Let’s talk about multifamily investment opportunities. For many investors, especially ones just starting out, single-family homes are a big focus. Discovering how to buy, renovate, and sell is a great way to learn the basics of real estate investing.
But Reunion Investments thinks, when you’re ready, you definitely need to be looking into multifamily investment opportunities as well. The reason? More income and lower vacancy rates.
Multifamily Real Estate Investing Tips
Investing in multifamily real estate is absolutely different than working with single-family homes. Read some of Reunion Investment’s tips below before you jump in:
Find Your 50%
You need to figure out just how much income a multifamily home can actually make you. Calculate the difference between expected income and expenses. But what if you don’t have access to good information, like neighborhood comps? Just use the 50% rule. Your expenses are about 50% of your expected income. The difference is your net operating income (NOI).
Calculate Cash Flow
Find out how much money you’ll actually make by subtracting your monthly mortgage payment from the NOI of a prospective multifamily property. This will give you your cash flow estimate and help you decide whether or not the investment will be worth your time.
Discover Your Cap Rate
Thirdly, you need to figure out the capitalization rate, or cap rate. This tells you how quickly you will get an ROI. Remember the cap rate for a “safe” investment, such as a certificate of deposit (CD), is usually in the low 1-2% range. The cap rate you’re looking for, however, doesn’t take into account factors like increasing property value, raises in monthly NOI, or the many tax breaks that you can get once you’re an owner of a multifamily property.
Here’s how you calculate cap rate: take your monthly NOI and multiply it by 12 (for 12 months in the year). Then divide that number by the property’s current market value. Remember though – a higher cap rate isn’t always better, it just means higher risk and higher return. A lower cap rate indicates a lower risk and return.
Beginners should shoot for a cap rate in the 5%-10% range.
Insider Tips For Investing In Multifamily Properties
Who doesn’t love looking at properties for sale on a lazy Sunday? Unfortunately, it takes a lot more than just viewing listings when it comes to multifamily properties. Here’s how to do your due diligence when locating a property below market value and analyzing its financial sensibility. Locate a property you’re interested in and then look at purchase price, short-and-long-term costs, and rental estimates. This gives you a nice ballpark estimate, but you then need to refine those numbers to be successful. Nothing is more important than the numbers! Once you refine them you’ll really see the bottom line. Furthermore, we’ve made up a checklist of important factors that can help you decide what property may provide you with the best returns.
Location, location, location. You’ve heard it a million times, but it’s especially important when it comes to multifamily properties. Pay attention to high-growth, high-yield areas where properties are in high demand, well-maintained neighborhoods.
Number of Units
It’s important to take into consideration the number of units on the property, as well as the number of rooms in each unit. If you’re just starting out, search for these three types of multifamily properties: duplexes, triplexes, and four-plexes. These types of properties usually deliver good income at a lower risk.
Next, let’s find out how much income you can make. Sites like Rentometer.com or Craigslist can help determine rental prices and income, but investors like you should go a step further. Again the 50% rule is great for determining cost vs income for beginners.
This is a toughie because different situations have different costs. For example, if you choose to live in one of the units while renting out another, you could qualify for owner-occupied financing. This means the income from the other units would be factored into the lender’s qualifying ratio. Your credit score also impacts qualification. Generally, lenders will look at credit, debt-to-income ratio, and down payment.
Multifamily Investing Benefits
Bigger income: Stating as simply as possible, single-family homes bring in one income stream, while multifamily homes bring in multiple streams of income.
Control Over Value: Generally, multifamily homes are steadily valued higher because they consist of multiple units.
Larger Tenant Pool: And less risk – unlike single-family homes, where income is lost if the home is empty, multifamily properties have multiple units where rarely every unit is vacant.
Scalability: Because you’re purchasing multiple units at once, you’re growing your portfolio at a much quicker rate.