Better Property Management
Some investors don’t handle their property management themselves. Instead, they often hire a property management service to do that. However, they pay the property manager a specific percentage of the generated monthly income with duties that range from collecting rents, maintaining the property, screening tenants, and handling evictions.
Most single-family investors can’t afford to hire a property manager due to their small portfolio. However, the amount generated by multi family homes monthly is enough for property owners to hire management companies without the expenditure cutting into their profit margin.
Grow Your Portfolio
Suppose you intend to build an extensive rental units portfolio. Investing in multifamily real estate is a perfect way to do that. Buying a ten-unit apartment building is efficient and requires less effort than acquiring ten different single-family properties.
If you’re buying ten single-home properties, you’ll need to work with ten different sellers and also conduct inspections on all the properties irrespective of their location. More so, you’ll need to opt for separate loans for the properties. The good news is, you can avoid all these by buying a multifamily property with ten units.
Easier to Finance
In most cases, the cost of buying an apartment building is often considerably higher than the amount you spend on a single-family rental property. However, while it may appear as if single-family property financing is easier than it is for multifamily homes, the truth is that banks are more likely to approve a loan for a million-dollar complex than the average home.
Multifamily real estate always generates strong cash flow each month for the investor, even when there’s a late payment from a renter or some vacancies in the building. For instance, when a renter vacates a single-family house, the property becomes 100 percent vacant.
Conversely, if there’s a vacancy in a 20 unit property, it’s only five percent unoccupied. Thus, there’s a low likelihood of a foreclosure in a multifamily home, unlike a single-family property.
Lending institutions see multifamily homes as less risky investments resulting in a competitive interest rate for you as an investor.
Tips for Investing in Multifamily Real Estate
The following are multifamily investment strategies and tips you’ll find valuable when investing in multifamily real estate.
Discover Your Cap Rate
Before investing in multifamily real estate, ensure you discover your cap rate, which shows how quickly you’ll get your ROI. However, take note of two things. Firstly, a “safe” investment’s cap rate such as a certificate of deposit (CD) isn’t more than two percent. Secondly, the cap rate doesn’t account for factors such as property value increases, tax breaks, and monthly NOI boosts.
When calculating your property’s cap rate, multiply your monthly NOI by 12 and get the annual number before dividing the number with the building’s current market value.
Note that a higher cap rate doesn’t always mean better. Instead, it denotes higher risks and returns and vice versa. It’d be best to look for a cap rate between the five to ten percent range. Anything lower than this range means the investment’s profit may be poor and a higher cap rate translates to higher risks.
Calculate Your Cash Flow
Before buying a multifamily home, you need to calculate your estimated monthly return to enable you to calculate your mortgage payments. Discover the amount you’ll get by removing the monthly mortgage payment from the NOI.
That way, you’ll determine your cash flow and whether the investment is worthwhile or not.
Find Your 50 Parent
You’ll need to calculate how much a multifamily home can make before making a purchase. Start by calculating the difference between expected expenses like maintenance and repairs and income such as storage fees, rent payments, and parking fees.
Suppose you don’t have access to information about the neighborhood to help you with the calculation, consider using the 50 percent rule. Divide your expected income into two, and the amount becomes your expense number and the difference, your NOI.
Multifamily Real Estate Investing Basics
One significant part of residential real estate investors prefer presently is multifamily real estate investing. The pros far outweigh the cons. Suppose you’re a new investor that wants to dip your foot into residential real estate, you’ll need to learn these basics starting from understanding the concept of “multifamily real estate.”
What’s Multifamily Real Estate?
Otherwise called multi-dwelling units, multifamily real estate implies a building with multiple units, such as apartment complexes and other structures with many rentable living spaces.
Examples of multifamily real estate include townhomes, duplexes, triplexes, quadplexes, amongst others.
Benefits of Multifamily Investing
There are several benefits of buying a multifamily home, and they include the following:
- You’ll enjoy better financing options with multi family homes than single-family property because financial institutions believe they’re averse to many risks
- Multi Family homes mostly share the same amenities, lowering maintenance costs
- Most times, renters help property owners pay off their mortgage
- Property owners may live in one unit and lease out the rest
- Easy to mitigate vacancy risks due to multiple tenants
Multifamily Real Estate Financing
New investors that want to invest in multifamily real estate are often scared due to multifamily property prices. Most multifamily real estate prices are considerably higher than single-family homes.
