Multifamily investing is a type of real estate investment that offers many financial benefits. It’s crucial that you weigh the pros and cons of multifamily investing and choose the right property before managing multiple tenants. Choosing a multifamily property in the right location, at the right price, and in good condition can be a great source of passive income. Learn what to look for when shopping for your multifamily investment.
What Is a Multifamily Property?
A multifamily home is a single building that houses multiple families. Multifamily homes can include apartments, duplexes, townhomes, and condominiums. Any single building that houses up to four separate units is a multifamily home. To qualify as a multifamily property, each unit must have its own kitchen and bathroom.
Adding a multifamily investment to your real estate portfolio can be a financially profitable decision. You can live in one of the units and rent out the others. You can also rent out each of the units for maximum profits. With multiple sources of income in a multifamily property, it can be easier to keep up with maintenance and repairs. Additionally, the rent from current tenants can help cover the carrying costs when other tenants move out.
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Here are a few key takeaways when it comes to multifamily investing:
- A multifamily home is any property that houses two, three, or four units.
- Location is one of the most important factors when choosing a multifamily home.
- Calculate your costs against the average rate of rent in your area to determine profitability.
- Evaluate the seller to determine if they’re willing to negotiate with you on the property’s price.
- Compare the condition of your property, and plan for renovations in the near future.
Why Consider Multifamily Investing?
Multifamily investing offers many advantages, including:
- Reliable cash flow.
- Easy to finance.
- Tax benefits.
- Passive income opportunity.
- Quick profits.
Of course, it’s also important to be aware of the potential disadvantages that come with multifamily investing. Multifamily investment properties require more capital upfront. Multifamily homes often cost much more than single-family homes. Because of the higher cost, your lender might require a larger down payment on a multifamily property. You might also have more competition from other investors when it comes to buying multifamily properties.
What To Look for When Investing in Multifamily Homes
A successful real estate portfolio with multifamily homes includes a few important characteristics. Here are a few things to look for when investing in multifamily homes:
Location is a key factor to consider when buying any type of real estate. Location can be even more important when it comes to multifamily homes because you’ll need to market your property to multiple tenants. Searching for multifamily homes in areas with high housing demand is a good place to start.
Then, consider nearby attractions or amenities. For example, choosing a multifamily home near a college might attract students. A multifamily property near one of the largest employers in the state might attract new workers looking for a place to live.
Number of Units
A multifamily property might include two, three, or four units. Consider how many tenants you’re comfortable managing and the overall budget of your investment. While a fourplex unit typically costs more than a duplex or triplex, it also enables you to collect four rent payments each month.
Calculating the potential income of multifamily investing is also important before choosing a property. Market research can help you identify how much similar units are renting for in the area where you want to invest. Consider each unit’s number of bedrooms and square footage to determine how much you can charge.
Factoring in your operating and carrying costs can give you a better idea of how much you can afford. You’ll want to calculate your mortgage payment, insurance, taxes, and repair costs. Setting aside money each month to cover preventive maintenance can also help you avoid unexpected costly repairs. Getting preapproval before multifamily property shopping can help you predict your costs.
Interest rates on multifamily investments vary, depending on factors such as your credit score, down payment, debt-to-income ratio, and whether you plan to live in one of the units. Some people prefer to be hands-off investors, in which case you’ll also have to calculate the cost of property management.
Evaluating the seller can provide you with valuable information when it comes to multifamily investing. You might learn a lot about the seller by comparing the price of a property to its fair market value. A seller who prices a multifamily unit way outside of its worth might be less willing to negotiate with you.
You’ll also learn fairly quickly if the seller is willing to work with you on any necessary repairs. It can be helpful to work with a real estate professional to ensure the purchase agreement is written accurately and includes a full inspection so you know what you’re buying.
You’ll also want to consider the overall condition of any multifamily investment you’re thinking of buying. Consider the necessary repairs or renovations you’ll need to make before renting the units. Some cities have strict rental laws that require you to schedule and pass an inspection. The good thing is, if the building requires many repairs, the price typically reflects that.
You might also need to complete cosmetic updates to make the property appealing to potential renters. Look at the condition of other rentals in the area, and compare yours to theirs. This is also a good time to make a list of repairs or updates you’ll likely need to make in the near future to meet your tenants’ needs. For example, an older roof might need to be repaired in the next five to 10 years.
Are you ready to add multifamily investing to your real estate portfolio? Sign up for an investment workshop today, where you’ll learn the ins and outs of real estate investing.