The #1 mistake I see new multifamily operators make on their first value-add deal
It's not overpaying for the property. It's not picking the wrong market. It's underwriting the renovation budget like it's a fixed number instead of a range.
Here's what happens: an operator gets a contractor bid of $8,500/unit for a full reno (LVP flooring, granite counters, new fixtures, paint), plugs that straight into the model, and calls it done. Then week 3 of construction hits and they find galvanized plumbing behind the walls, or the electrical panel can't support new appliances, or the property has asbestos tile that needs abatement before anyone can touch the floors.
Suddenly $8,500/unit is $11,200/unit, and the deal that penciled at a 19% IRR is now barely clearing 12%.
The fix isn't complicated, it's just uncomfortable: always underwrite renovation costs with a 15-20% contingency built in above your contractor's number, and get a second bid before you go hard on earnest money. If the deal still works with the contingency baked in, you have a real margin of safety. If it only works with the optimistic number, you don't have a deal, you have a bet.
I built out a full value-add roadmap (underwriting, renovation sequencing, refi timing, and the exact scripts I use to get local operators to collaborate on deal flow) for anyone trying to close their first one without learning this the expensive way.