Investing in Multifamily real estate can be very rewarding. However, there are many things to take into consideration with this type of investment. We will share 10 tips for multifamily investing with you and more.
If you are investing or thinking of investing in multifamily real estate, you probably have many questions and many you might not have thought of. This article will help you learn all you need to know about multifamily real estate investing.
How to Decide What Type of Multifamily Investment to Make
When investing in multifamily real estate one needs to investigate the potential income generated, maintenance to be performed, and the location of the multifamily dwelling. The number of units the multifamily property has will also influence the potential of the investment.
Deciding to buy a multifamily dwelling can be exciting and nerve-wracking, especially if you do not have any experience in rental real estate. There are many things you should take into account when investing in a multifamily complex. These include:
- Having good credit and job history.
- Deciding how you will invest in multifamily real estate.
- How location can affect your investment.
- What the difference is between commercial or residential multifamily property is.
- Knowing the average rental prices in the neighborhood.
- Figuring out the potential cash flow.
- How much money will be needed for repairs and maintenance on an ongoing basis?
- Deciding if you need property management.
- Learning about tax breaks and incentives.
- Benefits of an owner-occupied dwelling.
We will explore the above list in more depth in this article. We will also explore other forms of real estate investing, such as MCIO and REIT, that do not require purchasing a multifamily unit to invest in this form of real estate.
How Do I Start Investing in Multifamily Properties?
To start investing in multifamily properties, have your finances in order. Search for the physical multifamily property, or research other forms of investing right for your needs. For new investors, it is best to start small and work your way up.
There are three ways to invest in multifamily properties.
- You can buy and own the property outright; in this way, you are directly involved in everything that happens with the property. You know what kind of condition it is in, and invest your physical time and resources into the multifamily residence.
- Invest through crowdfunding.
- Invest through a multifamily real estate trust
These involve different levels of involvement as well as risks. You will need to decide how involved you wish to be with your investment. Answer these questions to help you determine how you want to invest:
- Will you want to live in the multifamily complex?
- Do you just buy it and rent the entire place out?
- Do you want to have a partnership with someone else?
- Would you like to just invest your money in a fund and let someone else do the work?
Once you have decided how you want to invest, you will need to figure out what type of multifamily real estate you want.
You should also make your intention known that you want to invest in multifamily real estate. He says not to be a “secret investor.” Instead, you want everyone to know what you want and what you are looking for. In this way, others will be thinking of you and might let you know when they hear something.
What is the Difference Between Commercial and Residential Property?
The commercial multifamily property consists of more than 5 units and can be spread across more than one lot. The residential multifamily property consists of two to five units on the same lot.
Residential multifamily will have no more than five units on a single lot. It is one of the best types of multifamily dwellings to invest in because these are the least expensive to buy initially, and you get better loan rates. You are more likely to get a 30-year fixed-rate mortgage with a residential multifamily home.
Commercial multifamily investments usually require a five to seven-year loan with a balloon payment or the possibility of refinancing your investment. Unfortunately, there have been devastating issues with refinancing in the past, such as the 2008 housing market crash.
You will typically need to spend more of your own money when investing in commercial multifamily real estate. Kevin says this is usually a 30 to 40 percent down payment, and then the loan will cover the rest.
Can You Have a Partner When Investing in Real Estate?
You can form a real estate partnership with another investor. This is known as RELP, or real estate limited partnership agreement. More often investors decide to go with a limited liability company, limited liability partnership, or a corporation.
If you decide to have a RELP partnership, you will be equally responsible for the investment and share the profits equally. By partnering with someone else you will first need to make sure that you are both financially able to invest in the real estate at hand.
According to Roof Stock, it is much more common for investors to partner with “limited or passive partners” and create a “real estate partner entity.” Such as an:
- LLC
- LLP
- Corporation.
A partnership takes some of the responsibility off of your shoulders. There are two main types of partnership, active and passive. Active partners will have equal responsibility in the investment. Passive partnerships are formed to help assist with funds and managing a new investment.
