Is a Multifamily Market Crash Coming? A Peek into the Crystal BallAugust 9, 2023
How to Pick the Best Apartment Operators: A Guide to Safe Investing
By Karl Krauskopf, a commercial multifamily operator
There’s hardly a worse feeling than that of being frauded by somebody you felt you knew. I’ve been scammed, cheated, lied to, and taken advantage of in the early days of my investing career. I hope to help you identify the signs of a bad actor as well as how to dig deeper into those that operate with integrity.
Most people have heard the stories of how contractors have overpromised and underdelivered. I spent my first year of flipping homes with a General Contractor who gave me rock bottom prices (low fees) and promises of a quality job (returns).
The first stage, we were in a honeymoon period. He was all over any small thing that came up. Proved himself to me and gained my trust. I decided to move deeper into a relationship with him to find out shortly afterwards from somebody I referred him to that his business model was to do the minimum amount of work to get paid.
He went around, collected unknowing clients, collecting demo and deposits for materials. It wasn’t long before I called him out and fired him. However, damage had been done (overpaid).
Fast forward 9 years to where I am today, buying apartments and still hiring contractors. I am far more scrupulous with those I decide to partner with.
I analyze those I invest with the same way I avoid scamming contractors.
If you've ever thought about investing in big apartment buildings, you're in for a treat. Just like when you pick the best toy in a store, choosing the right people to work with in apartments is super important.
Who is an Apartment Operator?
An apartment operator is like the lead surgeon on a coronary bypass. They lead the clinicians and make sure everything runs smoothly. When you invest with them, it's similar to agreeing to go under anesthesia and under their knife. You'd want the very best surgeon, right?
How to Spot the Best Apartment Operators:
- Experience, Experience, Experience!
- Good Sign: They've led many turnaround projects and have lots of stories (or examples) of success and failures.
- Warning Sign: They're new and don't have much experience. Or, they don't want to share their past stories or referrals.
- Ask Lots of Questions
- Good Sign: They answer happily and in simple ways. It's like when a teacher explains something, and you understand right away.
- Warning Sign: They seem annoyed, or their answers are confusing, like when someone tells you a story that doesn't make sense.
- Check Their Team - Operators that are focused on building their team is one that you want to partner with. The operator that is OK staying a one-person band is unacceptable. Ask them about their staffing plan.
- Good Sign: Their team has worked together for a long time, and they're like a happy family. There is evidence of a growing team, even if comprised of virtual assistants for those that are newer and more capital strapped due to low fee structure.
- Warning Sign: The team keeps changing, or there are signs they don’t get along. The operator mentions that they prefer to handle everything on their own.
- Look at Reviews and References - Seek out referrals of professional partners, not just mom and dad.
- Good Sign: Lots of people say good things about them, like patients who went under the surgeon’s knife that had a smooth and full recovery.
- Warning Sign: Bad reviews or no one wants to talk about them or worse they will not provide a reference.
- Ask About Their Plan - What’s their model for buying and operating apartments? Are they building a business or just a hobby? Is this their full-time job or just a side gig? What do they plan on doing with their fees?
- Good Sign: They have a clear plan, like a map, and can explain it simply.
- Warning Sign: They seem lost or change their plan all the time. This is a side-gig or just a hobby for them, and they make most of their money doing something different.
- Are They Open and Honest? - This is about trust. Look for vulnerability, then third party validate their claims. Anybody can come up with stories, but when those are validated through references, books, podcasts, etc. a stronger sense of trust can be formed.
- Good Sign: They share both good and bad news and feel like a friend you can trust.
- Warning Sign: They hide things, don't talk much, or only share the good stuff.
- Use the "Gut Feeling" - Sometimes, your belly gives you a feeling. Listen to it!
- Good Sign: You feel happy and safe talking to them.
- Warning Sign: You feel something is wrong, even if you don't know why.
- They Teach and Help
- Good Sign: They help you understand everything, like a great teacher. They are giving with their time.
- Warning Sign: They talk fast, use big words, and don't care if you're lost.
How to Spot the Not-So-Great Operators:
- Too Good to Be True
If they promise you'll become rich overnight, be careful!
- Avoiding Your Questions
If you ask difficult questions, and they look away or change the topic.
- Big Words, Little Action
Constantly talking about making it big but having very little to show for it.
- Pushy, Pushy, Pushy
If they push you to decide fast, like someone saying, "Buy this NOW, or it's gone," think twice.
By following our guide, you'll have a happy investment journey. Remember, always listen, ask, and trust your gut feeling. Investing should feel right and safe.
Remember, I'm here to help and answer any questions. Let's make smart choices together!
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