How to Make Money with Small Multi-Family Real Estate
If you are a property investor, then you may want to think about multifamily investing. Why? Because investing in properties like this helps you to rocket your income while significantly reducing your vacancy rate. If you can learn how to renovate, sell, or even establish a rental property, then this will help you to diversify your portfolio while increasing your general security.
What You Should Know About Investing in Multifamily Real Estate
Investing in multifamily real estate can be a very unique experience. If you want to make sure that you are making the most money possible when it comes to your multifamily properties, then the tips below will help you to navigate the market.
Calculate Potential Profit
One of the best things that you can do is work to find your 50%. Crunch the numbers and find out how much money a property like this can make you as an owner.
When you have done this, you then need to calculate the difference between your expected income, such as your parking fees, rental payments, storage fees and more. You can then deduct expenses, such as maintenance and repairs.
If you don’t have access to this kind of information, then using the 50% rule is a very good thing to do. Take your income and then halve it, as this will be the anticipated number for your expenses.
Work Out Your Cash Flow
The estimated mortgage payments will then have to be considered. As an investor, you need to work out how much money you are going to be putting back into your wallet.
Take the monthly mortgage away from the number you calculated above. This will give you an estimation of your cash flow and it will also help you to know if the property investment is going to be worth it.
Find Your Cap Rate
Another calculation that you need to work out is the capitalization rate. This shows how quickly you can expect to make a return on the investment property.
You have to remember two different things here. First of all, the cap rate for a relatively safe investment is around 2%.
The cap rate doesn’t include a lot of varying factors either. You will need to consider things like the property value increasing, tax breaks and more. If you want to calculate your cap rate, take your net income, and then multiply it by 12.
You will then have an annual number. Divide this by the current market value. With your cap rate, you need to remember that a higher cap rate is not always better.
A higher cap rate can denote a higher risk, but the returns will also be higher. If you can shoot for a cap rate that is between 2-10% then this is ideal. Any higher, you’ll have too much risk.
Multifamily Properties – What Should You Be Looking For?
Window shopping for real estate may sound good, but you need to be doing more than this. As an investor, you should be carrying out your own due diligence.
Find a multifamily property that is below market value and then try to analyze its financial sensibility. If you were to buy a multifamily property, then you should know that this will require more attention to detail when compared to other real estate deals.
Financial figures will help you to see the true value of a property as well as showing you its bottom line. Figures like this are essential when it comes to cash flow and rental properties, and it can also mean the difference between success and failure.
If you want to make money from your multifamily property, then you need to begin with the following checklist.
If you want to purchase a multifamily property, then you need to look into the location as much as possible. The more tenants you have, the more you will appeal to renters. When it comes to renters, the top criteria are usually linked to location. As an investor, you should be looking for properties that are in well-maintained neighborhoods and in areas that are high in demand, especially when investing in a multifamily property.
The next thing that you need to do is evaluate the property. Consider the number of units, the number of rooms in each unit, and anything else that may be considerable. As a general rule, a duplex, triplex and four-plex are the top properties, as they have the least risk and are generally quite affordable if you are seeking a multifamily property. Having a solid real estate investment strategy is also a very good idea, especially if you are looking to invest in larger multifamily properties with conventional mortgages.
Next, you will have to determine your income. There are sites out there that can help you to verify the rental price as well as the income, but as an investor, you should take everything into consideration. Spending 50% of the investment income on expenses, as opposed to the mortgage, is a good rule of thumb.
When it comes to multifamily properties, every situation is different. Investors can live in a unit while renting out the other. This means that they can then qualify for owner-occupied financing. The great thing about this is that it means the income from the second unit can then be included with your qualifying ratio. If you want to invest in the best multifamily properties, then you will want to consider adding rental units to your investment portfolio. A lot of real estate investors also choose to look into commercial real estate, but if you are only a beginner then a multifamily investment property is what you should be focusing on first of all. You may also want to hire a professional property management company when you feel that your real estate business is giving you a good enough net operating income.
What Markets are Best for Multifamily Real Estate Investing?
Want to make sure that you are making the best decisions when it comes to multifamily real estate investing? Then here are the top US markets you should be looking at.
- Columbus, Ohio
- Los Angeles, California
- Seattle, Washington
- Boston, Massachusetts
- Minneapolis, Minnesota
- Oakland, California
- Portland, Oregon
- New York City, New York
- San Francisco, California
- San Diego, California