For those involved in real estate investing, multifamily properties are a popular option. For one, it provides a service to the community in the form of housing and is a stable investment during market downturns. Everyone needs a place to live regardless of market conditions, and real estate is a familiar area for investment. Let’s look at multifamily real estate investment and how to get involved. Let’s study some pros and cons to this investment strategy too.
What Constitutes a Multifamily Property?
Any residential real estate with multiple separate housing units in one property is considered a multifamily property. Examples would be condos, duplexes, quadplexes, townhomes, and apartment buildings. If you are new to investing or even looking to make your first investment, multifamily properties are a great way to begin generating passive income. You could even choose to live in one of the units and operate it as an owner-occupied property.
Tips to Being Investing in Multifamily Real Estate
Keep three essential tips in mind when investing in multifamily real estate:
- Find your 50%.
- Calculate your cash flow.
- Figure out your cap rate.
Find your 50% refers to calculating your estimated expenses based on the expected income if you do not access specific information. Finding your 50% is merely calculating the expected incoming cash flow through rent, parking, storage, and other fees and taking half of that to get estimated expenses for repairs, maintenance, and other expenditures. This 50% is roughly what you can expect for your net operating income.
The second tip is to calculate your cash flow. To do this, you take your estimated mortgage payments from a multifamily loan and subtract them from your net operating income. This number will give you a rough estimate of what the cash flow will be and will help you figure out if this investment is worth it or not.
The third necessary calculation is the capitalization rate, the cap rate for short. This calculation is an indicator of the time it will take to get a return on your investment. It takes your monthly net operating income and multiplying it by 12 to determine the annual net operating income. Next, take your annual net operating income and divide it by the property’s current market value to end up with your cap rate.
Higher cap rates usually indicate higher returns for sure but also potentially higher risk, while a lower cap rate usually means lower risk and lower return. A general rule for cap rate is something between 5% and 10%. Higher than that may be too much of a risk, while lower may not be profitable enough for consideration.
What to Look for in Multifamily Investment Properties
If you are looking to invest in a multifamily property, you need to research to ensure the investment is financially viable. First, find a property that you could purchase for less than market value and begin to research and analyze the property. Dig a bit deeper into the numbers to refine the estimates and compare rental appraisals, purchase prices, and costs in the long run and short term.
In addition to crunching numbers, there are other things to consider as well. As you have probably heard sometime in your life, the old mantra is that the three most essential aspects in real estate are location, location, and location. This also applies to investing in multifamily properties, even more so actually. Location is probably the most important factor for renters determining where to live. Look in high-yield, high-growth areas where demand is high and the neighborhood is well-maintained.
Another consideration is the total number of units on the property, including the number of rooms per unit. Newcomers to multifamily real estate investing should focus on smaller properties like duplexes, triplexes, and quadplexes. These smaller units offer an excellent upside with much less risk while being more affordable as well.
Next, you will want to figure out the income a property can accumulate. Research sites and local publications that offer ads for rental properties to get a good idea of what you can get for rent. You may also be able to get financial records from the current owner to find out what the current rates are for the units.
Finally, try to find out who’s selling the property and why. The price can vary greatly depending on the seller’s situation and their motivation for selling the property. For example, bank-owned properties are dealt with much differently than those sold by owners, and bank-owned properties can offer substantial price savings.
Benefits of Multifamily Investment Properties
There are many benefits to investing in multifamily properties, especially as compared to single-family residential property. Firstly, a multifamily investment property can result in a more significant cash flow than a single-family property. This one is pretty obvious to see the benefits of multiple income streams versus one.
Multifamily investment properties also enable the owner to live in one of the units and make passive income on the other units. As an owner of a multifamily property, you can also exert more control over the property’s value. Simply, the more income a property generates, the more valuable it becomes. With multiple income streams versus one, you can influence the value a bit more.
Another benefit of multifamily property investing is the tax benefit for the investor. The property can be depreciated annually to offset much of the income generated. While multifamily properties have multiple aspects that will need insuring, these policies can often be procured as a blanket policy, keeping things simple while saving money overall.
Multifamily investing can be a great source of passive income and an investment with a high return as long as you put in the requisite time and effort into the research and analysis upfront. If you’re interested in learning more about multifamily real estate investing, reach out to the team at Titan Funding. We offer several private money lending options that may work for you. You can reach us at 855-912-8313 or via our online messaging system.