5 Things to Establish Before Investing in Multifamily Real Estate
While owning single-family units has its own set of benefits, one vacancy in a single-family house means ZERO rental cash flow for the investor. This is one of the main reasons why countless real estate investors choose multifamily investment properties. The increased cash flow opportunity along with the convenience of having multiple doors under one roof gives real estate investors peace of mind that a single-family just doesn’t offer.
For those new to real estate investing, a multifamily property such as a duplex, triplex, or other multi unit apartment building, means having two or more units in the same building. The benefits of choosing to buy a multifamily property are endless. You have a much lower risk of complete vacancy since you have more units, a higher cash flow from more units, potential tax breaks that you don’t get with single family homes, and the opportunity to build your investment portfolio at a faster rate by partnering with to collectively invest in these types of properties.
Multifamily investing is a niche market that requires a great deal of due diligence. The purpose of this blog is to walk you through the questions and topics to consider before buying your first multifamily property. Whether you are an active or passive investor, these five topics taken into consideration before you invest will benefit you exponentially in the long run. Understanding the answers to the following questions will save you time, money, and headaches in the future.
Visualize Your Personal Investment Goal
The great Franklin Covey teaches us to “begin with the end in mind.”
Before you take on a large scope of work like investing in a multifamily property, it's important that you clearly define and visualize your end goal. While real estate investing is relatively simple in terms of the steps you need to take to execute the purchase and operations, it’s not easy. It takes a great deal of commitment, knowledge, and resourcefulness. The going will often get tough but clearly defining WHY you’re investing, what your long-term vision is for your life, and what you want your lifestyle to look like will be the juice that makes it worth the squeeze.
Before you jump in, ask yourself these questions:
What is my big WHY? What is my motivation? What is my long-term vision for my life?
What do I want my lifestyle to look like? How hands-on do I want to be when it comes to my properties? Do I need to hire a property manager or will I be handling things on my own?
What am I trying to achieve financially? How much money do I need to make to achieve that?
What does my lifestyle look like? Do I work full time? How many hours per week will I have to dedicate to expanding my portfolio?
Clearly defining the answers to these questions will help you to create a vivid vision for your life that will serve as your guiding light throughout your investment career.
Identify Your Preferred Market
This is a huge piece of the puzzle, and one that you’ll need to solve first. Sure, you can buy a multifamily property anywhere in the world, but you have to decide what kind of market you want to invest in. This should be done on a macro level (think state, city), then niched down further on a micro-level (think neighborhood and block). Your market selection will also depend on your personal investment goals and what type of property you’re looking to invest in.
First, you will need to decide on which state you are interested in investing in. Are you planning to stay close to home so you can have boots on the ground? Or are you interested in investing out of state? The way in which you proceed will vary based on this answer. Check out our blog, 5 Steps To Investing in Real Estate Out-Of-State for more guidance on venturing out of your backyard.
To help you decide on which city you want to invest in, begin looking for median property prices that fit your budget. You can do so on the Census website or you can get an idea of what property values are on real estate websites such as Zillow or Realtor.com
Once you’ve narrowed down a city, it is time to decide on a neighborhood. Neighborhoods are always in flux. In big cities such as Philadelphia or Chicago, neighborhoods are in a constant state of evolution. A neighborhood that is underdeveloped today may be the next block to be renovated tomorrow. Many investors will purchase properties on the outskirts of developing neighborhoods with the hope that they will be the next in line and in turn, their property value will dramatically increase. Don’t just pick a neighborhood based on hope though. Do your research and always go back to your goals and the type of property you’re looking to invest in.
When deciding on a neighborhood, put yourself in the shoes of your future tenants. Think about things that would make living in that neighborhood convenient for them. Ideally, you want as little turnover in your units as possible. A happy tenant means consistent cash flow for you.
Tenants are often looking for things such as:
Easily accessible transportation
Highly regarded school systems
Parking accessibility
Grocery store locations
Safety and crime rates
Stores, shops, and activities within walking distance
Take all of these things into consideration when exploring neighborhoods. You can find out a lot of this information from looking on Google Maps, Zillow, or other real estate listing websites. If you are close enough to do so, one of the best ways to find out about a neighborhood is to actually go drive/walk around and get a feel for it yourself.
