BUYING MULTIFAMILY PROPERTY – An Important Next Step for a Real Estate Investor
- Do you have previous experience with single-family rentals?
- Multifamily Allows you to produce more income and build net worth faster
- Are you excited to buy multifamily property?
- Buy what you like: multifamily vs single-family homes
- Determine if the increase in responsibility, liability and money needed for reserves is best for you by working with an expert real estate partner.
Consider Living in One of the Units
- If you buy a building with four units or less and live in one, you can qualify for owner-occupied financing with little money down
- Investors usually have to put at least 20 percent down
- It may also allow you to purchase other investments sooner because your debt-to-income ratio would be lower.
Choose the Right Professionals
- Buying a multifamily can be overwhelming
- Choose an experience real estate professional broker who can help you through the entire process.
- At a minimum use a real estate broker, real estate attorney, accountant, and lender to better understand your situation for the best course of action
- Understand the local practices and customs, and determine the most important items to review during due diligence which include physical aspects of the building, the financials and the all-important cash flow.
Get it in Writing
- Income and expense statements for the current and previous years
- Current rent rolls, service contracts and all existing reports
- Make sure the historical information matches your expectation of the current operations – and if it doesn’t, reconcile the difference in the numbers.
- Understand the vacancy rate in the neighborhood
- Check tenant reviews online and talk to the tenants directly to get honest feedback about the building’s condition and potential problems.
- Verify proof of rental payments and copies of leases
- Have security deposits transferred to you and meet all of the current occupants if possible.
Evaluate the Investment Opportunity Carefully
- A multifamily property is not valued by its price per square foot, but rather its income and return on investment generated.
- Look at the income and expenses of the building and see how much is left over, which is called net operating income.
- Net Opertating Income is divided by the typical rate of return for a market area (called a capitalization rate) to determine fair market value
- A cash-on-cash return is determined by dividing the income after expenses by the cash you’ve put into the property
Keep Adequate Cash Reserves
- Unexpected events will occur when owning a bigger rental property.
- Do not assume the property will be fully rented all the time or that tenants will pay consistently
- Calculate worst-case scenario so that all the bills can be paid
- You’ll also want to make sure that you know what it will take to evict a tenant if necessary
- A good rule of thumb is to take 10 percent off of the top of expected rents to prepare for unexpected market declines, vacancies and other factors
Know What You’re Getting Into
- Are you doing it for reasons other than money?
- Make sure you are also mentally prepared to deal with managing a large asset.
- Most challenges come from the quality of the neighborhood and the age of the property
- Understand the Class of the Investment Property
- Class A (the best condition, highly desirable, costly to purchase)
- Class B (older condition, lower rents, ability to add value)
- Class C (over 20 years old, less desirable locations, a budget purchase)
- Class D (the “war zone”, least desirable)
- Understand and confirm the legal zoning of the property for its use and how many units are allowed
- Buy the property in a Limited Liability Corporation (LLC) to protect your personal assets
Consider Professional Management
- The best money spent for a first-time apartment building buyer is to hire a property manager to handle day-to-day issues for tenants and repairs
- Each market has its own rules and regulations which includes
- Landlord-tenant relations
- Disclosures and many more items
- It’s a great idea to have a professional property manager working for you than to learn by making mistakes yourself.
Here are the previous strategies for your reference.
Disclaimer: The information provided on this page is for educational purposes only. Amelia Wong and Robert Wayne Mason, Inc. makes no warranty or representation as to the accuracy, completeness or reliability of this information. Please be advised that this content may contain errors, is subject to revision at all times, and should not be relied upon for any purpose. Under no circumstances shall we be liable to you or anyone else for damage stemming from the use or misuse of this information.