your portfolio is going to be, the better you're going to sleep at night. That is the thing that keeps me up, is Wow, what if this happens and what could we have done to prevent that? And most of it comes down to the paperwork on the front of a deal. If you write it correctly where it cash flows, you fix that debt, you get a long balloon, you— if you have partners, you have fixed rate buyouts on fixed periods of time. The word fixed is your friend through this.

And the last piece that we're talking about today for number 5 is don't violate your principles. If you set out principles, and this is really important, cash flow is important, but if you violate your principles that you set out in the beginning just 'cause you're doing a little better today, you move the ethical boundary over just a little bit because you can afford it now, eventually that boundary is way farther than it used to be and it's really easy to crumble. We're very careful. We would never do an Airbnb prior to doing the resort. This is an expansion of the resort, but we know our boundary shifted just a little bit and now we're going and stabilizing everything, paying down the debts a ton. Because if you violate principles that you set out in the beginning, there's a reason you had them in the beginning. You're going to be really susceptible to failing in your multifamily business.

By the way, if you want to check out our 35 principles that we don't violate, we put them all in the channel and we finally finished it. We were doing that every Monday for 35 weeks. That ended, I believe, 2 weeks ago. So we have every single principle of real estate, and I think we actually have a whole section that's just labeled Rules of Real Estate. You guys can check those all out.

Now, we violated a couple of those to do the resort and to do this project right here, the sauna house, the hood lodge. However, we built a position to where we acknowledge, okay, we're going to make an exception for this role, we can't afford it, and after we do this, we're not going to do any more of this until we're stable. You can extend beyond your reach a little bit, but you have to make sure that if you set your principles in the beginning, until you can afford to do otherwise, you don't want to violate it because that is a sure way to fail.

And I want to highlight the cost of that, by the way. Had we not bought the Robin Hood, which is my favorite project we've ever done.

Yeah, I would have bought the McLaren 720S.

And we would just be financially done. We bought enough real estate in one year following our principles to just be done. We won capitalism.

Yeah, there's enough 20-something-year-olds with McLarens. Instead, we bought a resort. It's a different level of flex, but we chose to do the adventure over the little fun toys that we could have afforded. It's a violation of principles. However, this was an expansion play as part of the adventure. And we wanted to share that with everybody on the channel.

Yeah, I want to be honest with what we're doing. If we're telling you not to break principles, I do want to tell you what happens when we did break ours. It fit a lot of the principles as far as massively cash-flowing, long-term debt. I mean, how do you own it, how do you never lose it? Answered.

Yeah, but it did cost us the, the fact that we could have been done. We could have been driving the luxury cars, could have each bought the, the super houses, and could have been done. So you get to choose where you're at in your cycle. But make sure you don't violate your principles when you build this business.

And don't adjust until you reach your goal.

Yep.

That's it for today. That is what we have. Join us every Friday for our— I don't know what we call these— our keynote pieces. Every Monday we're going to have a guest on our channel. All of January it's going to be solely Cayetano. Rolling into February, we're going to be joined by Matt, the Lumberjack Landlord.

Big baller. He is. He's got more units than both of us, and he has no partners.

His principles, a lot of ours are actually based on his principles. He's one of the best players of the game I've ever met. And then on Tuesdays, we're still doing our Multifamily 101. So if you just wanna, you're getting into the game right now and you want to learn the basics, we're gonna continue to deliver that to you every single Tuesday. So stay tuned if you haven't yet subscribed, 'cause those are all coming to you.

We'll see you soon.