It’s an undoubtedly weird time for multifamily real estate. It has been a hot commodity for a very long time, and the prices of condominiums and land have reached heights they never have before. There may be no more effective wealth-building strategy in the world, aside from inheriting millions of dollars, than real estate investing. And when it comes to generating long-term cash flow, through passive income means, becoming a multifamily investor is often at the top of a redeveloper’s to-do list. Investing in multifamily housing is not simply a “more expensive” version of single-family investing. It’s vital you understand the single vs. multifamily investing paradigm, and keys to success when investing in multifamily properties, so that you’re primed for success, not left out in the cold when it comes time to make a deal.
3 Strategies I Use to Succeed in a Cooling Multifamily (or Any) Market
Acquire value-add opportunities
At its most basic form, a multifamily property is a structure which has more than one unit. Multifamily properties are generally divided into two distinct categorizations:
- Small multifamily properties: Those that house between 2-4 units.
- Large multifamily properties: Those with five or more units.
Within this grouping, there is a wide range of property options available. A multifamily building could be as small as a two-unit duplex at the beach or as large as a 1000-unit co-op downtown. The key differences between the two are in how they are financed and valued. The value of a small multifamily investment property is often ascertained by comps in an area, not unlike that of a single-family property. If you’re shopping for a loan to buy that duplex you’ve had your eye on, a nearby duplex will help determine the loan-to-value (LTV) ratio for financing purposes.
The value of a large multifamily property, however, is determined by the capitalization rate, or as it’s often called, the cap rate – an indication of the rate of return on the property. This number is determined by finding the net operating income of a property and dividing it by the cost of the property. If a large multifamily property brings in $200,000 in yearly rent, has a vacancy rate of five percent, requires $50,000 a year in operating expenses, and costs two million dollars, the cap rate would be seven percent.
Buy for cash flow. Aim for appreciation as a bonus
Areas in which employment rates are on the rise. You don’t need a ton of tech start-up companies in the town, but you do want a nice cross-section of businesses to underpin future development. Meaning areas in which multifamily properties are valued lower than the average income, when compared to nearby markets. Ironically, the “hotter” and “more popular” a region is, the less yield there will be for you, the landlord. The ideal mix is to find a region that is off-the-beaten path, affordable, and filled with plenty of employment potential.
Cater to renters-by-necessity
There’s no beating around the bush, financing a multifamily property requires more capital than a single family property. Having your network and financing options in place beforehand will help greatly. The more units, the more problems. From vacancy rates to tenant issues to government regulations, all those tiny streams of passive income can add up to one huge headache if you don’t have systems put in place to handle them. When you’re a multifamily investor, you’re playing with the big dogs. This means realizing you’ll encounter a lot more competition. You may have to look at things like foreclosed multifamily properties to get started.