The benefits of partnership offer the investors the advantage of sharing the responsibility of income or loss generated by the investment. These numbers are used for tax purposes. Having a partnership also adds a bit of “legal protection” for other businesses they may own separately.
Before deciding on making a partnership agreement, it is highly recommended that you seek legal counsel. An attorney can help you with your decision as well as draw up the agreement.
How to Deal With Newly Inherited Tenants
When buying a multifamily residence and inheriting existing tenants, check the original lease agreements and verify all credit and background checks on the tenants. Then, write up a month-to-month agreement for the tenants to sign before making a more permanent lease agreement.
Do not just accept the tenants. Make sure you ask for a “tenant estoppel certificate for each tenant.” This way you will know what they normally pay and how. You will also need to have original credit screenings and move-in walk-throughs.
Having these in hand will allow you to collect the deposits for any damages incurred should a tenant leave after you have ownership. You can also give the tenants a new application if you do not like how the previous owner screened them.
What Should I Look for in a Multifamily Investment Property?
When looking to buy multifamily real estate, look for a place that is in a decent neighborhood with easy access to thoroughfares or freeways. The monthly income generated should not be outrageous, yet it should not be too low either.
Looking for a multi-unit property is not something done leisurely, but it won’t take all of your time either. Choose the areas you like most for the investment and research the properties for sale in that area.
The first few times of looking, you will weed out what you do not want or cannot afford. Having an agent helping you is also a great idea. The agent will be able to contact you with new listings in your criteria.
When you view the property, make a note of any updates and the age of the building. The older things are in the units the more likely you will need to spend time and money updating the premises.
This is especially true if the place was built before 1970. Electrical wiring may be outdated and dangerous. There may also be issues with lead water pipes or water pipes that require replacing due to age. This is also an important reason to have inspections done before purchase.
Here are some pointers for your search:
- Search for a property that is in a good neighborhood.
- Look at dwellings that are the least expensive but in top condition
- View the properties in person
- Talk with tenants if possible to find out if there are a lot of maintenance issues and more.
This will be a cash-inducing investment, and done correctly, will support you fully. You want to make sure the rent you will be charging your tenants will not be more than they can afford. However, you need to charge enough to cover all outgoing expenses while earning money.
When interviewing new tenants, follow the 30% rule when it comes to their income. This rule states that the renter should not pay more than thirty percent of their income on rent. Many apartment complexes will state this rule upfront when advertising an available unit, giving prospective renters a chance to figure out if they can afford to live there.
Why Location Matters When Investing in Multifamily Real Estate
Where you invest in your multifamily real estate will have a lot to do with how much money you need to invest and how much return you will receive quickly. You need to find a good neighborhood where people want to live.
Finding a property that is somewhere between an A-plus property in a high-end neighborhood and a C-class property in a low-end neighborhood is a good place to start.
This is because the higher the neighborhood class, the more expensive it will be to purchase. A high-class multifamily complex will most likely be newer; the rent charged will reflect this, as will the upkeep. A low-class property may have really good cash flow, but there will also need to be a lot of management and probably maintenance.
You will need to deal with people whose credit is not great in a lower-class multifamily complex as well. This could be difficult as those with problem credit often have trouble paying the rent. These tenants are also more likely to move around a lot.
If you find a property somewhere in the middle, you will most likely find a fairly even cash flow with few credit and payment issues from the tenants. The middle property will probably need some work done, but it will not be as extensive as the lower class, older multifamily unit.
Will I Need to Hire Property Management?
Multifamily property often requires extra management. This is especially true when buying a larger complex or one in a low-income neighborhood. Even if you decide to live on the premises, you should look into property management companies.
Property management will help you keep all of the cash flow from tenants in order. Their service will interact with the tenants on your behalf, helping to ensure that lease agreements are dealt with within a timely manner and that you receive your rent when it is due.
You may also need groundskeepers and maintenance people to help with the multifamily property. If you opt to have management that resides on the property, this can be of added benefit, as they will be on the premises to repair and care for the units and the land when it is needed.
