Investing in residential rental properties can take many forms—from a single-family property with only one unit to a multifamily apartment property with hundreds of units. While they may seem similar in concept, their successful execution can vary dramatically. Follow these four steps to get headed in the right direction with your first multifamily apartment purchase.
A simple truth of investing in rental property is that “you make your money on the buy.” Overpay and you’ll be digging yourself out of a hole from the start. Pay a fair price and you’ll give yourself some cushion for the future. Here’s how to find the right deal for you:
- Find a real estate broker who specializes in small multifamily properties in your market. There are plenty who specialize in large institutional-quality assets because of the potential for a bigger commission, but seek out someone who is good at the smaller-size property that you’re looking for.
- Be ready to act fast. Unlike the market for single-family homes, multifamily properties often are sold off-market through broker or investor relationships. When you find the right deal, you’ll have to act quickly or it will go to another investor.
- You’ll want to be more involved with your first multifamily property to learn the ropes yourself. Look for a local property so you can ensure your property manager is keeping everything in marketable condition, and personally inspect any critical maintenance items.
You’re going to have to step up your game on evaluating the past and potential future financial performance of the property.
- Smart pricing on multifamily properties is generally established using a recent profit and loss statement and market capitalization rate. There’s a wealth of information online to help you brush up on its application. Carefully review past P&L statements to make sure the seller is recognizing all income and expense items. Your broker can advise you on current capitalization rates in your market.
- Beware of the commonly used “price per unit” metric. Its simplicity is alluring, but it is weak at best for establishing a fair value on your prospective property. Sounds simple, right? Divide the price paid for a multifamily property by the number of units and… Voila! You think you know what to pay for the property you’re evaluating. Although it might give you some indication of value if the rent and expense structure is identical to your prospective property, but that’s rarely the case. Do your homework on the property’s financial statements and you’ll make a much smarter investment.
Leverage provides one of the key advantages to investing in real estate. You’re rewarded not only on the returns to the equity portion of your investment, but also on the debt by virtue of the spread between your property’s return and the rate you pay on your debt.
- The local option: Community bankers make money by putting their deposits to work in the form of loans. Local bankers often accomplish this by working with existing customers with whom they have a trusted relationship. Take the time to meet these bankers in-person, and see if you can turn one of them into a win-win relationship going forward. The first is always the hardest, but over time it will pay off and facilitate more deals for you.
- The broker option: The appetite that lenders have for multifamily investing is constantly evolving. Lenders often shift their preference for geography, transaction size and risk profile. An effective way to find the right lender for your prospective property is to work with a mortgage broker. Your real estate broker can be a good source to find a qualified mortgage broker.
A well-managed property can make a significant difference in the return you see on your multifamily property investment.
- Going it alone: If you have experience with a single-family rental property as an investment, you may already have management experience. Rent collection, property accounting and late-night maintenance calls on single-family properties are all similar in concept to those in multifamily properties. The difference is scale. Every issue is multiplied, making this a full-time job, which may not be practical if you already have an existing job but want to properly care your valued investment.
- Hiring a property manager: Your nephew with some free time on his hands may seem like an appealing option, but a multifamily property is a serious investment and warrants employing a competent, professional property manager to match. Start by visiting your local chapter of the National Apartment Association for a list of members that provide management services to investors like you. Meet with as many as you can, but three at a minimum. You’ll quickly discover the differences and will be able to make an informed choice about the best property manager to care for your property investment.
Need more help or information regarding a multifamily apartment purchase you may be considering? Rize Homesource can help you navigate all the aspects of this big investment… Just ask us.