The more units you intend to buy, the more money you’ll spend. However, you don’t need to be scared, seeing as getting a loan for a multifamily home is relatively easier than for a single-family rental property. That’s because multifamily real estate has higher chances of turning out regular monthly cash flow.
Even with a few vacancies in a multifamily building, it’ll still make a monthly return, unlike a single-family home which becomes a non-performing asset when it loses a tenant.
More so, the likelihood of a multifamily property facing foreclosure is lower than a single-family home. Hence, why lenders view multifamily homes favorably, especially private money lenders.
One multifamily real estate investing strategy seasoned investors adopt for financing their investment is using bridge loans and equity from their current assets. However, you must know how to use bridge loans for this purpose before trying out this strategy.
Seeing as private money loans focus on assets, they tend to lend to investors with more promising and secure returns. Thus, multifamily properties have better financing options than single-family homes because of their numbers. However, before searching for multifamily real estate for sale, ensure you understand the financing options available to you.
The Golden Age of Multifamily Investing
In the residential real estate sector, multifamily homes are known for outperforming other investment options, and they keep living up to expectations. Some of the notable reasons for this rise lie in people downsizing, younger people prefeggin longer leases, and an increasing cumulative return premium.
Presently, demand for apartments has outpaced supply. The National Multifamily Housing Council (NMHC) has disclosed that the country needs about 4.6 million additional flats by 2030, seeing as more Millennials and Baby Boomers keep delaying buying their own homes.
While Millennials are delaying buying a home due to student debt and lifestyle choices, most Baby Boomers are downsizing. According to the NMHC, the United States needs about 325,000 new apartment units every year before 2030 to meet the demand.
Only 243,000 new units per year were completed between 2011 and 2017, causing a 29.8 percent average annual shortfall. More so, nearly 50 percent of apartments in the country are over forty years old, so you can understand why there’s an ever-growing demand for quality multifamily properties.
Why Investors Are Rushing Into Multifamily Real Estate
Multifamily properties are popular at the moment in the residential real estate sector for many reasons. The following are some of the benefits of multifamily investing:
Regardless of the pandemic, people are still looking for the perfect place to live. While the pandemic might have affected other sectors in real estate, the multifamily vacancy rate hit its lowest point since 1985 at 6.4 percent.
Rent Growth Potential
Value-added opportunities, such as interior renovations and regular rent increases, provide more growth potential for multifamily homes.
Potential Hedge Against Inflation
Multifamily serve as a potential hedge against inflation as witnessed in the 1970’s inflationary crisis where there was an 8.5 percent median rental rate increment above inflation.
However, with the short lease terms, pricing tools, and modern technology, multifamily properties stand as a bigger hedge against inflation.
Demand for Modern Apartments
Close to half of the US apartments have existed for over 40 years now, leading to demands for modern multifamily properties.
Favorable Government Financing
Multifamily properties have a more competitive advantage over other residential real estate investment sectors due to the numerous favorable financing options available and inexpensive capital.
Like stocks, there are different real estate investment strategies you can adopt to become a successful investor. One popular way to invest in real estate is by buying some rental properties, especially multifamily homes.
There are several reasons to consider multifamily real estate investing, including access to better and easier financing opportunities and the ability to grow your rental property portfolio. While you’ll need to expend a lot of time and effort to start multifamily investing, the multiple units are the perfect passive income source when you plan to retire.
Nonetheless, you’ll need to ensure you understand everything about multifamily investing, including how to buy them. Hence we put together this guide to multifamily investing.
If you want to learn more about multifamily investing or other types of investment options available in real estate, consider attending the Real Estate Masters Summit where you will hear top industry professionals address all your concerns and offer expert opinions and tips on how to get the most out of both the residential and commercial real estate sector. What’s more? You get to interact with other investors and exchange contacts with realtors to ensure you have a smooth purchase process when you’re ready to buy.