Assemble Your Investment Team
As you begin to scale into multifamily investing, you’ll soon realize there is power in partners. It’s imperative that you have a strong team alongside you as you set out on your investing journey. Each player on your team holds a significant role. Vetting, interviewing, and choosing your vendors and partners wisely will be key ingredients to your success.
First, you will need an acquisition team to help you find a property and purchase it. Players include a realtor, broker, or wholesaler, all of whom can help you to find the perfect multifamily property. Some real estate investors go directly to the property owner, which can often be cumbersome and tedious work. For those that don’t have the time, find the right people to help you reach your goal. Focus on building relationships if you plan to continue to invest in that market vs just the transaction at hand.
From there, you will need lenders. If you are not purchasing the property in cash, you will need to find a bank, hard money lender, or private lender willing to fund your deal.
A lawyer to help you through the legal process of acquiring the property, a title company to make sure the property is free of liens, and an insurance company to properly insure your company are all integral players to add to your acquisition roster.
If your property needs any amount of rehab work, you will need to source contractors for the job. Local real estate investing groups either in person or on social media are great ways to find contractors. Ask fellow real estate investors who they have used for rehab work and create a list of available contractors for the work that you need. Remember, cheapest doesn’t always mean best when it comes to rehab.
Once you’ve purchased and rehabbed your property, you will need to maintain it. The big question here is if you are going to be doing the maintenance yourself or if you will hire a property management company to handle the tenant issues on your behalf.
If you’re investing passively, you’ll still want to ensure the syndication team you’re working with has these players in place and have a history of working together. Having a quality team in place will pay dividends when it comes to investing in multifamily.
Choose A Real Estate Classification
The next decision you will need to make before purchasing your multifamily investment property is which classification area or asset type you’d like to invest in. From affordable housing to student housing, new construction, to senior living, the possibilities for multifamily properties are seemingly endless.
Deciding on which type of asset to invest in is dependent on your needs and goals. Are you trying to build wealth or do you need a consistent flow of guaranteed monthly income?
If your goal is to invest for growth and you can tolerate higher risk, it may benefit you to invest in workforce housing, affordable housing areas, or new builds. These properties are in high demand and can warrant benefits such as government assistance and tax breaks, but they often need quite a bit of work to gain the payoff you’re looking for.
If you are investing to preserve wealth then your best bet may involve market rate or Class A housing. As property values increase, so does your wealth. You may not see as big of a payout as you do with a lower class property that needs rehab work, but you can still get a steady cash flow at a lower risk from these types of property.
Senior living and student housing are great avenues for investors looking for consistent, higher monthly cash flow, however, it is important to take into consideration that these living situations are often temporary or seasonal.
Create A Business Plan
As the saying goes, failing to plan is planning to fail. Creating a business plan for your investment property before you get started will set you up for abundant success.
The big question is, “How are you going to make money?”
The answer to this question can come in many forms. You may plan to add value to your new property by adding things such as a new pool or playground. Maybe you will upgrade the units and create more efficiency for your tenants, in which case you will be able to increase the rent.
Offering a space for convenient parking then charging tenants a monthly parking fee is one way to create value for tenants while also increasing your cash flow.
You may take the route of focusing on decreasing your costs to increase your profitability gap. You can do so by bringing in a new property management team that better meets your needs or replacing toilets and sinks that are energy-efficient, thereby lowering your utility bills.
If the property is already income-producing and you are simply taking over for a previous landlord, you may not need to change anything. However, there are always ways to increase your income through multifamily investing. Sometimes, you just have to think creatively.
Investing in multifamily properties can prove incredibly lucrative if done correctly. These five decisions will help you get the ball rolling in the right direction. Ready to get started on your multifamily investment journey? Learn more by exploring our courses or community for everything you need to achieve financial freedom through real estate investing. We look forward to helping you to expand your real estate portfolio through multifamily investments.
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