A multifamily home is a great addition to any real estate portfolio. That’s because, with just one transaction, an investor can begin earning passive income from several units. Whether you’re a new or experienced investor, multifamily real estate investing has the potential to be a real game-changer.
But how do you actually go about purchasing a multifamily property?
Unsurprisingly, the logistics of multifamily real estate investing are extensive. Local price trends, zoning rules, and vacancy rates all must be taken into account. Not to mention financing and renovation costs!
While it may seem stressful, it doesn’t have to be overwhelming. Continue reading for our complete guide on how to invest in multifamily homes.
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There are many benefits to multifamily investment. For example, they offer multiple streams of revenue and high potential for appreciation. But there’s no denying that the initial costs are hefty. Most mortgage loans for multifamily property will need a downpayment of approximately 20%. Then, there’s the added cost of renovations, maintenance, and property management.
So, the first step in buying a multifamily home is very important. An investor should look at their finances and determine their budget. Important facts to consider include:
The closing costs are expenses beyond the down payment. Closing costs include lender fees, property taxes, title insurance, and property insurance. These can be approximately 2% to 5% of the property’s sale price.
These are the monthly costs of owning the property. Carrying costs include mortgage, taxes, insurance, and utilities. The longer units are empty due to repairs, the higher the carrying cost will be.
Depending on the condition of the property, renovations may be extensive. Any potential repair costs should be taken into account when deciding a budget.
These are typical maintenance expenses that come with owning a property. Some examples include broken appliances, clogged pipes, or landscaping.
When budgeting, it’s better to overestimate potential costs than underestimate them. Having an extra cushion in the budget will help cover any unexpected expenses.
A residential building with two or more separate housing units is a multifamily home. Each unit must have a separate entrance, kitchen, bathroom, and utility meter. Examples include duplexes, triplexes, fourplexes, and apartment complexes.
A multifamily home with less than five units is a residential property. These can be bought with a residential mortgage. Properties with five or more units are commercial and will require a commercial mortgage.
When choosing a property type, investors should consider their budget as well as financial goals. Each type of property will come with their own set of pros and cons.
Here’s an overview of a few types of multifamily housing units:
A duplex is one building divided into two separate units, each with its own entrance. Triplexes and quadruplexes are similar, except with three and four units, respectively. Plex properties are ideal for investors new to multifamily property. That’s because they are less complicated to buy and easier to manage than apartment complexes due to their size.
Conventional apartments are the most common type of multifamily housing. They consist of a building with several units built above and below each other. Apartment complexes offer a higher amount of cash flow than smaller multifamily homes, but apartment complexes are also harder to buy as you’ll need a commercial loan. Because of the sheer number of units, apartment complexes are also harder to manage.
Another significant factor affecting an investment decision should be the area that the property is in. Location can have a major impact on the financial success of the investment. An investor should look at the rental rates, vacancy rates, and employment rates in the area.
Managing leases, maintenance, and repairs are just a few of the hassles of owning rentals. And owning a multifamily property means managing all the above for multiple residents! This requires a lot of time and attention.
When it comes to multifamily real estate investing, the more units an investor owns, the more important it is to seek help in managing them. That’s where a stellar property manager comes in. Property managers can help to market the property and find residents. They will also handle all communication with residents (including payments and, knock on wood, evictions). Property managers also advise an investor as they make decisions regarding their property.
There are plenty of property management options available. As such, it’s important that each investor chooses a manager that will work with them to achieve their unique goals.
Some things to consider when hiring a property manager include the manager’s:
While this may seem like a lot of things to keep in mind, remember that rental property is a big investment. That’s especially true when it comes to multifamily investments. So, it is imperative to have a manager that will take that responsibility seriously.
Before making an offer on a property, it’s important to look at the numbers. The first step is calculating the monthly income of the property. To get a return on the investment the monthly income needs to be higher than the operating expenses, which include the mortgage, taxes, property management, advertising, utilities, repairs, and landscaping.
Once an investor has completed all the above steps, they can move forward with making an offer on their multifamily property. Looking at their budget, an investor should determine what is the highest offer they can make.
After the numbers are ready, negotiation can begin. Counter-offers are common so there may be several rounds of renegotiation. After coming to terms that suit both the buyer and the seller, the closing process begins. During this time, details like scheduling an inspection, purchasing insurance, and paying closing costs should be handled.
While it takes substantial time and effort, a multifamily home is a great addition to any real estate portfolio. When done correctly, a multifamily investment is a passive income source that could pay dividends for decades. By following the tips above, investors can be confident in every step of the process.
Now, are you ready to dive into multifamily real estate investing? Get started by speaking with an Evernest team member today.
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