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.
