October 14, 2021

Everything You Need To Know About Investing In Multifamily Real Estate Properties

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By

Eric Wilson

Everything You Need To Know About Investing In Multifamily Real Estate Properties

The world of real estate provides investors with a simple and lucrative way of increasing their returns on capital - the ultimate goal of real estate. However, when asked to describe the sort of real estate property they would like to invest in, many investors would respond with single-family units.

Single-family units are safe and affordable; however, multifamily units provide investors with better returns, higher capitalization rates and benefit from economies of scale. They’re, nonetheless, grossly underestimated.

Here’s everything you need to know about investing in real estate properties: from the what’s to the why’s and the how’s?

What: What Is A Multifamily Unit?

A multifamily (as the name suggests) is a single property or several buildings grouped as one that houses more than one group of tenants. The number of units can range anywhere from two to four, or commercial buildings with more than five units can be reconstructed as larger multifamily properties. 

Common examples of multifamily properties include:

  • Duplexes; two units
  • Triplexes or condos; three units
  • Townhouses; four units

The sort of property you should invest in will be discussed later, right now you need to go over the types and benefits of properties that houses more than one family, or group of tenants:

  1. Greater Monthly Income:

In a single-family unit, there's only one stream of income coming in from the tenants. However, in a multifamily one, you have multiple streams of income coming in. Understandably, this increases monthly income (rent) generated from the property.

  1. Lower Economic Risks:

Let's say the family living in your single-family unit gave in their thirty-day notice or you moved to evict them within a week or two, now what? That single stream of income you had coming in has suddenly been cut-off and unless you have tenants lined up to move in the second the existing ones move out, you'll face an economic loss for that month (possibly longer).

On the other hand, multifamily units mitigate this risk by having one tenant compensate for another one's move or eviction. While the monthly income generated would be lower, it wouldn't be zero.

  1. Easier Maintenance:

When a rental unit requires maintenance, or when routine maintenance is to be done, the cost for it comes out from the monthly income generated from the property. 

Whether it’s a unit that houses one family or two, there will be one roof to fix. To put it simply, multifamily units require maintenance of the same roof for all tenants, the same paint job for the entire building, wiring, plumbing .. you get it.

How: How Should You Calculate Your Returns And Such?

An investor is believed to be someone who takes a backseat when an investment is being carried out. This is attributed to the fact that they’re often referred to as ‘passive’ investors. However, their role is anything but passive. 

Investors are responsible for crunching numbers and their due diligence when an investment is happening - it's their money after all. Here's a list of what should be calculated before you put down money on a multifamily property:

NOI: Net Operating Incomes

As aforementioned, a significant amount of money from the monthly income of a multifamily unit has to be put down for maintenance. Day to day wear and tear of a property building, especially one that houses tenants is not uncommon. 

The foremost calculation an investor has to make is of his or her NOI. This is calculated by taking the projected monthly income and subtracting the projected operating expenses. 

Profits

When it comes to investing, many people believe it’s an easy game - it isn’t. The NOI is not your profit because the mortgage has to be paid for from the NOI. The profit has to be calculated by subtracting the mortgage rate from the NOI. 

It goes without saying: Be very sure of an investment before putting down any capital on it because the returns are subjected to many factors.

Capitalization

Every estimate done up until this point has been subjected to estimations made beforehand. Hence, the capitalization rate (the rate at which you begin receiving returns on your investment) is calculated without taking market growth, economic growth, and tax benefits into considerations.

A rough estimate can be made by multiplying the NOI with 12 (annual NOI) and dividing it by the mortgage. Be wary of capitalization rates that are either higher or lower than 5-10%. 

A higher rate indicates higher risk and a lower rate indicates less risk, but more time-consuming return rate. Strategists put the ideal capitalization rate at around 5-10% with minimal risk and a shorter time frame.

Why: Why Should You Take Certain Factors Related To The Property Into Account?

Multifamily properties provide investors with easier cash-flow and mitigate risks. There are, nonetheless, several factors that have to be taken into account before you can sign a deal with the seller. We’ve talked about the numbers, now let’s move onto the property in itself:

Location
Does location matter? Yes. A better question would be, what could matter more than the location? The location of a property helps you understand the sort of income you are expected to generate from that multifamily unit and just how quickly you can expect to receive it.

If a property is in a locality with commercial buildings nearby as well as employment opportunities, odds are the population growth rate for the area is increasing. As a real estate investor, it's advisable to invest as quickly as you can in neighborhoods that are either transitioning or established as successful ones.

Income

How can you calculate the income generated from a multifamily unit before families move in? You go over to rental sites and estimate from other units rental fees or neighboring properties to estimate how much is viably charged from tenants. Thus, how much you can charge.

Who’s Selling The Property

Due diligence also includes running a check on the person or entity selling the unit and understanding their motivation behind the sale. Bank-owned property sales and an agent’s sales can vary greatly

Conclusion:

Multifamily units are a great investment opportunity for an investor to diversify their real estate investing portfolio. These properties provide capitalists with greater returns and more incentives.


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