Multifamily real estate investing is particularly popular among first-time investors. It’s relatively simpler, easier to grasp and one of the best ways to improve your skills in real estate investing. It’s convenient as well as you basically buy a home on mortgage and rent the units at a high rate that typically covers the additional expenses.

What Is a Multifamily Home?

A multifamily home is any residential property comprising more than one housing unit. Some examples of multifamily properties include duplexes and apartment complexes. Such establishments are slowly gaining popularity among investors as one of the most lucrative investment opportunities.

Tips for Multifamily Real Estate Investing

Multifamily real estate investing will be considerably different if you are making a shift from single-family property investments. But sure enough, it’ll open a wide array of opportunities available in the market. For first-time investors it’s a new experience altogether but can give you a glimpse of the real-estate market and its trends.

Here are some tips to keep in mind before making that deep dive:

1. Find Out How Much You Will Make

Calculating the difference in your potential income accruing rent payments and the parking fees, storage fees and expenses arising from maintenance and repair costs is a simpler yet an effective way to start.

If you have insufficient information on neighborhood comparable, it is recommended that you use the 50% thumb rule. Estimate the rent your property is likely to generate per month or per year. Then divide this figure by two to estimate your net operating income (NOI).

2. Compute Your Cashflow

Once you have calculated your monthly cash inflows and outflows, you can determine the amount you will walk away with by subtracting your monthly mortgage from the NOI. This computation provides you with an estimate of your cash flow. It also helps you determine the feasibility of your investment.

3. Determine the Cap Rate

Another important measure needed is that of the capitalization rate, commonly known as the cap rate. It gives an estimate on the rate of return on the property and can provide valuable insights into your investments. It is, however, essential to note that this rate doesn't consider factors such as increases in property value, tax breaks, and monthly NOI boosts enjoyed by multifamily property owners.

You calculate the cap rate by multiplying your monthly NOI by 12 to obtain the annual figure. Divide this figure by the property's current market value. One important thing to consider about the cap rate is that higher does not automatically translate to better. A higher rate denotes higher risk and returns. Aim for a 5 to 10% cap rate to be on a safer end.

Factors To Consider When Investing in Multifamily Properties

Multifamily real estate investing requires more than just frequent visits to the open houses. Investors need to conduct their due diligence, which includes finding a property below market value and assessing its financial feasibility.

Are you planning to locate your first and most significant investment? Here is a checklist to guide your search:

1. Location

This factor plays a significant role, especially when it comes to multifamily real estate investing. Because you will deal with several tenants, each unit must appeal to renters. Having this in mind, ensure you go for high-yield and high-growth areas. Such neighborhoods are well-maintained, and there is high demand for properties.

2. Number of Units

Once you've settled for a location, it is time to evaluate the entire property. One thing you should consider as an investor is the total number of units on your selected properties. You also need to pay attention to the number of rooms in each unit. If you are a beginner, keen on multifamily real estate investing, you might want to consider duplexes, triplexes, and four-plexes. This is attributed to the fact that besides offering the most upside and least risk, these establishments are also relatively cheaper.

3. Costs

Financing in real estate differs for each investment, and multifamily real estate investing is no exception. Some investors prefer occupying one unit and renting out the rest so they can qualify for owner-occupied financing. This allows the income from the other units to form a part of the lender's qualifying ratio. Additionally, investors should consider their credit scores when weighing the financing options, as this figure will impact the qualifying process. Generally, lenders look at your debt-to-income ratio, credit, and down payment.

4. The Seller

An underrated question you should ask yourself as you evaluate potential multifamily properties is: who is the seller? A property's buying price can vary depending on the individual making the sale and their motive. For this reason, investors must understand who they are handling.

Single Family vs. Multifamily Investing

While both options offer several advantages, each represents different management styles, projected incomes, and exit strategies for investors.

If you are torn between single-family and multifamily property investments, take time to study what each of the investment vehicles does. Keep reading to find out the difference between these two.

1. Multifamily Investment Benefits

As an investor, some of the perks of investing in multifamily real estate include:

· Huge cash flow as multifamily properties will produce several forms of monthly income

· More control over the value, given that the more revenue a property generates, the higher its value.

· Less risk as the possibility of all the units being vacant is low

· High-income generation that allows investors to recruit a project manager to handle all operations

· Tax benefits for investors

2. Single Family Investing Benefits

Here are some of the benefits of single-family investing:

· Comparatively affordable

· Single-family properties appreciate more compared to other types of properties

· Financing is more accessible given the low costs of the properties

· Easy management of the units

Multifamily real estate financing can generate more cash flow and, therefore, more control over value, less risk, and tax benefits for investors. Of course, deciding between single-family and multifamily real estate investing dramatically depends on your goals and personal preferences. But you should ensure you educate yourself about the two and seek expert advice before venturing into any of these journeys.

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Contact us today to find out how we can take your real estate investing to the next level.