How To Invest In Multi-Family Real Estate

 

How to invest in multi-family real estate begins with learning real estate investor’s language.

Learn how to speak like an investor.

 

How to Learn to Speak like a Real Estate Investor

 

Words like CAP Rates, Cash-On-Cash Returns, Net Present Value, ROI, and 1031 Exchanges must become first-hand for you.

Past blog posts here help you understand most of these real estate investor terms:

Capitalization Rate (CAP);

Return on Investment (ROI); and

1031 Exchanges

 

How to make a Market Analysis before Investing

 

Know your locations well to find the best investment properties.

This requires performing a Comparable Market Analysis (CMA) to compare sales prices on similar properties in the same location. But, it takes time and skill to do a proper CMA.

If you can’t do a CMA on your own. Work with an experienced Realtor specializing in multi-family investments to perform a CMA for you. Find a Realtor who helps investors.

We published a post explaining “How Real Estate Agents Help Investors”. Here

 

How to Calculate Good Deals and RE Investment Profits

 

After learning all the important terms you need to learn the math.

You must calculate your estimated costs, rental income, and net income before deciding to make an investment. Thus, instead of an impulse investment, it becomes a calculated risk.

Investors depending on gut feelings and impulses always fail. But, since all investments involve risks, taking calculated risks increases your chance for success.

If math is not your forte, online calculators exist to help you make fast calculations. Read this Bigger Pockets guide providing links to online calculators and other web tools for evaluating real estate investment deals. Here

 

How To Invest In Multi-Family Real Estate

 

Once you learn the language and how to calculate loss and profits and returns on investments you must understand the benefits of multifamily investments.

 

Benefits of Multifamily Investments

 

Many benefits exist for buying one multi-family building than many single apartment units. Most rental investors start out by buying condo units in different buildings or homes scattered around town.

But, you need to consider multifamily properties instead. Let’s explore the benefits.

 

The Economy of Scale

 

After realizing that each single-family home rental or duplex requires separate maintenance, the economy of scale becomes beneficial.

The “economy of scale” best described as all units in one location lowers the per-unit expenses.

This means instead of many lawns to mow and paying several garbage bills; paying only one garbage bill and mowing one lawn saves time and costs.

Also, no more driving from one location to several more to maintain or repair items. Only one roof to maintain. Easier to collect rents at one location instead of several.

The Economy of Scale makes it easier to manage your investment.

 

Spread Risks with More Units

 

A single-family home becoming vacant for two or more months means paying the mortgage and other expenses with no income generation.

But, owning a 4-plex when one tenant vacates means still having three rents coming in to cover expenses.

Multifamily properties lower the risks of a vacancy cutting into your ability to pay the expense.

 

Less Work to Purchase

 

It takes more time and expenses to buy 10 single-family homes than one 10-unit building.

Think about paying for 10 escrows instead of one. Also, the time to visit many homes before putting offers on 10 homes.

An easier, less stress life exists when you buy one building instead of 10 homes. Negotiate with one owner instead of 10 owners. Attend one closing instead of 10. This saves you time and expense.

 

Less Competition

 

Finding one property to buy instead of competing against other buyers and offers for 10 or more homes reduces the competition.

Single homes bring many potential buyers all competing against each other. Yet, pooling your money into one multi-family property lessens the competition. That’s because the sales price and down payment are larger for a multifamily property than a single house.

 

Forced Appreciation

 

People buy single-family homes using the sales approach. They rely on market “comps” to determine a property’s value. What a 2-bedroom, 2-bath sell for? Comparing the home to similar homes in the same market.

In contrast, multi-family properties sell using the income approach. Read about “How to Value Multi-Properties”. Here

The advantage of using the income approach over the “comp” comes down to your control to force appreciation. No waiting on market forces to raise the value. Instead, you increase the Net Operating Income (NOI) to raise appreciation.

Read “How to Raise Appreciation”. Here

Employing sound repositioning strategies for your investments generates wealth much faster than single-family rentals.

 

Bonus – Tax Savings and Asset Protection

 

Additional benefits for multi-family investors include tax savings. Learn about “Tax Savings Tips for Real Estate Investors in 2019”. Here

Also, Learn “How to Protect Your Multifamily Investments from Lawsuits”. Here

 

Got Questions on How To Invest In Multi-Family Real Estate?

 

How Big for Your First Multi-Family Investment?

 

Unless you’re a millionaire or got access to large commercial loans your first multifamily investment depends upon these factors:

 

Experience

 

Little or no experience with making real estate investments requires starting small. Start with a duplex, triplex, or a 4-plex.

After your first year, you’ll learn how to collect rents, deal with people’s quirks, how your renters behave as neighbors with your other renters, and how to deal with repairs and maintenance issues:

• Learn “Why Real Estate Rental Investors Fail”. Here
• Also, learn “Rental Investors Share Secrets”. Here
• You’ll find “Property Tips for Rental Owners” useful. Here

 

Comfort Level

 

Look at yourself as a rookie in the NBA or NFL learning the ropes during the first year. The second-year “jump” after learning the nuances of the pro ball system becomes essential to survive.

Your level of comfort dealing with renters in a multifamily property determines the amount you expand in the future.

Feel comfortable owning a 4-plex? Why not buy a 10-unit property? After all, it’s just as hard to purchase a 10 unit property as a 4-plex.

Also, “Learn How to Become a Successful Landlord” dealing with the right mindset. Here

 

Capital

 

Where does the money for your purchases come from? Capital determines whether you buy small or big.

Experienced real estate investors learn how to raise capital through obtaining private money, venture capital, or taking advantage of seller financing.

Learn “How to Invest in Rental Properties with Little Money”. Here

 

Partners

 

Find experienced real estate investors as partners to learn from and to raise capital. This eases the stress of no experience and little personal capital. It also spreads the risks in case of failure.

Banks become more likely to fund a multifamily investment when two or more investors each sign a personal guarantee.

However, make sure all partners share the same goals and vision for the investment. A partner wanting to buy and flip will not gel with a partner wanting to hold for future cash flow.

 

Make a Business Plan

 

Like any business investment, a Business Plan becomes essential. Your business plan not only highlights the experiences and successes of you and your partners along with details of how the investors profit from the investment (like an ROI).

Banks expect a business plan before loaning funds for multifamily investments.

 

You’re Goal

 

Decide your priorities for choosing multi-family investments. Do you wish to supplement your existing income? Or, use it for your retirement income? Just need a little spending money?

Establishing your goal before making your first multifamily investment prepares your future.

 

Work with an Experienced Multifamily Realtor

 

As you read here, it’s not easy becoming a multifamily investor.

But, working with an experienced multifamily Realtor saves you time and money. That’s because your Realtor knows the location and uses MLS and other data to find the best multifamily properties for you to purchase.

Contact Us to hook up with one of our experienced multifamily Realtors.

Steven Rich, MBA – Guest Blogger

 

We hope you enjoyed “how to invest in multi-family real estate”. Check out more of our blog pages here.

 

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