Real estate is one of the best forms of investments, if not the best. The sooner more investors realize this, the more money they can make. But for those who have already acknowledged its potential and have decided to get into this business, their next objective would ultimately be to find out where they can reap the best rewards. There are quite a few different types of real estate investments available that you might know of. However, there is another type of investment that comes under the umbrella of residential and mixed-use real estate investments. It is called multifamily real estate investing.
What is multifamily real estate?
To be precise, multifamily real estate refers to a building that incorporates multiple housing units to cater to multiple tenants or families. An obvious example of this are apartments where many housing units are stacked on top of each other in the same, single piece of property. Now that we have enough knowledge about what these properties are, the next question you must be asking is, “Is it for me?”
The answer to this question is not a straightforward one; it is a highly subjective question, and its answer would not be any different.
Multifamily real estate investing depends on what you are aiming to achieve. It has higher risks than purchasing and renting out single-unit buildings as well as higher cost. However, if you are looking to make some big money in this business, this is a great place to invest. Also, this is exactly what we will look at next — the good and the bad parts of multifamily real estate investment.
Here are some of the perks of investing in multifamily properties:
Abundant cash flow
This must be the first reason for you to invest in multifamily real estate. It’s a cash cow, plain and simple. Moreover, it doesn’t take a genius to figure that out since you are getting several rent checks for one mortgage. Yes, a property like this does cost more than a single unit building, but that cost doesn’t even matter when you compare it to the cash you get in return.
This, again, is pretty easy to understand when you really think about it. With only a single property, you won’t have to take care of multiple lawns, heaters, or even roofs. Everything is singular, which means you are going to have a lot less maintenance coordination and operating costs than if you had several families living in multiple properties.
Moving into one of your own units
With a multifamily property, if you really want to take full advantage of it, moving into one of the units would be a great way to do it. Not only will you save the maintenance and operational costs of otherwise living in a different property, but you can also qualify for less expensive financing options. Living in one of the units will allow this property to be considered a primary residence, which comes with the opportunity for smaller down payments compared to a traditional investors down payment.
Residential real estate is commonly valued based on comparable properties in its region. Valuation does not take into effect the rent rates or how profitable the investment. Multifamily assets are valued based off Net Operating Income and the Capitalization Rate (CapRate). Investors have the opportunity to quickly increase their property’s value by increasing the rents or even reducing the vacancy. Often these are done through renovations and better management.
Based on simple numbers, when a single-family rental sits vacant there is zero income. Multifamily generally has income being generated from several of the units, unless all remain vacant. This provides a level of protection for landlords when a unit sits vacant for extended period of time.
Financing multifamily real estate can be tricky
The interest rates are often higher, and the loan terms might be shorter compared to a single unit property. Also, multifamily properties with 5 or more units are considered to be commercial. This is a whole different animal that you might not be ready to tackle. So, if you aren’t looking for the trouble of commercial real estate investment, this may not be for you.
You can’t have all the cash flow from a multifamily property and expect no issues in return. Well, when you have multiple families/tenants living in the same building, sharing the same resources, disputes and conflicts are bound to be there. It’s inevitable. You just have to be the one who has all the solutions to keep all the parties happy. While the property might contain one roof, each unit will have their own appliances and typically their own heating/cooling unit. These are higher ticket items that will occur more frequently simply due to the quantity of units.
Renters are difficult to find
Considering our above point, it makes sense that fewer people are looking to rent a multifamily real estate unit. This makes it difficult for the owner to not only find people but to also receive the desired amount of rent. While the cash flow is indeed higher than a single unit property, placing a tenant might take more time.
What to look for in a multifamily property
If you have decided to take on a multifamily real estate investment, here are a few things you should look at:
- The Location
Like we discussed in our cons earlier, finding tenants for multifamily real estate is difficult. You have to make everything count to attract them. Location is one of the most important factors if not the most important in a tenant’s point of view.
- Number of Units
Multifamily investing doesn’t mean you can simply go on and build as many units as you want. The more units, the more complex the problems. Make sure you can manage these problems before increasing each unit in your multifamily real estate property. You might have to hire a property manager to help in this regard.
- Expected Income
We already discussed earlier that income from a multifamily property is higher in cash flow but lesser in return on investment compared to single unit property. Make sure your income isn’t too low to even finance your expenses and mortgage.
- Look out for who’s selling
It’s important to know this because the terms of your investment can vary significantly based on just this factor. A bank might have different criteria than a private owner when it comes to buying one of these properties. Make sure your purchasing strategy matches the seller’s terms.
Financing your investment
Financing a multifamily real estate isn’t very hard to understand. We have already touched it a couple of time above. To be more precise, the more the number of units you have, the more they will cost in comparison with a single-unit property. With every additional unit, this cost will only go up. So you just have to accept the fact that getting into a multifamily real estate investment would cost you much more than a single unit property.
Moreover, while the above information may trouble you, you should not be hesitant to get a loan. Lenders understand investment properties and are always looking to partner on projects that generate cash flow.
Ready to start your multifamily real estate investing empire?
It’s fair to say that multifamily real estate investing has a lot of benefits but still risks. You simply need to weigh the pros and cons to truly see if you are ready to enter this field of real estate.
Do not forget that this type of investing will take more time to manage all the tenants. If you need help with self-management, visit www.theburbz.com. You can find some tools that will improve productivity and reduce stress which include rent collection with automatic late notices, free background screening reports and maintenance requests.