Investing in multifamily properties is a great option for those looking to get into real estate investing and feel comfortable with the responsibility and time commitment. Done right, they can be a great source of passive income. However, it’s important to have an in-depth understanding of how to find properties that will provide worthwhile returns on your investment, and subsequently acquire them. Crunching the numbers instead of being influenced by extraneous factors will quickly give you comprehensive insight into an overall project.
What is multifamily housing?
A multifamily property is any residential property that consists of more than one housing unit and allows more than one family to live separately. Duplexes, triplexes, townhomes, apartment complexes, and condominiums are all examples of multifamily properties. Buildings with more than four units are considered commercial properties.
As the owner of a multifamily asset, you can either live in one of the units and rent out the others or live in a different property and rent them all out. If you live in one of the units, the building is considered an owner-occupied property. If you don’t live on-site, you’re considered an investor. This is important to know because the rules for obtaining a loan or mortgage are different for occupying owners and investors.
Real estate financing options for multifamily investments
Financing options for multifamily housing investments include cash financing, hard money lenders, banks, seller financing, and peer-to-peer lending. Generally speaking, every opportunity will be different, and which financing route you choose will depend on your timeline, your financial situation, and other factors. As mentioned previously, if you choose to live in one of the units while renting out the others, your property would be considered owner-occupied. This means that when you’re looking for financing options, the second unit’s income will be factored into the lender’s qualifying factors and may make it harder to find a loan.
How to buy multifamily properties
Much like purchasing a single-family home, there are real estate websites such as LoopNet.com that allow you to filter results for the type of property you are looking for. Another option is to work with a real estate agent who specializes in multifamily housing. They may have a greater understanding of opportunities in your area and even some that have not yet hit the market. If you’re looking to invest in a duplex, triplex, apartment building, or condominium complex, you can begin your search with this checklist:
Location: Location is one of the most important factors for real estate investors, particularly for multi-family properties. You should choose an area with high employment, well-maintained neighborhoods, population growth, and where housing is in high demand.
Number of units: Evaluate the property as a whole. Investors should consider the number of units in the property, including the number of rooms in each unit. If you’re a beginner, we recommend beginning your real estate search with three types of multifamily properties: duplexes (two units), triplexes (three units), or four-plexes (four units). Typically, these properties have the most upside with the least amount of risk.
Potential income: The next step is to determine how much income a property can generate. There are websites such as Rentometer.com, Zillow, and Realtor.com that let you analyze rental rates based on the size and location of your property. If you’re looking to remain conservative, you can use the 50 percent rule. As the name suggests, you should estimate your operating expenses to be 50 percent of the gross income. So, if a rental property makes $40,000 per year in gross rents, you should assume $20,000 would go towards expenses. This does not include the mortgage payment.
The benefits of multifamily investing
Some benefits you can expect when investing in a multifamily property and which will make your investment worthwhile include:
Greater cash flow: Unlike single-family properties, which generate one source of monthly income, multifamily properties draw rents from multiple units.
Less risk: When investing in single-family rentals, income is lost when the home is vacant. However, because multifamily properties have numerous units, you can offset the loss of income from one vacant unit with the income from others.
Taxes: You can make more income by renting to multiple tenants while only paying taxes on one building. You can also write off some of your home maintenance as a business expense and prorate part of your mortgage interest payments.
Scalability: With multifamily investments, the multiple units involved count as multiple properties instead of a single-family home representing one property. It’s a great step towards growing your real estate investment portfolio and possibly venturing into mixed-use and/or larger apartment properties.
The challenges of multifamily investments
Despite all the benefits of investing in multifamily properties, there are some downsides, which include the following:
Multiple units = higher cost: Multifamily investment properties usually cost more upfront. You also need to factor in the maintenance costs of multiple units.
Being a landlord: Finding and managing tenants is a time commitment. If you live near your tenants, you may get knocks on your door throughout the day with maintenance-related questions. And you’ll need to feel comfortable screening and negotiating lease terms with your tenants.
Selling the property: It can be more complicated to sell a multifamily property that has tenants because you’ll have to coordinate showings and appraisals.
Setting yourself up for success
On top of the considerations we’ve outlined, does the property allow for a healthy return on your investment—in terms of both time and capital—or is it a deal that’s too good to be true? Performing your own due diligence is critical to determining which properties will allow you to extract the most value. Additionally, knowing when to say no to a deal is just as important as knowing which projects are worth it.
Broadmark Realty Capital Inc. (NYSE: BRMK) is an internally managed real estate investment trust (“REIT”) offering short-term, first deed of trust loans secured by real estate to fund the acquisition, renovation, rehabilitation, or development of residential or commercial properties. The company has originated over $2.2 billion in loans since its formation through a rigorous and responsive underwriting process. Have questions? Contact one of our lending experts today.
Broadmark Realty Capital lends in Denver, Florida, Georgia, Idaho, Maryland, North Carolina, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Virginia, Washington, Washington D.C., and Wyoming.