3 Reasons You Should Invest In Multifamily Properties
Sean Bryant4-Minute Read
March 17, 2020
Real estate investing is a great way to add diversification to your investment portfolio. There are a lot of different paths you can take when getting started with real estate. You could choose to purchase single-family homes with the goal of either fixing and flipping them or holding onto them as rental properties. Or you could choose to purchase multifamily real estate.
Depending on your goals, multifamily real estate can offer a lot of benefits to investors, including minimized risk and scalability. Here’s everything you need to know before investing.
How Do I Buy A Multifamily Property?
Buying a multifamily property isn’t much different from purchasing a single-family home. There are a couple of differences, but the process should be fairly straight-forward for most.
1. Research Potential Neighborhoods
Start by picking a few neighborhoods that you’d like to focus on for your search. You want these neighborhoods to be attractive to potential tenants. Do they have good schools? Are there bars and restaurants that are within walking distance? Is there public transportation available nearby? Are other homes in the area in good condition? These are just a few of the things you should consider when choosing a neighborhood to invest in. Once you’ve made your list of a few potential neighborhoods, narrow it down to just one.
2. Get Preapproved By A Lender
Picking a lender is going to be the biggest difference between multifamily properties and single-family homes. Conventional loans are usually not available to multifamily investors and not all lenders are willing to lend for the purchase of these types of properties.
Once you’ve found a few lenders that are willing to give you money for your investment, start comparing each. How do their rates differ from each other? Pay close attention to the loan terms. Are they offering a 30-year loan or something shorter? If you’re planning to purchase a property that needs to be rehabbed, will these lenders still lend to you?
Once you’ve chosen a lender, you’ll need to get your preapproval letter before you can start looking at properties. This preapproval letter will let sellers know you’ve been preapproved to purchase a property up to a certain amount of money. It also lets sellers know you’re a serious buyer.
When getting your preapproval you’ll need a few items:
- Bank statements from the previous 2-3 months
- Past 2 years tax returns
- Credit score
3. Find A Real Estate Agent
Once you’ve received your preapproval letter, you’ll need to choose a real estate agent. Choose an agent that has experience with multifamily properties and has worked in the neighborhood you’ve decided to invest in. If you find an agent that’s an investor themselves, that will be an added benefit. It means they’ll have an idea of the things you should be paying attention to when walking through properties.
4. Pick Your Property
Once you’ve found your real estate agent, start looking at properties in your desired location and eventually narrow it down to one. When you’re walking through properties, pay attention to their condition. How much time and money will it take to make it desirable to tenants? Find out the current rents within the building and then compare that to comparable rents in the neighborhood. Finally, you’ll need to do a deep dive into the financials. Look at the total revenue over the past couple of years as well as the expenses. Calculate the properties cap rate which is the rate of return you’ll see on the property. Once you’ve found a property that checks all the boxes, you can start moving forward with an offer.
3 Reasons You Should Invest In Multifamily Properties
Investing in real estate can be a great way to earn passive income and grow your net worth. But some of you might be wondering why you’d want to invest in multifamily properties.
1. Your Real Estate Portfolio Will Grow Faster
If your goal is to grow your real estate portfolio as big as possible, then multifamily homes are the way to go. It’s much easier to buy a 10-unit apartment building than it is to buy 10 single-family homes. Not only would you only have to work with one seller instead of 10, but you’ll only need one loan instead of 10 separate loans for each single-family home.
2. Less Risk
If you’re investing in single-family homes and one of them ends up being vacant for a couple of months, you’re still on the hook for the mortgage payment. However, if you’re investing in a multifamily property and one of the units is vacant, you still have the other units covering your expenses and hopefully still generating cash flow. Multifamily properties allow investors to protect from most of the risk that comes from being a real estate investor.
3. Easier To Finance, But At A Higher Price
It probably isn’t a big shock that a multifamily home can be quite a bit more expensive than a single-family home. However, the individual cost per unit might be way less. As an example, there might be a single-family home in your neighborhood selling for $120,000 and a four-unit building selling for $250,000. While the multifamily home more than twice as expensive, each unit is really only $62,500, nearly half the price of the single-family home. Because of the overall cash flow of a multifamily building and the less amount of risk the lender will be taking on, it tends to be much easier to finance.
Are Multifamily Properties A Good Investment?
If you’re looking to start investing in real estate, then you should seriously consider multifamily homes. That doesn’t mean you need to go out and purchase a 20-unit building to start. Instead, you could start by house hacking a duplex. That way you’re using the rental income to pay a large chunk of your own living expenses each month. From there you can scale into bigger buildings with more units. Simply put, multifamily real estate is a great way to build a real estate portfolio quicker while minimizing your risk along the way.
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