Investing in MULTIfamily homes is a great idea for anyone looking to build their portfolio quickly. By choosing a larger home like a duplex or triplex, you can get a large stream of income while dealing with only a few properties. If they are kept in great condition then your residents will stay as long as they can which gives you a solid and dependable flow of revenue.
Let’s have a look at some of the most important things to consider when buying a MULTIfamily home.
If you have any worries or concerns about investing in multi-unit properties then experts suggest starting with a building that has two to four units instead of a large apartment building. This helps you get a better grip on what it’s like to handle the renting and maintaining of a MULTIfamily building and it will keep your starting costs much lower. These homes are also available on the real estate market more often than apartments so it will be easy for you to find a great one.
A duplex is a great idea to get your feet wet and they are usually available for a decent price. You can also consider renovating a single-family home into a duplex if you can find one that doesn’t require any extra renovations.
Consider occupying the home with your renters
There are many benefits to living in your MULTIfamily unit so let’s go over a few of them. If you’re renting a place already then this will give you extra income in your personal budget while allowing you to work as a property manager and maintain the quality of the building. You can also apply for more loans with better rates if you choose to occupy the MULTIfamily unit instead of just owning it.
Crunch the numbers
The easiest way to see if your MULTIfamily unit will give you a great return is by checking the NOI (net operating income). To find this number, use your building’s approximate rental income and minus the building’s maintenance costs.
For example, if your building has 4 units that are giving you $6000 in rental income and another $400 in parking lot fees and your operating costs (repairs, maintenance, dumpster fees, etc) are around $2400 then your NOI will be $4000.
To figure out how much money will be going directly to you, minus your mortgage cost from your NOI, and this will tell you whether or not the property is worth the investment for you. You might have other costs to factor in such as loan costs or sudden major repairs so make sure you keep your income level at a decent range. If it’s above the rent that your tenants are paying then your investment will more than likely give you a good return within a decent time.
Keep your cap on
Now that you’ve figured out your NOI and your property’s income, you should see whether or not it’s worth the investment for you and your own personal budget. This means figuring out your capitalization rate (also called a cap rate) which is the indication of how long it will take you to get a return on your investment.
To check your cap rate, Take your NOI ($4000 in this example) and multiply it by 12 to show you a year’s worth of income. Next, take this number and divide it by the current market value of the home ($48,000 divided by $450,000 will give you a 10.6% cap rate).
In general, sticking with a cap rate between 5% and 10% is a great idea for safe investing. A high cap rate indicates a high risk with high returns while a low cap rate will give you less of a risk but a lower reward. The home in our example is a great investment but adjust the numbers slightly and you might find yourself taking a gamble.
If your house was in the $1.5 million range and you were getting the same amount for rent and fees then your cap rate would be 3%. On the other end, a home with a market value of $125,000 will give you a cap rate of 38%. While the high cap rate might seem great, a low-cost property will likely require updates and repairs so the numbers don’t show everything.
Apply for a loan
Depending on where you are, smaller units quality for specific loans that are available to anyone who wants to create a moderately priced rental unit. If you’re living on one of the units then make sure to let the bank know when you’re applying because it might affect the amount you qualify for or your payments.
Banks are generally in favor of loaning if you can prove that you’ll receive a great return on the investment so coming in with all your numbers figured out is the best way to go. Make sure to also let your bank know what you plan on doing with the property because there are different types of loans for different types of building purchases. Let’s take a quick look at the different loans you might qualify for.
- Conventional Multifamily Mortgage
This allows you to purchase up to 4 units with a minimum down payment of 20%. The borrowers are also required to have good credit, cash reserves, rent rolls for the property, and provide two years’ worth of tax returns. This is a great option for long-term investors that want to keep an already well-maintained property in their portfolio for a while.
- Government-backed Multifamily Financing
There are multiple loans that can be provided from government-backed financing and they each have their own specific requirements. These loans are great for anyone looking to occupy.
The Fannie Mae & Freddie Mac requirements include a minimum of two units, a credit score of 650, and 3 months of cash reserves. The FHA requirements include a minimum of 5 units, a 650 credit score, and 9 months minimum of cash reserves.
- Portfolio Loan
For those who want to improve their investment portfolio, this is the best option for you to look at. These loans will have a slightly higher rate than others based on the property’s return rate. The better the return rate, the more likely you are to get a lower rate from your bank which means your credit score will matter less but you’ll need higher cash reserves. The requirements for these loans include a minimum of 2 units, a credit score of 600, and a minimum of 9 months cash reserves.
- Short-term Multifamily Financing
Anyone who’s looking to flip a rental property will prefer this loan option due to its ability to close quickly. Most of the rates and options are based on whether it will be a bridge loan to a larger loan or a hard money loan. You will also need to have previous reno experience to show that the bank’s investment won’t be going down the tubes.
Look for a great location
Multi-unit homes do well in areas that are close to school and amenities so keep the location in mind when you’re purchasing. There are plenty of websites that will give you a good idea of the neighborhood’s crime rate, walkability, and nearby school ratings.
If you’re looking at a property in a school-centric town then make sure you look at the risks and rewards before you invest in a home that could be student housing. These properties are in high demand so you are able to charge a larger amount for rent but you should be aware that these buildings will likely require more maintenance than other properties plus they will likely be unoccupied for a few months out of the year.
Consider some help
If you choose to invest in multiple homes then make sure you’re aware of all the maintenance that will go with owning them. Things will regularly need to be repaired, cleaned, and maintained so consider looking into a property manager if you find yourself getting behind. A trusted tenant who’s willing to work around the property in exchange for discounted or free rent will give you one less thing to worry about.
For larger issues like major repairs, try keeping a trusted contractor in your back pocket and use them for as many repairs as you can. Opening up new contracts with unfamiliar workers can leave you with poorly done work and unexpected prices. Some contractors work for investors and real estate professionals for a discounted rate so stick with one company for reliable work at a good cost.
There are so many things to check out and consider before you make the jump into MULTIfamily real estate so make sure you check off all the boxes before you invest. A MULTIfamily home can be a great addition to your investment portfolio if you find the one that’s right for you, so do as much research as you can and you’re bound to have success.