5 Things to Consider Before Getting Started with Multi-Family Real Estate
If you are wanting to get involved in real estate investment, you will find yourself facing many options. Which market do you invest in? Do you hire a property manager? What type of real estate investment are you looking to make?
When it comes to the type of real estate investment, you have a few options. Are you going to invest in residential or commercial real estate? If you decide to invest in residential, will you go with single-family homes or multi-family homes?
If multi-family homes are the way you want to go, there are a few things you should know before you take the plunge.
Don’t Leap Before You Look
For first-timers, purchasing a multi-family property can be exciting and nerve-racking all at the same time. No matter how nervous you are, it is important to always ask to see the current owner’s records. No point worrying whether you are making a sound investment or not—just ask! If the owner/seller isn’t willing to cooperate, chances are you aren’t going to like what you see, so be sure to reconsider the deal if they withhold this information.
Inspect, Inspect, Re-Inspect
Regardless of how clean the property appears or how new the interior seems, getting a property inspection is part of your due diligence. Purchasing a multi-family property can be costly up front, so you want to make sure you are not purchasing nothing more than an ongoing expense. How do you ensure this? By ordering a home inspection.
When you order the inspection, make sure you locate an inspector with experience in multi-family homes. These are a different being than a single-family home. Building codes can vary, systems can differ. In addition to inspecting the common areas of the building, you want every until individually inspected.
Other options to help weed out any unobvious problems is to check out the local courthouse for any legal violations, special assessments, and open permits.
Tenants—Past & Present
Asking to review tenant rental applications is a great way to see the trends in tenant profiles. Are they mostly younger or do you see more elderly tenants in this property? What are the average income ranges? Take a few moments to walk the property—especially if it contains a large selection of units. Talk to tenants about the current management, other tenants, et cetera, but do so casually—as if you were considering renting an apartment in the building. This will give you great insight into the main problems the building faces, such as loud neighbors or leaky roofs, and you will be getting it straight from the horse’s mouth, so to say.
Understand the Difference—Commercial vs. Residential
When you are looking at purchasing a multi-family home, there is one lesser-known fact that can alter the way your purchase is handled. If you are looking to finance and insure the property, it is important to be aware that a multi-family property with two to four units is considered residential, whereas MFPs with five or more units become ranked as commercial property—and that is a very different beast.
If you are looking at a five unit-plus multi-family property and are using the age-old residential family return on investment equations, you are going to find yourself coming up short down the road. In residential real estate, the value of the home is determined by the selling prices of similar properties nearby. This value is then used to calculate ROI. However, in commercial real estate, the value is determined by looking at the cap rate, or the ROI an investor would receive if the property was purchased in cash rather than by finance.
Be Aware of the Time Required
Managing a multi-family property is a complicated matter. As every unit essentially functions like a single-family home, you will be handling multiple maintenance requests, complaints, and emergencies. Just because the units are all under one roof, managing a multi-family property is no different than having a large investment portfolio. It will take time, patience, and a lot of trial and error. Be aware of this going into the project will allow you to decide whether you want to hire a property management company or not before things get too messy.
When it comes to rental home investment, you have many options. While multi-family properties are a bit of a handful, they are well-worth it as investment properties go. The key to a successful multi-family property investment is to do your due diligence both before and during the purchase. Research everything, consider all your options. Check your numbers, facts, and inspections and then double check them to ensure you are getting a good deal and not a big headache.