Buying a multifamily property is an idea on most real estate investors’ lists. The added income that a multifamily property provides, the diversification of your portfolio, and the possibility of even living in your investment are all tempting points. Purchasing a multifamily property can be a great investment if you are willing to do the research and fulfill the responsibility that this long-term investment requires. Read on to ready yourself for the undertaking — finding a multifamily property, obtaining financing and managing your investment for optimal income and continued success.
How to Find a Multifamily Property
One of the most important aspects of purchasing a successful multifamily property is finding the right one. This step cannot be taken lightly. Spend the time to identify where you want to buy, how much effort you want to put into renovating and what your realistic budget should be. Working with a local real estate agent can help to guide you in the right direction.
Location: The right location for rental property will be the difference of how much rent you can charge, how many vacancies you will deal with and perhaps the quality of tenants you can acquire. Look in areas that have good schools, walkability, shopping and other attractions. Basically, people want to live near work and play and are willing to pay more for that luxury.
Be prepared to pay more for a better location, but keep in mind the investment will pay for itself in the long run with higher rent, longer leases and fewer vacancies. Check out up-and-coming towns for a better deal or a building with the potential to renovate.
Condition: Are you looking for a turn-key, already profitable multifamily property to just take over and hit the ground running? If you have the financing for that, awesome. If not, be prepared to put a little sweat equity into your multifamily investment. Negotiate a better price on a property in need of renovations and make the place into a sought-after residence for higher returns.
Budget: Your budget will determine much for your rental property and if it will succeed. Can you afford a good area with great schools and shopping? Should you start with fewer units or in a less expensive town? Do you need to buy a fixer-upper and renovate it? Do you have the budget for renovations? Take a good and thorough look at what you have to get started and what options you have for financing before jumping in headfirst.
Target market: Identify who your target market is and appeal to them. Do you have renters in the area who will serve as your customer base? Is there a housing shortage? Are you aiming for families, college students or young professionals? Knowing who your target market is, based on the location and cost of living, is extremely important when choosing where to buy a multifamily property.
Why Purchase a Multifamily Property?
Purchasing a multifamily property can be a lucrative real estate investment. Compared to a single-family rental, there is more income potential, less risk with vacancies, and the possibility of a primary residence. It’s also just one roof to maintain, one lawn to manage, one heating system to service, and several checks to collect each month.
Income potential: Purchasing an apartment complex, a duplex, or any other type of multifamily property offers income potential from multiple rental units. Even if one unit is vacant, you may be collecting rent from several others. Unlike a single-family rental which, if vacant, you collect nothing — a multifamily rental property ensures a more predictable income generated from several rental units.
Property values tend to rise: This type of investment is best for the long-term real estate investor, as property values tend to rise. As you pay down your loan over time, your property may become worth more money, and increases in rent prices may be acceptable.
People need housing: The population in a particular location may be growing, creating more and more of a need for housing. Every year kids are looking to leave home and get out on their own, people are growing their families, people are getting divorced. People need housing — and affordable, multifamily housing is often the first place many look.
Your family can inherit the property: If leaving a profitable, self-sustaining legacy for your family is of the utmost importance to you, purchasing a multifamily property can help you achieve that. It takes hard work of course, but having something like this for your family to inherit and continue to profit from after you’re gone is impressive.
Or you can cash out by selling: A major plus to investing in a multifamily property is that if times do get hard financially, you are ready to retire and move on or you just don’t want the responsibility of being a landlord anymore, you can sell. Investment properties (especially successful ones) keep their value and usually have other investors waiting on the sidelines for the opportunity to purchase.
How to Finance a Multifamily Property
While most investors like the idea of purchasing a multifamily property, financing is where they can get hung up. Investment property loans do require a hefty downpayment and money for maintenance and upkeep.
The down payment: While the down payment may range depending on the type of loan and whether you will reside there, most often for a multifamily investment property, a minimum of 20% to 25% down is required.
Loan type: A conventional loan is usually the go-to for an investment property, as the interest rates tend to be lower and you can use projected rental income to help qualify for the loan. VA loans are also a great option for those who qualify and plan to live in the investment property.
Loans change based on the size of the property: You may also be eligible to use Fannie Mae or Freddie Mac for larger investment properties. An FHA loan can be used for a multifamily property up to four units, ideally if you will be living in one as a primary residence.
Renovate Your Multifamily Property
Renovating a multi-family property is always an option to improve the appeal to mass renters, especially if the property comes to you at a bargain price. Some federal loans also have eco-friendly upgrades that you are required to make to the rental property. Just be smart about what renovations are really needed and try not to get carried away while shopping. Don’t do shoddy work but keep expenses in mind.
Are high-end renovations not in your budget? Make sure the units are up to code, then add some special touches. Efficient heating and cooling, as well as some appliance upgrades, are better off for you in the long term anyway. It’s less time that you need to be there fixing things. Other cosmetic upgrades like ripping out carpet and adding a fresh coat of paint can easily improve the look and feel of a rental and offer an inviting and appealing aspect for potential tenants at a manageable cost.
Managing a Multifamily Property
Investing in a multifamily property does come with its share of responsibility. Most notably, managing that property will take time and effort. It can require a lot of work to maintain a rental property and deal with tenants. If it’s not something you’d like to do personally, you can hire a property management firm to help you and take the day-to-day tasks off your hands.
If and when you decide to sell your rental property, you still have to manage and maintain it daily until the price rises enough to make selling worth it. Plus, selling real estate takes time — so be sure that this is an investment that you are really comfortable getting into.
Passive Multifamily Real Estate Investments
While purchasing and managing real estate is an active investment, you can find passive ways to invest in multifamily real estate as well. Crowdfunding is a great way to get into investing without the daily responsibility of being a landlord on your shoulders. Check out these options for passive investing through different crowdfunding platforms.
Frequently Asked Questions
Is buying a multifamily property a good investment?
Yes. Buying a multifamily property can be a good investment with the right time and energy put into it. It does require research, financing and ongoing work to maintain this type of investment successfully, but purchasing multifamily housing really should be a goal for every investor.
What is the 50% rule in real estate?
The 50% rule is a formula used by investors when analyzing a potential deal. The rule says that investors should assume that operating expenses (insurance, taxes, utilities, repairs, but not including the mortgage payment) of an investment property will be an estimated 50% of the gross income.
Is buying a multifamily property a passive investment?
If you act as a landlord to the multifamily property, it is not considered passive income because you will have to perform landlording duties.
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