The fundamental difference between a multi-family property and a single-family residence is the potential to generate income. Investors and business-oriented individuals interested in real-estate have been affected strongly by the changes of today’s lending environment, but they continue to buy more properties. Multi-family homes may be a risky investment, but it is also potentially lucrative one. If you are a new buyer or landlord, interested in multi-family properties you should definitely take into consideration the following investment and management tips.
First of all, you do not require a lot of money for multi-family properties. What you do need is a good deal.When searching for such a property you should take into consideration a few aspects: the location, the number of units, the expenses and cash-flow based on the 50% vacancy assumption, the rent it will bring in and the seller. In general, rental income will exceed monthly expenses and generate a decent amount of extra cash. On the downside, you must be prepared for the struggles of being a landlord as well as dealing with difficult tenants.
The Pros and Cons of Multi-Family Investment Properties:
First time buyers should look into the pros and cons of multi-family property investment before they actually start investing.
· Pros: In general, multi-family properties generate a steady stream of income, because there is always demand for apartments, irrespective of economic issues. Another pro would be that having a vacancy in this type of property does not “hurt” your income as much. Landlords who rent single family homes have more to lose when a tenant decides to leave.
· Cons: As the owner of a multi-family property you are responsible of carrying out operating and maintenance checks for the building. Another downside to multi-home properties is having to obtain landlord education for certain mortgage programs (which also require that the property “carries” itself on a monthly basis).
How to Buy a Multi-family Property Correctly
Before making a purchase you should know that only 1 to 4-family properties are considered residential. Therefore, they follow different rules. Everything over 5-families is considered apartment building, which is basically commercial real-estate and operates under different guidelines. To correctly purchase a multi-family property you must respect the following conditions:
1. Obtain Sound Financing: make sure that you obtain a loan which does not place excessive burdens on your budget. In general, lenders evaluate rental property based on potential income stream. In order to obtain a better loan for your multi-family property it must be fully rented.
2. Down Payment for Investment Loans: Federal Housing Administration (FHA) loans offer great benefit for multi-home residential properties but only if intend to occupy one of the units yourself. Even if you are investing in a 4-unit property, with the FHA loan you will be able to make the minimum 3.5% down payment. For purely investment properties banks require at least 25% down.
3. Understand how the Rental market Works: Find out what the average vacancy and rental rates are in your area. Simply drive around your community or take a look at the local newspaper. Talk to an experienced commercial Realtor.
4. Beware of Economic Conversion: Let’s say you have found a great multi-family property that has low rents due to poor maintenance. Use this as an opportunity to upgrade the units and increase rents. Remodeling and upgrading a rundown apartment building in a good area can be a profitable venture.
Investment and Management Tips for First-Time Buyers
While the multi-family strategy can return immense profits, it comes with some key caveats. First of all, you cannot know for sure if prices will rise. Secondly, you have to repair and maintain the property with your own two hands. A sound strategy would be to always monitor the property for damage. Thirdly, you must become comfortable with the idea of having tenants around. It is recommended to write up contracts that include policies on repairs, permissions, credit check information, policies on hazards etc., for all your tenants.