Real estate investment has always had a majority of its focus on single-family homes. Understanding real estate trading comes in handy when you know how to acquire, sell, or renovate the property.
But sooner or later, you will want to see a major cash inflow, which is when you should drive your focus towards the multifamily investing portfolio. You may wonder why; the reason is simple multifamily properties helps you increase your income while helping reduce the vacancy rates.
So, where do you begin? Deal making in multifamily properties is one of a kind experience. Here we will share some tips that will help you nail the deal.
Find your half
The ideal way to sift through multifamily properties is to first crunch the numbers and second identifying the properties and how much percentage you would have to invest to become an owner of the property. It is simple, you can do the math by calculating the difference between expenses and expected income.
Anytime you do not have the complete information about the neighborhood, area demand and so on, you simply implement the 50 percent rule. Take the expected income and simply divide it in half, this will give you the estimated expense figure. The total difference between your expenses and income will give you the NOI (net operating income).
Multifamily properties: What to look for?
For other properties, a casual Sunday afternoon with chips and cola sounds good. But when it comes to multifamily properties, you need more effort than simply browsing through the properties. As an investor, you will have to perform due diligence which involves not only looking at the property values—below the market pricing—but also understanding the financial stability of that property.
It is a constant hustle finding the right property, but it is also trying a combination of things that work the best for you. In a typical setting, the search will first begin from finding a good property and comparing the property prices of the same with other similar properties. While these numbers will give the investors a ballpark estimate, it is completely up to their discretion if they want to continue looking further to get better deals.
When it comes to multifamily properties, the first agenda for every investor should be the pricing of the property. Along with this, some other elements can potentially influence the buying decision.
You can follow the simple following checklist, to begin with:
It stands true for every real estate investor, location is of the utmost importance, especially when you are investing in multifamily properties. The more the tenants, the more appealing the property has to be for every renter; because we all know that location is the best-selling criteria. The location that gives high returns, has clean neighborhoods and has been in demand for quite some time now.
The next move will be to evaluate the complete property. As an investor, you will have to understand the number of units that property has, which includes the number of rooms available in every unit. If you are a beginner in the industry, then you should narrow your focus on three distinct kinds of multifamily properties—four-plex, triplex, duplex. These properties work best for beginners because they come with the least amount of risk and at the same time are affordable.
Now that you have understood the property, it is time to understand the income you will be making of the same. Look up online for rental prices of similar properties but ensure that you use these numbers only for reference and apply your understanding for fixing the price.
In the real estate market, the costing differs, especially with the multifamily properties. For instance, the buyer would want to live only in one unit and lease out the others, which will make them eligible for owner-occupied financing. To simplify, it means that the income drawn from the second unit will be considered in the lender’s qualifying ratio. Investors will also have to pay attention to their credit score when sorting through financial options, as this number will have a major impact on the qualifying process. Lenders should always look at three things—down payment, credit score, and debt-to-income ratio.
The biggest question, that many often overlook is, who is selling the property. This is important because the purchase price heavily depends on the motivation of the seller and also it is important for the investors to know their client. Always remember that a property owned by the bank will be sold differently versus a privately owned property, which means there is a cost-saving margin involved.
Multifamily properties: Investing benefits
Also known as MDU (multi-dwelling unit), which means that there is more than one unit within one property. These properties have different naming conventions, but each unit within this property comes with its own living space, bathroom, and kitchen. Although multifamily properties are the least common kind of residential properties, they come with their benefits. Here are some of the advantages of owning this property:
- More money: A single-family property will only generate a single income. However, a multifamily property will generate multiple incomes. Moreover, as an investor, you can choose to live in one unit and rent out the others. These properties are also beneficial for people looking for retirement investment options.
- Value: The greater the income, the greater the property value. Multifamily properties are valued higher because they help generate income from every unit making the income multiple streams, thereby increasing value.
- Scalable: Multifamily properties are scalable. Instead of investing in a single property and witnessing a slow rise in the business, multifamily provides the opportunity to acquire more properties. This option is ideal for people looking to grow their investment portfolios.
For new investors, it should function in a hybrid manner, juggling between multifamily and single-family properties. Also, these options are better when it comes to offsetting the risks associated with the monthly income generation.
Multifamily properties: Can you crack the deal?
You will have to invest a significant amount of time and effort to first acquire the property and later to sell it as well. Ensure that you selling pitch be it written or verbal communication, does not beat around the bush but gets straight to the point highlighting the best-selling features of the property. If done right, multifamily properties can become the best source of income. Always remember that when working on a deal for multifamily properties, never get influenced by external sources and only pay attention to the ROI projections and avoid whatever has to be avoided at all costs.
As an investor always be conscious about what deals to work with and what deals to walk out from, because you know the best where to pull the deal trigger. The real estate market is competitive, competitive to a level where everyone is eyeing the gorgeous city penthouse, an accommodating multifamily property in the city, and a quaint house in the suburbs. This is where pitching for the property and ensuring that it goes through seems like the real struggle these days.
It is about creating a pitch that convinces people to buy. All you have is a couple of moments to capture the buyer’s attention and land a successful introduction. Mastering deal-making of multifamily properties is challenging, but when done right brings worthwhile rewards.