A great article I read in Units magazine (Nov 2008 issue) sums up the key mistakes to watch out for in order not to come out upside down on an attempt to accomplish a value play on a multifamily purchase.

If a prospective property is able to be purchased at a discount compared to current market prices and yet, a potential owner is thinking that with some key changes, the property could be managed or renovated from an unattractive cap rate to an attractive one, avoid the following pitfalls:

Paying Too Much - Don’t underestimate the real costs, this can be difficult to fully assess without meticulous due diligence during the inspection period. A good commercial broker will know how to guide you through this process and to appropriate professionals to best determine these real costs.

1. The Wrong Repairs - Focus repairs on ones that will improve the property’s operating expenses. For example water and energy saving upgrades can be relatively inexpensive and save considerable monthly expenses for the long-term. Interior design changes are aesthetically pleasing, but their costs don’t end up being offset by savings.
2. Over-Building - You may want to consider repositioning the property rather than adding on more of the same. Building costs are high and unless it’s part of a larger marketing or repositioning plan that will payoff in the long run, don’t spend large amounts on additions.
3. Lack of Capital - Don’t underestimate the costs of turning around the property. New investors often make the mistake of not allowing for enough money for necessary expenditures to improve the property’s bottom line.
4. The Engineer’s Problem - Be sure you have a marketing plan beyond improvements and renovations. It won’t matter if you have completely repositioned the property physically and aesthetically if you have no plans to address the marketing and/or operations management also. While marketing addresses the income side, management can also be examined to look for ways to improve efficiency of daily operations expenditures.