A multifamily real estate property is a great investment because you can rent it out to generate income or sell it as a fix-and-flip to earn an immediate profit. However, multifamily real estate can be risky if you don’t know what you’re doing. Follow the tips from industry experts below to minimize your risk.
Below are 25 tips for buying multifamily properties from the pros:
1. Choose Your Location Wisely
Adam Busch, Community Outreach Manager, RentLingo
Experienced real estate investors know that location always has a significant impact on the choices they make. Being able to identify great locations to keep an eye out for a great deal is half the battle. It’s important to choose your location wisely when buying a multifamily property. The location should be within a family-friendly community, near schools, hospitals, and establishments, and should be generally safe.
2. Overestimate Your Expenses
Rosie Tran, Owner, RAMJ Properties, LLC
Investing in a multifamily property often calls for unexpected expenses like additional repairs. It’s best to overestimate expenses, have a larger cash reserve than you need, and add an extra cushion into your repair budget when calculating your total ROI. This ensures you won’t be left with a costly surprise.
3. Decide on Your Financial Goals Before You Buy
Gary Lucido, President, Lucid Realty, Inc.
It’s all about the numbers. You have to decide what your financial goal is, the metric to use, your cash flow, cap rate, and return on equity (ROE). Decide which is more important to you: the property’s appreciation or its current return? Use that metric when computing the building’s worth to you, and from there you can decide which path to take to get the most of your investment.
4. Work with a Qualified Professional Who Focuses on Multifamily Real Estate
Stephanie Trevizo, Realtor, PLG Estates
Although the process of purchasing a multifamily is similar to purchasing a single family home, there are key differences that must be addressed during the escrow process. It’s important to work with a qualified professional who focuses on multifamily real estate because he or she is more familiar with this. This can ensure you have a smooth transaction and a wise investment.
5. Start with a Small Multifamily Unit
Odest T. Riley Jr., President, WLM Financial
If you are new to multifamily investing, it’s best to start with a smaller multifamily unit, like a duplex, triplex, or quadruplex. It is generally easier to manage (if you plan to have it rented) or generally quicker to renovate and sell (if your business is more on fix and flip). Starting small is a great way to learn the ropes, especially if you’re new to something.
For more on this topic, read our guide on how to buy a duplex, triplex, or fourplex.
6. Don’t Let Your Emotions Drive Your Decisions
Julia Stoner, Real Estate Investor, Spaces Real Estate
Don’t fall into the trap of letting your emotions influence your decisions. It’s exciting to purchase your first property, but make sure to balance your excitement with objective analysis. Calculate key metrics like the cap rate or return on asset, the cash on cash return, the discount from full value, and the internal rate of return when making a decision.
7. Renovate the Units to Make Them More Appealing to Renters
Shane Lee, Data Analyst, RealtyHop
If you want to increase your occupancy rate, consider renovating the units to make your multifamily more attractive to potential renters. Set a renovation budget and make sure your renovation expense does not exceed your earnings. Through this, you can maximize your returns from your rental properties and decrease turnover and vacancy rate.
Learn more about remodeling that will attract renters.
8. Utilize the FHA Programs for Owner-Occupied Multifamily
A. Donaue Baker, Founding Member, Inner Circle
If you’re buying your first multifamily, you should use one unit to utilize the current FHA programs to secure owner-occupied financing that requires a lower down payment. FHA provides a loan for 1-4-unit residential properties, and they will also lend you the money to renovate the building, if needed.
9. Inspect the Property for Deferred Maintenance
Derek Christian, Owner & Real Estate Investor, Handyman Connection
Before buying a multifamily, be sure to check the maintenance done on the property and take into account any deferred maintenance. Any deferred maintenance can mean additional cost to you, as you’ll have to be responsible for the repair after you buy the property. You should consider any delayed maintenance and needed repair when you value the property.
10. Look for Properties with Fire Safety Measures
Ryan G Wright, Founder & CEO, DoHardMoney.com
A multifamily real estate is a big investment. Because there will be more families who will live in it, the property is exposed to greater risks when it comes to fire. It’s best to look for buildings with building-wide alarms, sprinkler systems, and reliable fire escapes. Make sure that the property you’re buying complies with the local codes and undergoes regular fire prevention inspection, as these things will significantly affect your insurance.
11. Make a Strategic Property Management Plan
Kurt M. Westfield, Managing Partner, WCEquityGroup.com
A key component to any multifamily investment is the property management. If you plan to invest in a multifamily real estate so you can rent it out, it’s important to plan your strategic property management thoroughly to reduce turnover, increase occupancy, increase income, and decrease expenses. This may result in an optimal cash flow for the property and the investor.
Want more? See which property management software is best for you.
