Entering the multifamily real estate space may be the best move you'll ever make as an investor. You don't have to rely on just one tenant to generate cash flow; instead, you create a portfolio of properties, which gives you many income streams.
This guide will detail the major advantages of multifamily real estate, provide you with tips for identifying high-yield areas in multifamily real estate, and present you with the top 5 things you should review when evaluating a potential multifamily real estate investment.
Multifamily properties (duplexes, apartments, etc.) offer many benefits that set them apart from owning a single-family home. Here are some reasons this investing strategy can be a powerful way to grow your wealth.
When you buy a multifamily property, you get paid by each tenant that rents an individual unit as opposed to one rental payment per month. If one of the units becomes vacant, you will still receive rental payments from the other units, which will allow you to continue paying your mortgage and other expenses on time.
The fact that you have multiple rental incomes will provide you with a far more predictable and lower-risk cash flow scenario than would occur when you are renting out a single-family residence.
Lenders view multifamily properties as a less risky investment opportunity due to the numerous potential sources of income associated with each property. Therefore, you may be able to get a loan that is better than with a single-family rental home.
In some cases, lenders will use the projected rent from the multifamily property to determine how large a loan they will approve for you, which could help you accelerate the growth of your real estate portfolio.
Rather than purchasing one home at a time, you can purchase multiple units under a single agreement. The ability to expand your real estate portfolio and your monthly revenue will be substantially faster with this type of acquisition.
Having all your units under one roof will make managing them as a whole more efficient than managing each unit individually. As if they were completely separate properties located throughout various areas.
When you have all your units in the same building, it is much easier to run them efficiently and cost-effectively. For example, there will be only one roof repair when that time comes, one property tax bill each year, and only one insurance policy for all of the rent-producing units.
Since everything can be done from one location, such as lawn care and repairs, your costs per unit will decrease, and your total net operating income will increase compared to managing many different single-family homes in several locations.
Multifamily is an excellent option for those who wish to live within their investment. By using one unit as your residence and collecting rental income from the remaining units, you can significantly reduce your living costs while simultaneously building wealth. This method of using real estate as a vehicle for reducing your living costs is referred to as house hacking.
Image Alt Text: Aerial View of Buildings
Location is just as important as selecting the best multifamily rental property for your investment. Identifying the best cities for multifamily investing can help maximize returns and reduce vacancy risks.
Below are what every property owner should know when evaluating whether a city has the right mix for your multifamily real estate investment.
Focus on areas that have new business openings and people moving in. An active population of working residents continually demands rental housing at a high level.
This is why you should focus on markets with multiple employers, such as technology, education, and healthcare. These markets tend to be less vulnerable to high vacancy rates due to economic diversity.
Renters are generally in areas with high rental rates, typically because of large universities, major companies, and/or high home-ownership costs. With the advantage of location, your aim is to fill your property units as much as possible.
With a strong rental market, you will not have to search for long periods for quality tenants and can focus on having consistent rental income, which is the best way to maximize long-term investment returns.
Before investing in an area, it is wise to determine which cities have laws more beneficial to property owners than others. This can be done by researching local landlord-tenant laws and the eviction process, as well as any local rent control laws and regulations.
Investing in a city with landlord-friendly laws will give you more control over your rental property and reduce your potential for costly lawsuits, creating a smoother, more predictable experience during your real estate investment journey.
The Boston area is a perfect example of the above. The combination of top-tier educational institutions (world-class) and an increasing number of companies in the life science industry creates continuous rental demand for properties.
Additionally, this market is competitive and regulated. That is why you need professional Boston property management. An experienced local manager will help you navigate through the complex Boston rental market issues, such as renter screening, repair, maintenance, and more.
Whether you own one unit or a portfolio of buildings, Boston property management is essential for long-term success.
Your first job is to appraise the house before you sign that contract. This can help you prevent costly errors and ensure the home you're buying supports your financial objectives.
There is an old adage that says, "the three things that matter in real estate are location, location, location." When evaluating neighborhoods, look for low crime rates, quality school districts, and proximity to mass transit, employment opportunities, and services such as grocery stores. The perfect property in a bad location will never perform better than a good property in a highly demanded, great location.
Your cash flow is what keeps your investment alive. Therefore, you need to determine all your rental income and all your expenses. Be sure to include your mortgage, property taxes, insurance, maintenance, repairs, and property management fees. Your objective will be to have rental income exceed total expenses, resulting in a good profit each month.
A professional inspection is absolutely necessary. The home inspector will be able to find issues that are completely hidden from view, such as the roof, foundation, plumbing, and electrical systems.
A major issue like this may require a large amount of money to fix. With an inspection report, you'll be able to get an accurate estimate of how much it will cost to fix all these problems, which could help you negotiate the sale price with the seller.
Does the local rental market appear to be improving or weakening? Examine vacancy rates, average rents, and the number of recent developments in your local market. Also, high vacancy rates or a surge of new apartment buildings may both reduce your ability to attract potential renters. As such, investing in markets with stable or rising demand will protect you from extended periods of vacancy.
Cap rates are an essential factor to compare one investment property with another. The cap rate provides an idea of what a given investment property could earn as a return on your money compared to other investments.
However, the cap rate does not account for the cost of borrowing to purchase the investment property. Therefore, it is simply the annual income from the property after subtracting all expenses, divided by the total amount paid for the investment property. In general, a higher cap rate will yield a higher return; however, it typically entails a higher level of risk.
Multifamily real estate offers an effective way to build wealth through diversified income streams and opportunities for long-term growth.
Success depends on applying discipline, including selecting a high-demand location that meets your criteria and carefully examining all financial and physical aspects of each property.
With the use of knowledgeable decision-making and competent property management, you can manage obstacles and maximize the potential of your multifamily real estate investments and achieve significant returns for many years.
