People usually think of a multifamily property as a multiple-unit dwelling like an apartment complexes. But, you can also use the multifamily description when describing townhomes, duplexes, and triplexes.
The Benefits of Investing in Multifamily Properties
Multifamily properties offer the investor so much, especially when compared with single-family homes.
- They provide the investor with better financing options over single-family residences since multifamily properties often spread the risk over numerous tenants.
- They give investors the option to live in one unit while renting out the remaining units. This allows tenants of the other units to actually pay down the homeowner’s mortgage.
- Multifamily properties often share the same amenities, which generally lowers overall maintenance costs.
- These properties mitigate the investor’s vacancy risk because they can rent to different multiple tenants.
Having said that, here are a few things to keep in mind when considering investing in multifamily deals.
Choose The Right Professionals
Think about when you’ve considered just a single-family dwelling and all of the details that people must take into account. It includes the condition of the property and whether you need to repair anything. You must look at the neighborhood and whether there’s a HomeOwners Association, as well as the financing needed and the insurance required. Now multiply many of those factors due to the nature of investing in a multifamily deal involving separate units. Hiring a qualified real estate broker to help is absolutely necessary.
Get All Paperwork
You should get current income and expense statements as well as the statements for previous years, in addition to all service contracts. Again, having a professional advisor would be wise.
Consider The Property Carefully
Remember, you typically value multifamily investing by the income generated and the expected return on investment as opposed to a single-family dwelling. That is usually measured by its price per square foot.
Have Adequate Cash Reserves
Invariably, “events” will occur when owning any residence. Natural disasters and accidents, among other things, will inevitably occur. So, always expect these things to occur, but perhaps even more often because we’re talking about multiple units.
Determine Your Cap Rate
Once you have a good idea of the cash flow from operating the property, you’ll be better able to determine how long it will take to realize a return on your investment. People commonly refer to this as the Cap Rate.
Do Not Be Afraid of Financing
New investors of multifamily deals tend to believe it is harder to get a loan because the price point for a multifamily property is usually much, much higher than a single-family dwelling. The truth is, obtaining financing for a multifamily structure is often actually more likely to be approved by lenders than for a single-family home. This is because multifamily real estate carries a higher likelihood of steady monthly cash flow for the investor.
Despite the occasional vacancies, multifamily properties tend to provide positive cash flow overall, keeping the investor liquidity guaranteed. Single-family homes do not guarantee the homeowner any regular monthly cash flow, only costs.
Moreover, purchasing, say, a half-dozen units through a multifamily property most likely just requires a single loan and saves you time. Alternatively, buying six single-family homes would require multiple loans, more time, and increase your risk of being turned down. You can tell right away which on is more attractive to the prospective investor.