If you are buying a small multifamily residence such as a duplex or triplex and planning on living there as well, you might decide that you do not need extra management. This is fine, especially if you are handy and well organized.
However, it is still recommended that you look into a property management company to learn what they offer and how much they cost to help with the property. At some point in time, you may decide it is worth your money and time to have the help.
Is Residential Multifamily Property More Profitable than Commercial?
Commercial properties are more profitable than residential multifamily properties due to the amount of money generated from more units. Commercial properties also involve more risk than residential properties.
When there are more family units, you will collect more money in rent monthly than if you own residential property. However, this may be offset by other necessary costs. These added costs can include:
- Higher maintenance bills
- Higher management fees
- Larger repair fees
- A larger initial investment
Other factors to look at when buying a commercial property are the influx of visitors daily. There will be a greater potential for crime and other property damages. If you are not generating a large enough income to sustain your property and make a positive income, you are better off buying a residential multifamily unit.
How Much Cash Flow Can You Expect from a Rental Property?
When determining the cash flow of a multifamily rental property, figure out the gross monthly income minus the expenses and any debt owed on the property. This will give an approximate monthly cash flow.
Depending on the property, there may be additional cash coming in from
- Pet fees
- Onsite laundromat
- Late fee penalties
- More
Combine these fees with the monthly rent total of each unit to learn the gross cash flow.
Then you will need to figure out how much of that needs to go back into the property.
These expenses can be numerous and include:
- Insurance
- Taxes
- Utilities
- Vacant Units
- More
You can ask the seller for their income records to help you determine if the property is worth investing in. The Million Acres states that you want to aim for at least 8% of a return. If you are unable to find the property’s expenses, it is suggested that you use the one percent rule.
The one percent rule means that the rent should be one percent of the purchase price. For example, if you are buying a multifamily dwelling for $400,000, the income from rent should be at least 4,000 dollars per month. It is optimal to have the rent generate much more than this.
With a higher cash flow, you have a larger safety net to deal with unforeseen and surprise expenses along the way. You should always aim for a larger gross income.
How Do You Determine a Fair Rental Price?
To determine fair market rent for multifamily properties in a particular area look at the advertised prices of similar multifamily rentals. There are many online calculators available to help you find the fair market rent of a multifamily dwelling as well.
You can usually see what other multifamily rentals are going for by checking the nearby competition. However, some calculators can give you fast and reasonable estimates online. For example, just type in the Fair market rental calculator into the search bar, and you will be presented with them.
Rent Data has a calculator that you can use by choosing the bedroom size of the home or apartment. You will then enter the zip code and press enter. It will give you the fair market rent in that area. The FMR is determined by the Department of Housing and Urban Development and is a reliable source.
What is the 2% Rule In Real Estate?
The 2% rule is a guideline used in real estate. Real estate investors use it to find the property with the highest return rate. The 2% rule states that the monthly rent should equal at least 2% of the property’s purchase price.
The one percent rule is for coming up with an estimate. The two percent rule is just a variation of the one percent rule. Typically the one percent rule will give you adequate cash flow.
How Much Can You Write Off for a Rental Property?
There are many deductions you can claim on your taxes from multifamily rental investments. Some rental owners can even deduct 100% of their rental property losses. Keeping good records and learning about different deductions can help you get the most from your tax return.
Nolo shares 10 of the top tax deductions for rental owners. These include:
- Your Home office or workspace. It doesn’t matter if you rent or own your home. If you meet the minimum criteria for this deduction, you will be able to claim this space and any other space you use to do business in.
- Any type of insurance you have on the property can also claim a deduction. This even includes employee health insurance and workers’ compensation.
- Business expenses incurred for employees or contractors can also be deducted.
- Personal property used for the rental may also be deducted.
- Real Property Rental Depreciation is another deduction that can be claimed.
- Deduct interest paid on the property.
- General Repairs can be deducted as well.
