Real estate is popular among investors thanks to the many types of properties and different opportunities available. One type of real estate investment that’s especially good for beginners is multifamily real estate investing. In fact, multifamily investing is relatively simple compared to other real estate investments.
But aside from being easier, there are other reasons why investing in multifamily real estate is worth it. Here’s what you need to know about this type of real estate investment.
What Is Multifamily Real Estate?
Multifamily real estate refers to multi-unit homes. It’s any residential property having more than a single dwelling unit. Apartment complexes or buildings with multiple rentable living spaces are some examples of multifamily properties. Aside from apartment complexes, multifamily homes can be duplexes, triplexes, and condominiums.
Beginning investors benefit from multifamily real estate because it provides broad investment properties.
How Multifamily Real Estate Works
There’s more financing required with multifamily properties, so if you’re a first-time investor, starting with two to four multifamily units can be less risky.
When looking at a multifamily property with tenants, it’s essential to know their payment history first. Informing yourself of the current rent prices can also help before making an offer. You can expect a back-and-forth negotiation with the property seller’s agent, so be prepared to compromise.
If the multifamily property doesn’t have tenants, the first step is to find them so you can begin to collect monthly rent. Make sure to invest in a property in a great location that attracts renters. The rent prices should surpass all costs. If a tenant disagrees with the price, you can lower it to reach the break-even point.
Over time, you can increase the rent and expand your profits. The property can also appreciate in the future, giving you higher returns.
The Pros of Investing in Multifamily Real Estate
There are multiple benefits of investing in multifamily real estate over single-family real estate, including:
· Living in one of the units yourself
· Lower maintenance costs (if you hire a property manager)
· Mitigating vacancy risks with multiple tenants
· More financing options than single-family units
· Diversification of your investment portfolio
· A steadier cash flow
· A passive income (if you hire a property manager to manage your tenants)
· Upscaling the property’s value by making improvements and repairs
· More tax benefits
· More straightforward than commercial real estate
· Blanket insurance policies for all the units
The Cons of Investing in Multifamily Real Estate
While investing in multifamily real estate has excellent advantages, it also has its imperfections. A few of these disadvantages include:
· Greater initial expense and more expensive down payment requirements
· More units to manage, which can take up most of your time
· The responsibility of making repairs if you choose not to hire a property manager
· A competitive market due to the low supply of multifamily properties
What You Should Consider before Investing
It’s best to be prepared before investing in multifamily real estate. Here are essential factors to consider before starting your investment.
– Location
Research the location because it greatly affects rent prices and your potential to find new tenants. Getting a great location is the most significant component of investing in real estate.
– Cap Rate
The cap rate helps you identify a rough estimate of the return rate for a property. To get this, divide the income of net operations by the property cost.
The cap rate is a helpful tool to let you compare different investment opportunities.
– Number of Units
The more units you have, the more potential tenants and the higher the rent prices. You should always find the perfect balance between the number of units you desire and your available budget.
– The Costs
Always assess all costs. A rough estimate will help you gauge the cash flow of the property.
– The Property’s Seller
Knowing the seller’s history will help you identify whether the property is good for selling. Check how the seller treats their tenants and other properties. Doing this also prevents you from getting involved in legal issues in the future.
Tips for Getting Started Investing in Multifamily Real Estate
Investing in multifamily real estate can be your ticket to having a successful investing career. However, there are a few things you’ll want to keep in mind.
– Find your 50 percent
This means having a roughly expected income and dividing it into two. One half is your estimated expense cost, while the other half is your expected income.
– Calculate and predict your cash flow
Don’t forget to include a rough estimate of the mortgage payments. Predicting your cash flow helps determine whether the investment is worth your time.
– Know your capitalization rate
This is the rate of how fast you’ll get a return on investment. The higher the cap rate, the more risks and the higher returns there are. Ideally, the cap rate should be between the 5 percent to 10 percent range.