Do you want to invest in multifamily real estate but don’t know where to start? You’re not alone. This can be a daunting task for anyone, especially if you’re new to the game.
That’s why we’ve put together this comprehensive guide on how to invest in this type of property. We’ll walk you through each step of the process so you can feel confident about your decision.
Table of Contents
What Is a Multifamily Property
A multifamily property comprises a residential building with multiple units and more than one tenant. Many new investors start out by buying single-family homes, but it’s possible to invest in apartment complexes or condominiums as well. You can proceed with your investment on your own or through syndication partners.
Unlike single-family units, there are a few different ways to invest in multifamily properties. You can do it passively or actively, depending on your goals and level of experience with real estate investing.
Why Invest in Multifamily Properties
There are great benefits of investing in multifamily properties, which is why there are also many real estate developers in the US building multi family homes. Here are some specific perks that you will not enjoy from other types of properties. You can check out Showcase IDX list of the top real estate marketing agencies.
These properties are often in high demand because they offer stability, especially in times of economic recession. People will always need a place to live, which is why apartments and condo units are generally less volatile when it comes to rental prices and vacancy rates. In fact, many investors choose these properties as a way to balance their investment portfolio with more stable assets.
Ease of Management
When multi family home investing, you usually have one management team, and they’ll be responsible for everything related to the building (e.g., maintenance).
If you invest passively through syndication partners or invest directly with other investors in a shared ownership scenario, then this will also reduce your workload more because you won’t have sole responsibility for every little thing that needs fixing or updating within the property itself.
Range of Financing Options
Multifamily properties are generally easier to finance than other types of investment properties.
For example, you can get a commercial loan on this type of property without putting down any money at closing, provided that it meets certain requirements. This means less risk for you as the investor and more opportunities to invest in other units.
You may also qualify for a Federal Housing Administration (FHA) or a Department of Veterans Affairs (VA) loan to buy these properties, given that you are eligible for such financing options.
How to Invest in Multifamily Properties
Like any other type of property investment, how to invest in multifamily real estate requires you to take certain steps to land on the best deal available on the market today.
1. Choose your investment type.
When you’re investing in multi-family real estate, there are two primary ways to do it: direct ownership and indirect ownership.
Direct ownership – This means that you buy a property yourself without any outside help from brokers, agents, banks, etc.
Indirect ownership – This involves working with another company that already owns the property you want to invest in, like a real estate investment trust (REIT), which offers shares instead of direct ownership.
The latter is often used by investors who know little about real estate but want to invest in multifamily properties without having any money at all.
2. Find a good location.
Ideally, you should invest in areas where there are already many homes being built or neighborhoods that have seen growth over the last few years. Locations with high population density will typically be more profitable because they provide renters with easy access to jobs and amenities, like schools, parks, and shopping centers.
You can also choose a location near public transportation facilities, so people commuting from this place don’t need their own cars, which saves them money on gas. The main thing to remember is that the property should provide good value for renters, which means it’s close to things they need while still being affordable.
3. Assess your income and expenses.
One of the most important aspects of real estate investment is making sure your monthly income from rent payments surpasses your monthly expenses by a comfortable margin. This “margin of safety” will help protect you from any unexpected vacancies or repairs that may come up during your ownership no matter how careful you are.
4. Determine the return on investment (ROI) potential.
The ROI is simply a measure of how much money you’re making (or losing) on your investment each year. In order to calculate it, take the annual net income generated by the property and divide it by the total amount of cash you’ve invested in the deal.
So, for example, if you invest $50,000 into a multifamily property that generates $6,000 per year in net income, your ROI would be 12% ($6,000/50,000).
Keep in mind that this number may change over time as market conditions fluctuate, so always consult with a real estate professional before buying.
5. Inspect the property.
Once you’ve chosen a real estate multi family investment property and calculated its ROI, it’s time to inspect the actual building. You can hire someone else to do this for a fee, but if you choose to do it on your own, then at least know what to look out for before buying.
Here’s a checklist for you:
- Signs of deferred maintenance such as water damage around sinks, toilets, showers
- Cracked walls/ceilings due to extreme weather conditions experienced by the area
- Roofing issues, like leaks, which could lead to mold growth or other health hazards if left unchecked over long periods of time
- Outdated heating/cooling systems that may not be able to handle higher temperatures experienced by newer models
- Signs of pest infestation, such as rodents and insects in attics/basements where food might be stored
- Poor ventilation due to lack of proper insulation throughout the house (this affects both tenants’ comfort level when living there during summer months but also can increase monthly utility bills significantly)
Apart from taking these steps, it is always best to hire an agent who specializes in multifamily properties. Not only that they can help you find the best listings out there, but they can also help with the due diligence process and provide you with market insights that will save you a lot of money in the long run.
How to Look for the Best Multifamily Properties
The most convenient place to search for these properties is, of course, the internet. All you need to do is use relevant keywords, such as “multifamily properties for sale + city/state”, and you will find some listings of potential options.
Another way is to use a brokerage firm or a company specializing in this type of investment, such as Holdfolio. They have a large database of multifamily properties for sale and can help connect you with the right property in the right location.
Of course, you can also ask around relatives and friends who may know some properties that are up for sale.
Once you’ve narrowed down your search, these are the steps you’ll want to take before making an offer:
- Check if the property is zoned for multifamily use. This may be important if you plan on living in one of the units yourself.
- Verify that all permits and licenses are up to date and in order.
- Get a copy of the insurance policy and make sure it covers rental properties (some only cover single-family homes).
- Review the tenant screening process and make sure it meets your standards.
By following these steps, you’ll be sure that the property you invest in is a good investment for years to come.
If you invest in multifamily real estate, you’ll be able to enjoy some of the benefits that come with owning rental units without having to invest as much money upfront. Not only will this provide excellent returns over time but it also allows investors who are new or inexperienced at managing properties to ease into their role more slowly by starting off small before tackling larger projects down the road.
But like other real estate investments, you need to do your due diligence to ensure you are making the best decision to help you build wealth and ultimately attain the financial freedom that you have been longing for.
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