“Those operational errors, just like a toupee on a windy day, are about to get exposed.”
First, I hope nobody loses their apartment! That just seems highly unlikely though.
When the economy is booming, operational errors tend to go unnoticed; Overshadowed by the natural incline of the market. Our current economical climate is far from booming though, which means those operational errors, just like a toupee on a windy day, are about to get exposed.
This will leave many operators scrambling and many of their investors with returns that are far less than they were hoping for.
I find zero joy in writing this post btw. It’s the exact opposite actually. The far majority of the other multi-family operators I’ve been blessed to associate with are some of the best people I know. Unfortunately, “being a great person” doesn’t make you immune to the consequences of operational errors.
Mistakes happen, and this post isn’t meant to rub those mistakes in the faces of those who fall guilty. Rather, it’s meant to expose what those mistakes were so we can learn from them. Hopefully you can course correct quickly enough to keep that toupee (apartment) locked down and in place!!
MISTAKE #1: OVERPAYING FOR DEALS
I have the opportunity to train multi-family operators from time to time and have warned about overpaying for deals for the past couple years.
I’m afraid a number of them didn’t head the warning though.
This is caused from having a “scarcity” mentality. Meaning, they are worried that another deal won’t present itself, and because they want to do a deal so bad, they justify overpayment.
Overpayment also stemmed from demanding capital placement needs. The multi-family space, just like the economy as a whole, had been on a bullish run! That means investors had capital they needed to put to work… A LOT of capital they needed to put to work! That’s a good problem to have as long as you stay principled in your approach.
Those who sold their properties and decided to defer their taxes through a 1031 exchange found themselves in a similar position. With their 45 day identification window creeping up on them they become desperate (never how you want to position yourself in a negotiation btw) and decide they would rather overpay and bank on the equity increase, than risk paying taxes on their hard earned money.
Does that sound familiar to anyone?
Buy for cash flow! Equity is great, we want that too, but staying principled means we don’t risk cash flow in hopes for equity. What’s our minimum return threshold? Meaning, what’s our walk away point? If you don’t know that, you probably overpaid for your deal.
MISTAKE #2: LACK OF TRAINING
Instead of getting trained properly to protect those capital placement needs, some decided they’d just learn on the fly! If we’re being honest, we’re all learning on the fly from time to time, that’s life.
That being said, if they decided to cut corners, save money, and hope the all mighty internet would guide them to the promised land, they are undoubtably in trouble.
In a simple asset class like single-family residences, where there’s not a huge difference between best-in-class and mom-and-pop owners, that may work.
A large apartment functions more like an operating business though. The systems, processes, relationships, and know how you gain from working with seasoned syndicators, mentors, and coaches are invaluable.
They are costly to gain access too, but not as costly as losing your toupee (apartment) from the winds brought on by crisis.
Obviously get trained! Expand your network. Get access to coaches and mentors who can help. You owe it to yourself and to your investors!
MISTAKE #3: Laziness, oversight, or ignorance
Ouch! There’s a lot that can fit underneath the umbrella of that title eh?
Things like, improper screening policies, not being diligent enough to train tenants to pay rent on time, not improving the property or the overall community feel, and/or allowing a below average on-site manager to run the property.
Overall, not taking responsibility for the performance of the asset.
All of this comes from the top down. It is our responsibility to set the standard, train our management team, and expect excellence. I’ve come to realize that people will treat you (and your investments) like you expect to be treated.
For example, my kids have a clock in their room that lights up at 7am. If they come out of their room before that, which they did EVERYDAY in the beginning, we ever so patiently and lovingly take them back into the room. If we’re being honest, sometimes that takes more effort than if we were to just let them sneak out a few minutes early. In the beginning anyway. Now, because we were consistent about what the expectations were, they quietly play in their room until Mella (the clock) turns green!
Our property managers and tenants are no different! If we don’t set expectations with property management and employees, or we’re inconsistent with those expectations, they will inevitably pass that same lack of vision and focus on to the tenants; leaving us with an underperforming and at risk asset!
Set principled expectations, train your property management on those expectations, and be diligent enough to stick with them! If you’ve allowed bad habits to creep in, it’s going to be a challenge.
Just remember, that’s your fault for feeding those habits as long as you have in the first place.
That being said, unlike kids, you can replace your property management company if needed. So, for the love of everything holy, stop being the slang word for a female body part and do what is necessary.
If your property is struggling, now is the time to course correct and fix the problem!
Need some guidance on how to solve problems? Check out our PROBLEM SOLVING 101 blog post, take some notes, and implement the principles!
Teaser, be BLIND to excuses and HYPER-FOCUSED on solutions.
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