Investing in multifamily properties may seem daunting, but it can be the key to growing your portfolio and earning more passive income. If you break it down into manageable steps, the process of buying your first multifamily property is straightforward. When building a multi-million-dollar portfolio of multifamily properties, it’s important to understand the buying process.
A multifamily asset is any residential property that includes more than one housing unit. For the purposes of buying and selling, any property that has two to four units is classified as a residential property, while anything with five or more units is considered a commercial property. This differentiation is important when determining how to find properties, when getting financing and in determining how the property will be managed.
Reasons To Invest In Multifamily.
1.It expands your real estate portfolio quickly.
Instead of adding units one at a time, investing in a multifamily property adds two, three, or even 20 units at one time. Having a large, diverse portfolio protects you from major cash flow issues when vacancies or volatile economic shifts occur.
2. It generates cash flow.
One of the easiest and quickest ways to start making more money from your real estate investments is to invest in multifamily properties. Be careful, though; not every multifamily investment will make money. You need to know your numbers and make a sound financial decision for your property to work for you.
3. It cuts your own living expenses.
Many investors are looking to cut their own living expenses by moving into one of the units in a multifamily property and renting out the other units (this is called an owner-occupied property). Often income earned from the other units will cover the mortgage payment, so the investor can live in their unit at little or no cost.
4. It reduces investment risk.
While all investments carry some risk, investing in a multifamily property helps mitigate some of the inherent risks of real estate investing. Because you have the option to live in one of the units on your property, it provides a safety net if you have cash inflow issues. In addition, you are unlikely to have complete vacancy at any point. If you have a single-family home, you are not getting any income when the property is vacant. With a multifamily, you will still be getting income from the other units when a single unit is vacant.
How To Buy A Multifamily Property
Smaller properties with four or fewer units are usually sold through real estate agents in the same way that single-family houses are. Larger properties are sold by commercial real estate brokers and typically have information sheets (called APODS) that they send out with all the property information.
While you’re looking for an investment property, you want to consistently be running your numbers so that you know exactly what you can afford. As the market changes, costs can change quickly, so keeping things up to date will ensure that you know exactly what you can afford at any given time.
Getting A Good Deal
In real estate, data gathering (due diligence) is absolutely critical to make sure that you are getting a good deal on your investment property. There is a myriad of software programs that will run the numbers for you, but you must understand what you’re looking for so that you can make decisions based on math and not emotions.
Data You Should Gather
• Location and area.
• Number of units.
• Rent charged per unit.
• Other sources of income (i.e., laundry, parking, etc.).
• Handling of utilities.
• Condition of property and known repairs needed.
• Price of closing and property taxes.
• Price of insurance.
• Other expenses.
• Your financing plan and details.
Most of this information will be included in the sales paperwork, but sales paperwork can paint a rosier picture than it exists. To be a savvy investor, you need to ask questions and do your own research to ensure that you are working with the most accurate numbers.
Typically, you want to set your own thresholds for cash flow, cash-on-cash return and average annual return. You can use these thresholds to determine if the property will work for you. If, when you plug your numbers into an analysis system, it doesn’t meet the thresholds you set, find another property.
All these mathematical steps can be time-consuming, but the process is well worth it. If you make your decisions based on math, you will more than likely end up with a solid investment that will make you money.
Making An Offer
Once you have secured financing and found a property that meets your criteria, it’s time to make an offer. This part is easy but can also be the most nerve-wracking because there is often a lot of competition for multifamily properties.
If there is a lot of competition for the property, you can do things like offering a shorter closing time or more earnest money. Don’t offer anything that you aren’t comfortable with, but if you have room to sweeten the deal, do it.
Once you’re ready to make an offer, you want to work with your real estate agent or a lawyer to submit a Letter of Intent, followed by an offer if the seller responds favorably. This is a relatively straightforward process but also a legal one, so you want to make sure that nothing is missed. Finding an expert to handle the process means that you can remain relatively hands-off and have the confidence that your deal will go through seamlessly.
As you can see, the multifamily investing process does have its differences when compared to single-family homes. Although subtle, it’s good to be clear on good, common practices if you are thinking about venturing into this asset class.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.