Interested in Multifamily Investing? Here’s How to Buy Multifamily Homes

Interested in Multifamily Investing? Here’s How to Buy Multifamily Homes

Interested in Multifamily Investing? Here’s How to Buy Multifamily Homes

Multifamily investing offers a nice compromise between single-family and commercial investment properties. You get the increased cash flows and revenues of commercial properties with the simplicity of single-family management. But that also means buying multifamily properties is more complicated than single-family. You have to know how to buy a multifamily home, or you could make an expensive mistake. This guide will give you an overview of buying a multifamily property — whether your first, second, or beyond.

Decide Your Budget

As stated, multifamily investing can offer excellent and more predictable cash flows. If one resident leaves, you may still have others to keep cash flowing while you fill the vacancy. But multifamily properties are also more expensive, so you must hammer out a budget for the purchase and ongoing costs. Here are some costs to consider when creating your budget:

  • Closing costs: Closing costs are costs associated with completing the purchase. They tend to cost around 2-5% of the property’s sale price. So, higher-priced properties can run you more in closing costs. Some closing costs include lender fees, property insurance, property taxes due at closing, and title insurance.
  • Carrying costs: Carrying costs are monthly recurring costs associated with owning the property. These vary widely depending on the property and location. Some carrying costs include mortgage principal and interest, insurance, property taxes, and utilities.
  • Initial renovations and repairs: You might need to do some repairs and renovations depending on the property’s condition when you buy. Amounts vary by the work needed. You may be able to negotiate some of these at closing. You might pay a higher sale price if the seller performs the repairs and vice-versa.
  • Ongoing repairs and maintenance: All properties need ongoing maintenance, such as fixing leaky roofs or clogged plumbing. However, it can be hard to nail down exact numbers until you’ve owned the property for a while. Add some cushion to your desired revenues/cash flows to account for these while maintaining a sufficient profit margin.

Choose a Multifamily Property Type

There are a few broad categories of multifamily properties. Each offers different benefits and drawbacks, suiting them to various investment goals. Let’s look at the major multi-family property types:

Duplexes, Triplexes, and Fourplexes

Duplexes are residential homes with multiple units. Each unit contains a separate entrance, but they’re all within the same building. Duplexes have two units, triplexes have three units, and fourplexes have four units, as each name implies. These properties can be excellent properties for new multifamily investors. Buying and managing them is simpler than full-blown apartment complexes. One of the easiest ways to get into “plexes” if you’re brand new to real estate is “house-hacking”. You purchase a multifamily property, live in one of the units, and then rent out the others. You pay your mortgage and expenses with some of your cash flows, then bank the rest for future properties. At some point, you move out of your unit, fill it with a resident to boost cash flows, and buy your next property. If you don’t have significant family obligations and are just starting in real estate, house-hacking a “plex” might be worth it.

Apartment Complexes

Apartment complexes can generate significantly more cash flows than “plexes” because vacancies don’t harm cash flows as much. If a couple of units are vacant, your cash flows don’t dry up. But buying and managing an apartment complex is, well, complex. Buyers generally need commercial loans to purchase apartment complexes. Overall management and maintenance costs will be far higher. Oh, and although vacancies don’t hurt as much, resident turnover is often higher. Self-management requires a lot more work. You’ll need to be vigilant about marketing your property and filling those units.

Turnkey Properties

Turnkey properties are properties ready to rent out the moment you buy them. No large-scale repairs or renovations are needed. This makes turnkey properties some of the fastest cash-flowing properties money can buy. Little effort is needed on your part to find residents, and you may be able to demand higher rents. They’re the closest you can get to “hands-off” investment. In exchange, these tend to be the most expensive, given what you’re buying. Your ability to personalize the property may be limited since it’s fixed up.

Choose Location & Neighborhood

Location, location, location! Your property’s location plays a big role in its value and the rent you can demand from residents. So don’t just buy the cheapest property you can find. Instead, research neighborhoods in the general area you’re buying a property in. Evaluate neighborhoods based on factors like:

  • Average price per rental unit
  • Crime rate
  • HOA
  • Nearby amenities/attractions
  • Unemployment rate
  • Vacancy rates

Here are a few sources you can use to find these and other data about neighborhoods:

Choose a Property Manager to Work With

Juggling multiple units is tough with just one multifamily property. You have to ensure you fill all the property’s units, keep each resident happy, collect rent on time, and handle all maintenance promptly. Now imagine doing this for multiple multifamily properties. As you can see, hiring a property manager is almost mandatory to succeed in the multifamily space. Yes, you pay the property manager out of your rental income, but it’s an investment that often pays far more in returns. Consider this: Not only does a property manager handle everything for you, leaving you to enjoy your rental income without the hard work… But they’re experts in this stuff. They know how to market and price your rentals, “wow” your residents, find the best maintenance providers, and follow local and federal laws. This is especially helpful when investing in another state. Some property managers, like Evernest, can also find you the right multifamily property by providing agents in the markets you want to invest in. Plus, they can help you close the deal. No need to look for and coordinate with a separate agent and a property manager.

Estimate Your Profit & Losses on the Property Interest

You’ve got a budget, a property in mind, and a property manager to work with. Now you must dig into the property’s numbers to determine if the potential income exceeds all expenses associated with the property.

  • Multifamily mortgage: This will likely be your biggest expense. Look at the principal and interest to get the total monthly amount.
  • Utilities: This can vary depending on which utilities you take on vs. which ones your resident pays.
  • Taxes: Property taxes vary by locality. The higher your property value, the more you’ll pay in taxes given a specific property value.
  • Property management: Property management will shrink your profit margins, but only if the services they provide don’t allow you to increase your revenues and cash flows disproportionately. So weigh the property management costs against the potential revenue increases.
  • Repairs: Inspecting the property can give you an idea of what your repairs will cost you on an ongoing basis.
  • Ongoing maintenance: These can vary by property and location. Items include snow and lawn care removal, pest control, safety checks, gardening, and landscaping.

If revenues exceed all these, you earn a profit. But of course, you don’t just want a profit. You want as much as possible. So paying more in some of these areas may be worth it if doing so raises your profit margins.

Make an Offer

Final step: With your budget in order and critical data in hand, it’s almost time to make an offer on your property. Double-check all your numbers because you can’t make a sound offer without having all the details worked out. Work with your real estate agent to iron out the highest possible offer you’re willing to make to the seller based on budgeting and financing limits worked out earlier. This will help you screen out anything you can’t afford, saving time. Then, your agent will meet with the seller’s agent to negotiate the offer. Don’t get discouraged if the seller counters your offer — remember, both sides are trying to get the best deal. It’s not unusual to work through a few rounds of negotiation. Once you and the seller settle on an offer, you’ll go through the closing process. This is where you’ll pay many of the closing costs mentioned earlier.

Final Thoughts on Buying Multifamily Homes

Investing in multifamily properties is a great way to up your cash flows and expand your portfolio. However, they’re a little more involved than single-family properties. So if you’re breaking into multifamily, or if you made mistakes buying your first multifamily property, follow these steps to find a great property that pays you well. Or, you can shortcut the process by working with Evernest. You get an expert team and “boots-on-the-ground” resources to find the best multifamily deals — and we’ll handle all the “management” for you. Want to know more about partnering with Evernest in your next multifamily deal? Here are two ways to get started: