Instead of hiding your extra cash under your mattress, it’s usually a better idea to have your money work for you through investments.
And while you can play the stock market or invest in your high school friend Carol’s magic health drink that promises rock hard abs in two weeks, a safer and more lucrative bet is investing your money in real estate.
One real estate investment many are turning to make bank is multi-family real estate. By working with an experienced real estate agent you get quick access to the best investment opportunities.
Here’s what you need to know about getting started in multi-family real estate.
What Is Multi-Family Real Estate?
Like the name suggests, multi-family real estate is property with more than one living unit, each with their own kitchen and bathroom. This can be an entire apartment complex with dozens of units or can be a smaller property with only a few units like a duplex, triplex, or quadplex.
The main incentive with multi-family real estate is the potential to have multiple sources of passive income from tenants to build your net worth faster. Investing in multi-family property can be a great venture, but before jumping in, there are a few things to consider.
5 Things to Know Before You Invest in Multi-Family Real Estate
1. Calculate Your Potential Income
Naturally, you’ll want to see a profit from your multi-family real estate investment and knowing how to calculate your potential income can help you decide which property is a good choice and which you should pass over.
To estimate your potential income, take the total amount of expected income from rent, storage and parking fees, and subtract the amount for repair and maintenance costs. This difference is your net operating income (NOI).
Once you know your NOI, subtract from it your monthly mortgage payment to get your expected monthly cash flow — the amount that will go into your pocket each month.
And if you’re lacking some key information to calculate your NOI, follow the 50% rule where you take your expected income and halve it to estimate how much you’ll spend on expenses, not including your mortgage.
One final number you’ll want to calculate is your capitalization rate, or cap rate, which determines how quickly you’ll see a return on investment. To find this percentage take your NOI and multiply it by 12 for the annual number, then divide by your total mortgage.
A high cap rate means higher risk and higher return, while a low cap rate means lower risk and lower return. For multi-family investments aim for a 10% to 15% cap rate.
2. Plan for Expected and Unexpected Costs
While your expenses will vary depending on the size, location, and condition of your property investment, some of the upfront costs you can plan for include a down payment, closing costs, inspections, and repair costs.
Also plan for monthly expenses such as property insurance, maintenance services, landscaping, security, and a salary if you hire a property manager.
It’s smart to keep an emergency fund for unexpected costs such as storm damage, pipes bursting, or if you find yourself with extensive vacancies.
3. Prepare to Manage Tenants
Along with managing the property itself, you’ll have to also manage the residents. And as you know, people can be feisty. While hopefully everything will go smoothly, be prepared to handle a slew of problems.
For instance, you may have to negotiate tenant complaints such as loud neighbors or unauthorized behavior such as smoking in the building. You’ll also need a system in place to collect rent and manage maintenance repair requests.
Be prepared to deal with tenants paying late rent or missing payments altogether, and in the worst case scenario, how the process works for evicting a tenant.
If you’re not entirely thrilled with the idea of managing tenants, you’ll want to work into your budget hiring a property manager who can deal with the day to day and handle any issues that crop up.
4. Choose a Great Multi-Family Property
Especially if you’re new to the multi-family real estate game, choosing the right property is imperative.
One of the most important factors when choosing a property is the location. If you’re located in a sought after neighborhood you’ll most likely have less trouble with vacancies or tenants paying rent on time. Additionally, look at how the property is classified — either A, B, C, or D.
An A classification indicates the property is in a good location and the building’s condition is in good shape requiring less repairs and upkeep on your part. It’s recommended for first-time investors to seek out either A or B classified properties until you gain more experience.
Do your homework. Gather as much information as possible checking the property’s history of rent prices, previous profit, cost for maintenance, and estimation of ongoing repairs. Also talk with each tenant to gain insight into any potential issues with the property or problems they’ve experienced.
5. Obtain Financing for Multi-Family Properties
Securing financing for multi-family real estate is actually easier than you think. Many lenders find multi-family properties less risky than single-family homes as there’s a lower vacancy rate.
For example, if a four unit multi-family property has a vacancy, it’s still 75% full, bringing in income, while if a single-family home has a vacancy, it’s earning nothing.
Typically, lenders require at least a 20% down payment for multi-family real estate, however, if you live in one of the units you’ll be eligible for owner-occupied financing with a smaller down payment saving you upfront costs.
And if you live in a unit, you’ll also be saving on another down payment and mortgage for another residence.
A Clever Partner Agent Can Help You Invest
Knowing which multi-family property is right to invest in can be tricky, especially if you’re just getting into the real estate investing game. With a Clever Partner Agent, they’ll help assess your budget and goals to find you an amazing investment property that meets all your needs.
A Partner Agent will help you navigate your specific housing market and know when to jump on a good property. Clever Partner Agents also offer on-demand showings so you can view buildings and put in an offer quickly.
Contact Clever to connect with an experienced Partner Agent and learn more.