Buying a multi-family property can be an important next step for a real estate investor who has previously purchased single-family homes for rent from tenants. It can allow you to generate more income and build net worth faster, if you are up to the challenge.
âYou’re ready to buy a multi-family property when you’re excited about the idea,â says Brian Davis, real estate investor and co-founder of SparkRental.com. “I’ve known people who buy a multi-family property as their first investment property, and I’ve known investors who buy dozens, if not hundreds, of single-family properties because that’s what they love.”
The key to determining if the increased liability, liability, and capital reserves required to buy a multi-family property are right for you is to do your due diligence, so consider the following advice from real estate experts:
Consider living in one of the units on favorable terms. If you buy a building with four or fewer units and live in one, you can get homeownership financing with little money, whereas investors typically need to put in at least 20 percent, says Ferguson, real estate agent, investor, author and creator of InvestFourMore.com.
It could also allow investors to buy another investment earlier as their debt-to-income ratio would be lower to show banks that they are better qualified, Ferguson said.
Choose the right professionals to help you. Buying a multi-unit property can be overwhelming, so choose an experienced broker who can help you through the due diligence process.
âAt a minimum, your experienced team should include a broker, lawyer and lender,â said Lee Kiser, chief broker of the Kiser Group in Chicago.
âThese professionals can walk you through local customs and practices and help you determine the most important items to consider during due diligence,â says Kiser, which includes the physical aspects of the building and the financial and cash flows. of it. Instead of hiring an inspector general, ask to consult with local tradespeople to give you their opinion on each major system or component in the building.
Ask for detailed documents. Ask for income tax and expense returns for the current year and previous years, current rental listings, service contracts and any existing reports, Kiser says.
âMake sure the historical information matches your expectations for current operations – and if not, find out why,â he says.
âFamiliarize yourself very, very well with the vacancy rate in this area,â Davis adds, and speak directly to tenants to get honest feedback on the condition of the building and potential problems.
Also check proof of rental payments and copies of leases, says Janine Acquafredda, associate broker at House n Key Realty in Brooklyn, New York. Have security deposits transferred to you and meet with all current occupants.
Carefully assess the prospect. A multi-family property is not valued by its price per square foot, but rather by its income and the return on investment generated. Look at the income and expenses of the building and see how much is left, this is called net operating income. That number is divided by the typical rate of return for a market area (called the cap rate) to determine fair market value, Davis explains.
A cash return is determined by dividing the income after expenses by the money you invested in the property, says Kiser.
Keep sufficient cash reserves. Unexpected events will happen when owning a larger rental property. For example, don’t assume that the property will be fully leased all the time or that tenants will pay consistently, says Corey Vandenberg, mortgage banker in Lafayette, Indiana.
âSometimes it’s good to see if 50 percent of the people rented would pay the bills,â he says.
You’ll also want to make sure you know what it will take in your jurisdiction to evict a tenant, says Ralph DiBugnara, vice president of Residential Home Funding in Parsippany, New Jersey.
A good rule of thumb is to reduce the maximum amount of expected rents by 10% to prepare for unexpected market downturns, vacancies and other factors, says Adam Bray-Ali, real estate agent and investor in Los Angeles. Angeles.
Know what you are getting into. âDo you want to own a home for reasons other than money? Said Bray-Ali. âYour due diligence should include an attitude check to determine if you want to deal with management. “
âThe headaches are largely based on the quality of the neighborhood and the age of the property,â says Davis.
You can determine these factors by seeing how it’s rated – either as a Class A, B, C, or D property (A being best condition) – and buying one within your means and budget.
âHaving owned many Class D properties, I can tell you firsthand that this is absolutely true,â Davis said. âIn my worst properties, it’s a constant struggle to collect rents, repair tenant damage, keep properties rented, etc. In my best property, I don’t have any of these headaches. Renters there have always paid like clockwork by the hour and treated the property with children’s gloves. “
There is often less inventory of multi-family properties than of single-family homes, so “you may have to sacrifice the location or condition of the property to find one in your price range,” says Allison Bethel, Analyst real estate investors for FitSmallBusiness.com.
Bethel says investors often fail to confirm that the property is legally zoned for its use and number of units.
It’s also a good idea to have a property lawyer to set up your leases and an LLC to own the property, says Vanderberg.
Consider professional management. First-time apartment buyers should consider paying a property manager to handle day-to-day tenant issues and repairs, which normally costs between 3% and 10% of rents, Kiser says.
âEach market has its own unique characteristics for landlord-tenant relationships, advertising, leases, disclosures and more,â he says. “It’s generally a good idea to learn this from a professional third-party manager working for you rather than learning by making the mistakes yourself.”
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Stock market information as of December 4, 2017