- You can deduct travel expenses so long as it involves working with your tenants or getting supplies for your rental. It doesn’t include driving to the property to improve the rental or grounds.
- Professional and legal services can also be deducted including property management or attorney fees.
- Another deduction is called the Pass-through It allows an income tax deduction as a business owner.
If you take advantage of these different tax deductions, it can be very lucrative. It is important to keep your records in good order so that you can give any needed information and documentation to your tax preparer.
How Do You Invest in Multifamily Real Estate Without Buying?
There are two main ways to invest in multifamily real estate without buying property. Multifamily Crowdfunding Investment Options are known as MCIO, and Real Estate Investment Trusts are known as REITs.
Suppose you do not have hundreds of thousands of dollars to spend on investment property or do not want the responsibilities of owning a multifamily property. In that case, this type of investing can still bring you an income from real estate.
REIT is a real estate investment trust. They are companies that own income-generating real estate. REITs are offered on the stock market and can be bought as a fund by any person. The stockholder of a REIT will earn a percentage of the income produced. They will not need to engage with the property in any way.
Real estate investment trusts own more than $3.5 trillion in gross assets, with an equity of $1.35 trillion in the United States. They invest in all kinds of real estate. They collect money from rental space and are then required to pay out 90% of the taxable income to shareholders. Investing in REITs is one of the best forms of stock investment.
MCIO, multifamily crowdfunding investment options, also known as real estate crowdfunding, is another way a person can invest in real estate without buying it outright. This form of investment has the highest risk, but it also has the potential for the highest returns.
With crowdfunding, many investors pool their money into one large investment. GoFundMe is a crowdfunding platform. In real estate, the main investor might not have the necessary funds for an investment, or they may not want to use their own money, so they source it out to a crowdfunding platform.
Others interested in the project are made aware of it through the crowdfunding platform, they invest some of their money toward the project in exchange for a share of the profits. Investopedia says that it is possible to make 11 to 15 percent on returns per year from crowdfunding.
There are some cons to real estate crowdfunding. Because this is a “liquid asset,” you may not see any return on your money for three or more years. Fees may also be high on some of the crowdfunding platforms, reducing your investment return. Sometimes only accredited investors are allowed to invest in certain opportunities.
It is important to thoroughly research the crowdfunding site and the investment sponsor before putting your money toward any crowdfunded project. You can just as easily lose the money you invested as you can make money from a real estate crowdfunding investment.
What is the Best Real Estate Crowdfunding Site?
Fundrise has the top reviews of the online real estate crowdfunding sites, according to google reviews. There are many excellent crowdfunding sites with different criteria to choose from.
The Fundrise website requires you to make an account with them. You will be able to make a portfolio of different types of residential investments and create categories for these investments. Your portfolios are “designed to grow” and Fundrise may add new properties to your portfolio as they become available.
Fundrise does charge a .15% Annual Fee per $1,000 invested. This fee compensates Fundrise for its services provided to you. They also charge an annual management fee of .85%. On top of these annual fees, Fundrise may also charge one-time fees for development and liquidation.
Other crowdfunding sites have varying fees and other hidden costs. Your due diligence is always advised. Research the sites thoroughly before you decide to invest through any entity.
Are Multifamily Properties a Good Investment?
Multifamily real estate is considered one of the safer forms of investment because even during times of housing market crashes, the multifamily real estate will still be occupied and bring in a cash flow. The demand for multifamily housing rises during a recession.
When recession hits homeowners who are unable to pay their loans and mortgages, they often lose their homes. They then need to find housing and often end up in multifamily rental situations. Because it takes time for these individuals and families to rebuild their credit, they often become long-term renters.
This scenario provides a good return on investing in multifamily real estate, even when the rest of the country is struggling.
Tips to Multifamily Real Estate Investing
First, it is important to realize that you do not need to buy property to invest in multifamily real estate. However, if you are into working for your investment and have enough money to invest in real property, multifamily real estate can be rewarding and lucrative.
