Key Takeaways
- Multifamily real estate investing can be a great move for those new to the game.
- New investors should invest in multifamily real estate if they want to cut overhead costs, mitigate risk and increase profit margins.
- A good multifamily investment deal can be a great way to dip your feet into the world of real estate investing.
Multifamily real estate investing has been the road to financial freedom for many seasoned investors. Commonly comprised of properties with two or more units, such as duplexes and apartments, this type of investment seeks to maximize revenues by leveraging multiple tenants for multiple sources of income. For ambitious investors looking to fast-track their real estate investment career, I know no better exit strategy than multifamily property investing, as these larger investments offer long-term business growth with potential scalability.
The following is a roadmap for investing in multifamily properties and tips for finding and acquiring these types of deals:
How To Buy Multifamily Property The Right Way
Casual window shopping for real estate is nice to do on a Sunday afternoon, but multifamily investing requires much more than browsing your local open house. For investors, it requires a reasonable amount of due diligence that will not only encompass locating a property below market value, but also commencing efforts to analyze and assess its financial sensibility.
Along with the actual hustle of finding so-called property, it takes a combination of things to ensure a quality real estate deal. In most cases, the search will begin by locating a potential property and then comparing purchase prices, short-and-long term costs, and rental estimates. While this will generally forecast a ballpark figure of what investors can expect, it’s up to them to continue their due diligence and refine those numbers to ensure success. Because investing in multifamily properties requires a little more attention than other real estate deals, an investor’s first concern should always be on the numbers. These financial figures will not only expose the true value of an investment property, but reveal its bottom line. In addition to the numbers, there is a selection of underlying factors that can, and will, influence multifamily investing.
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How To Evaluate A Multifamily Investment Property
For those looking to invest in a multifamily investment deal, the search begins with the following checklist:
- The Location: It’s been said many times before, but location is of the utmost importance for real estate investors, and even more so when investing in multifamily properties. With more tenants, each and every unit will need to appeal to renters; location is generally the most desired criteria. When investing in multifamily properties, investors should pay attention to high-growth, high-yield areas where properties are in high demand, well-maintained neighborhoods.
- The Total Number of Units: The next step is to evaluate the property as a whole. Investors should take into consideration the amount of units on the property, including the number of rooms in each unit. Beginner investors should begin their real estate search focused on three types of multifamily properties: the duplex (two units), triplex (three units), and four-plex (four units). These types of properties not only offer the most upside with the least amount of risk for beginner investors, but they are generally more affordable.
- The Potential Income: The next step is determining the income a property can accrue. Sites like Rentometer.com or Craigslist are helpful sources for verifying rental prices and income, but investors should practice due diligence, taking everything into consideration. For those looking to remain conservative, the 50 percent rule is a general recommendation: 50 percent of a real estate investment’s income should be spent on expenses — not the mortgage. While too mild of a strategy for some, it’s a good rule of thumb for beginner investors.
- The Costs: Every situation will differ when financing real estate, especially multifamily properties. For example, the investor may choose to live in one of the units while renting out the other, which would allow them to qualify for owner-occupied financing. This means the income from the second unit will be factored into the lender’s qualifying ratio. Investors need to also consider their credit score when contemplating financing options, as this important number will greatly influence the qualifying process. In general, lenders will look at three components: credit, debt-to-income ratio, and down payment.
- The Seller: There is one more question when evaluating potential multifamily properties is: who’s selling the place? Because the purchase price can vary greatly depending on the seller and their motivation, it’s imperative for investors to gain an understanding of who they’re dealing with. A bank-owned property is dealt with much differently than a for-sale-by-owner property, which means there’s potential for cost savings.
How To Find Multifamily Properties For Sale
- HUD: One of the best ways to score a multifamily investment at a discount is through the Housing of Urban Department (HUD) with a program called Multifamily Property Disposition. This program is not only responsible for foreclosed HUD-held multifamily properties, but they manage and sell them as well. Every new investor should begin their investment in multifamily properties here.
- MLS: The Multiple Listings Service (MLS) is a real estate investor’s dream come true. This extensive directory is a reliable source to find multifamily properties for sale across the nation, accompanied with in-depth details on every aspect of a property. While free to browse, the MLS does require registration in order to proceed further into property details.
- Redfin/Zillow: Anyone with a computer and access to the Internet should be utilizing these online sites when searching for multifamily properties. Sites like Redfin and Zillow provide a substantial amount of information with each property listing — that is both accurate and informative for investors. There is also an abundance of information on past, current and future market trends in every U.S. geographical area.
- Alternatives: In the game of real estate investment there are always alternative options for finding properties, and bandit signs are one of them. These innovative and attention-seeking signs serve to attract potential multifamily property owners who may be considering a sale. They aren’t necessarily there to convince people, but rather entice prospective sellers who are on the fence about selling. With a proposition and phone number available, bandit signs can serve as an excellent do-it-yourself resource to finding multifamily properties.
Once an investor has a clear vision of what they’re looking for, the next part is to go out and find it. Unlike the investment days of old, technology today has granted investors an invaluable resource that provides up-to-date and highly detailed information with the click of a button: the Internet. The majority of today’s research for real estate investment is accomplished using the Internet, with investors taking full advantage of these online super tools. It should be noted that an investor’s due diligence when investing in multifamily properties shouldn’t conclude with online research only, but rather serve as the prelude in the research process.
Financing Multifamily Investments:
Finally, with the previous steps complete, investors should begin considering residential redevelopment financing options for their multifamily investment. It should be noted that one’s ability to finance a property, including the total amount of money loaned and contract terms, will center around several key factors: credit score, debt to income ratio, and amount of money for a down payment. While there are many scenarios the apply to financing a multifamily investment, the following will outline the most common approach: owner-occupancy investment.
As the name suggests, owner-occupied investing means the investor occupies one of the units on the property while simultaneously renting out the other units. In most cases, the investor will also serve as the landlord. The perk of this exit strategy for investors is it qualifies under the FHA loan guidelines. This federally insured loan program means investors only need to put down 3.5 percent of the purchase price for a down payment, which significantly alleviates the initial costs of investing. In addition, this approach allows up to six percent sellers assist, which means the buyer can wrap the closing costs into the loan, rather than paying for it upfront.
Generally speaking, those looking to invest in multifamily properties should seek to not only meet the guidelines for FHA loans, but conventional mortgages as well. In some cases, investors can qualify for a loan using the rental income from additional units. However, most lenders will require renters to sign a lease in order for rental payments to be verified, otherwise the investor will need to qualify for the mortgage on the entire multifamily property. In addition, investors cannot have a non-occupying co-signer for an FHA mortgage on a multifamily property.
Multifamily real estate investing requires a considerable amount of time and effort to get started. Done right, multifamily properties can be an excellence source for passive income retirement investing. However, it’s important to understand the ins and outs of multifamily investments first, including how to find and obtain these properties. In the end, this will only enhance the buying process for investors.
For more on how multifamily real estate investing compares to single family investing, check out part one of this series.
