The Right Way to Buy Multifamily Property: 3 Proven Tips for Investors
Any rental income property that has more than one family unit is considered multifamily property. The smallest multifamily property would be a duplex (two units) and the largest might easily consist of a large rental complex with hundreds of apartments.
The advantage of multifamily property, like all income-producing properties, is that it can support debt from the income produced, or by using other peoples money.
When buying multifamily property this idea must be kept in mind because the success or failure of the rental property depends on the income it generates to meet debt service and other obligations to keep the property. Your multiple family property will grow or decline based upon this concept of using other peoples money.
Fair enough. So let's begin with an explanation why real estate investors buy multifamily property and then cover three things that investors can do to help insure that they buy it and can expect a profitable return.
Why Buy Multifamily Property?
The most obvious reason real estate investors buy any income-producing property is because they can grow wealthy in the long run. Just by holding onto the property and letting "other peoples money" payoff the debt, even if there is no immediate cash flow, is what drives people into real estate investing.
Moreover, the downside risk is limited because multifamily properties serve a basic need; they provide shelters to those who cannot afford or who do not choose to buy real estate.
Management problems associated in dealing with tenants can be the downside to buying income property, but you can hire the services of a professional property management company to deal with the day-to-day issues of running the property, and in effect, minimize this disadvantage.
How to Buy Multifamily Property Right
1) Obtain Sound Financing - Establishing a sound financing package on the property is paramount when buying multifamily property; you want to obtain a loan that doesn't place excessive burdens on the property or yourself.
Bear in mind, however, that lenders evaluate rental property based on income stream, and generally structure a loan based on the property's financial strength as well as the investor's. So, when applying for a loan to buy multifamily property, present lenders with clear and concise cash flow reports. When income and expenses are shown accurately, you are more apt to obtain a favorable financing package.
2) Understand the Rental Market - Since the rents tenants are willing to pay to occupy a unit in your apartment can make or break your investment, you must understand local rental market trends. You want to know what the vacancy rates and rental rates are in the area.
Watch the newspaper or drive around the community noting all rental properties that have vacancies. If you see few "for rent" ads or signs, or surmise that rents are increasing, it probably signals a shortage of rental units, and a favorable opportunity for you. On the other hand, numerous signs and ads signal higher vacancies and maybe rent reductions.
3) Watch for Economic Conversion - If the former property owners have let the property run down and rents had to be decreased to keep the units filled, consider an opportunity to upgrade the building and raise rents. When rental properties are in a good area of town or in an area that is returning to a former higher quality, remodeling a rundown apartment complex can be a profitable venture.
In this case, just be sure to get a qualified contractor to give you a bid on remodeling. You don't want to purchase a multifamily property with what you surmised as surface issues and discover later that the conditions are more complex and costly than expected.