Investors are usually wary of investing in multifamily real estate properties due to the high initial capital investment. However, a multifamily apartment complex, duplex, townhouse, or any other building housing more than one unit has been seen as providing more cash flow, less risk, easier financing, and better capitalization rates.
Needless to say, multifamily units have long been misunderstood. However, experts are urging investors now more than ever to dive into a world outside of traditional investments.
First, let’s review all the steps you’d have to take to secure a real estate investment:
How to Secure a Multifamily Property:
Assessing The Deal:
Your investing strategy is what sets you apart from everyone else - based on how thorough, yet quick your assessment of a deal is, you'll get to filter through multiple real estate properties listed for sale. The first thing you have to do when presented with an option to invest is to gather information or run a preliminary analysis on that deal.
Important information in any deal includes; the listing price, the number of units, rental prices for each unit, location, etc. With this data, you'll be able to calculate a rough estimate for mortgage payments, maintenance costs per year and also determine your ROI (although this number is subjected to change).
Just as important as it is to crunch numbers, it's equally as important to conduct a thorough inspection of the property in person. Every real estate listing allows investors and other potential clients to conduct walk-throughs of the property. Make good on this option.
The advertisement tells an investor everything they ‘want’ to hear. However, the actual condition of the property might (often) tell another story entirely. Investors need to confirm the number and condition of each unit in person, as well as estimating any repairs that might be necessary.
Explore Your Financing Options:
There are several financing options to choose from when purchasing a property. For example; a conventional loan, a private lender, a real estate fund, a partnership or even refinancing on another property.
Your financing options are to be explored before you conduct a walk-through and re-evaluated afterward as well. Inspecting the property in person helps in determining a deeper financial analysis of the property (added costs for repairs etc not listed on the advertisement).
Investors who mind their due diligence before striking up a deal will have better chances of having success. Use your financial analysis to figure out total monthly income, expenses, your annual net operating income, your capitalization rate, and your monthly cash flow.
Negotiate Terms With Sellers:
An important, if not the most important, part of any investor's strategy is their negotiation. Bear in mind that an absurd offer or an obscene amount of clauses might ward off a seller, make estimates based on the local market - what works and what does not.
A contingency clause is what the buyer wants to put down in the contract before putting money down on a property as a way to protect themselves. Clauses range from one investor to the next, but important ones include property inspections to be conducted before transferring ownership.
Secure Capital and Wait:
The amount of capital you secure for a property, or the method of which is determined by the closing period. Operational timings of several financing options may take longer than the closing time on certain deals. For example; you won’t be able to obtain a conventional loan within two weeks, but you might be able to secure a private lender in that amount of time.
After following all of the aforementioned steps, you’ve finally reached the closing stage that would most likely be conducted on your behalf by an attorney or a title company. All that would be required of an investor is their signature and management of documents.
And then the property is yours!
Helpful Tips For Efficient Investing:
- Living in one of the units yourself:
Financing options for owner-occupied units are different, and rather an incentive prone for lenders and companies. Investors who do not plan on occupying a unit for themselves have to put down a 20% down payment on the property. Hence, terms are more favorable for owner-occupied property units.
- Ask for records and documents:
It might seem like a no-brainer, but you would be surprised to find how many investors go into a deal with just the advertisement and an inspection. Although both of these are important to seal a deal, it is equally as important to reach out to a property's current owner or manager and request current and previous records.
These records include; income statements, expense sheets, and current rent roll for the units. The current lease will give you an idea of vacancies and allow for deeper financial analysis.
- Work with someone who has experience:
If you're new to investing in multifamily real estate, it would be in your best interest to work with a broker who can provide more insight into the property and your options surrounding a deal.
A broker can guide you through the entire process and assist you in the potential benefits and downsides of a multifamily unit to help you mind your due diligence.
- Examine potential cash influx:
As with every investment, the most crucial estimate to make is that of the potential cash flow on the property. This number can be calculated as monthly earnings and expenses or annual. These numbers can help you value the property in detail and determine whether or not it will truly make a good investment.
Multifamily real estate properties are a great opportunity for investors to diversify their portfolios, establish multiple streams of cash flow, and negate unnecessary risks. They're an unfamiliar domain for many investors, which is why it is important to carefully go over every detail with great scrutiny and mind your due diligence. It might also help if you get someone on your team who's experienced in investing in multifamily properties.
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