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.
As stated, multifamily investing can offer excellent and more predictable cash flows. If one tenant 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:
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 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 tenant 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 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, tenant 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 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 tenants, 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.
Location, location, location! Your property’s location plays a big role in its value and the rent you can demand from tenants.
Here are a few sources you can use to find these and other data about neighborhoods:
Juggling multiple units is tough with just one multifamily property. You have to ensure you fill all the property’s units, keep each tenant 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 tenants, 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.
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.
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.
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.
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:
McKenna is an Evernest Content Strategist based in Denver, Colorado. Her expertise spans the real estate and home financing sectors. When not writing, she enjoys picnics, yoga, and antiquing.