12. Verify the Property’s Current Cash Flow
Ralph DiBugnara, President, Home Qualified
Before buying a multifamily, find out the current income of the property. Make sure that your income is higher than your monthly costs, which should include your mortgage payments, taxes, utilities, property management, and maintenance such as repairs, lawn care, and snow removal.
13. Consider How to Maximize the Property’s Space
Drew Hoefler, Multifamily Realtor, TheDuplexDoctors.com
When shopping around for multifamily properties, make sure to be creative and consider how you can remodel the space to maximize its use. In multifamily properties, functionality and usage of a space are critical to profitability and success. Bedrooms are essential, and in some properties, there are ways to conceivably add extra bedrooms in the basement or in an underutilized space.
14. Find a Direct Lender to Finance Your Purchase
Lauren Goss, Realtor, Samson Properties
Finding a lender to finance your real estate investment purchase can be a tedious and challenging task. When finding a loan to purchase a multifamily real estate, your best option is to find a direct lender. Working with direct lenders allows you to not have to go through middlemen—which means you might not pay as much in fees. You’ll also be saved from getting bombarded with mortgage requests.
Read our complete guide to multifamily financing.
15. Include Your Multifamily Investment Real Estate in a Self-Directed IRA
Jaime Raskulinecz, Founder & CEO, Next Generation Trust Company
If you’re planning to invest in a multifamily real estate, consider including your investment properties in a self-directed IRA. This allows your investment and all income and expenses related to the asset to flow through the account, which enjoys the same tax advantages of typical IRAs. This helps maximize your retirement savings.
16. Know Who’s Selling the Property
Paul Esajian, Co-Founder, Fortune Builders
When evaluating potential multifamily properties, you should know who the seller is. Investors should have a good idea of who they’re dealing with because the purchase price and the entire transaction process can vary depending on the seller and their motivation.
17. Buy a 2-4 Unit Multifamily Under the Same Terms as a Single Family
Ben Bowman, Architect & Author, AssetsandArchitects.com
Investing in a multifamily real estate under the same terms as a single family is possible when you buy a 2-4-unit property. When it comes to mortgage lending, lenders treat 2-4-unit homes just like single family properties. The difference is that 2-4 units can generate more income potential, just like other bigger investment properties.
18. Find an Equity Share Investor to Help You with the Purchase
David Lindahl, Real Estate Mentor & Author, REMentor.com
If you’re buying a multifamily but you don’t have enough money for a down payment, you can find an equity share investor who will invest money so you can use it as a down payment. The investor will get a share of your monthly rental income if you plan to rent out, or a share of the profits if you plan to sell the property.
19. Prepare Your Financials Before You Apply for a Loan
James Kobzeff, Owner, ProAPOD
It’s important to obtain a sound financing package when buying a multifamily investment property. When applying for a loan, you should be prepared with your financials so you can present clear and concise cash flow reports to the lenders. This helps you get a more favorable financing package, especially if you can show an accurate projection of income and operating expenses.
According to Apartment Loan Store, talk with the existing tenants when you inspect the property. This way, you’ll get to know who you’ll be dealing with when you become the owner of the property. However, try not to mention the owner’s plan of selling the property and your interest in buying it. Some tenants might move out when they discover the property is for sale.
If you’re planning to invest in rental multifamily properties, it’s important to understand the rental market in your area. Find out what the average vacancy and rental rates are. You can find this information by visiting the community, checking online, or reading the local newspaper classified ads.
When assessing the value of a multifamily property, you don’t look at its price per square foot. You evaluate its income and return on investment generated. To determine fair market value of a rental property, consider the income, expenses, and the typical rate of return in the area.
Read our article about How to Determine Fair Market Value to know more.
The best way to understand the tax implications of buying a multifamily investment property is to talk to a trusted and experienced tax advisor. Your tax advisor can help you make clever decisions so you can take advantage of tax savings through writing off as many allowed expenses as possible.
Even if you plan to buy the property to rent out, you should still consider what happens if you decide to sell it in the future. Demand for multifamily homes is typically lower for different reasons. It’s best to buy a multifamily home with good resale to lessen the risk of selling it at a loss later on.
25. Consider Taking a Hard Money Loan to Finance Your Multifamily Purchase
Allison Bethell, Real Estate Finance Writer, Fit Small Business
If the property you want to buy isn’t in rent-ready condition, you may consider taking a hard money loan. Most hard money lenders understand the property will have more potential after a few repairs are made and will, therefore, lend based on ARV. That will get you more money to purchase and renovate a multifamily property.
Read our article about the best hard money lenders for more information.
Investing in a multifamily real estate can be both risky and rewarding. It’s important to make proper and strategic planning, do your due diligence, and really know what you’re doing to ensure success. The next time you think about buying multifamily properties as an investment, make sure to use the above expert tips as your guide.