Five Real Estate Tips for Investing in Multi-Family Properties
Updated: Jan 27
In recent years, there has been a lot of buzz surrounding multi-family real estate investment. If you are looking for lucrative real estate investment options, this article could help you understand whether a multi-family home is the right addition to your investment portfolio.
Owning rental property can be a viable option for those new to real estate investment. However, it does come with the important responsibilities of being a landlord. Some major deterrents to successful investment in single-family properties are potential for delayed rent payment and the possibility of dealing with difficult tenants.
However, multi-family real estate investment greatly ameliorates such difficulties by diversifying your sources of income. With this type of investment, your monthly income would be substantially higher than the property’s mortgage payment. Through economies of scale, the multi-family property investor bolsters his revenue. Rather than buying outright, you can even opt for rent-to-own homes, which give you the option to buy or an obligation to buy after a certain time period.
Why Should You Invest in Multi-family Real Estate?
Unlike a single-family real estate property that houses tenants in a single unit, multi-family properties have several units available for rent. Though the initial investment in apartment complexes is rather high, you gain the possibility of higher returns.
Investing in multi-family property substantially reduces the risk of having an entirely unoccupied rental property – a risk that could cause mortgage payment defaults. Investing in huge apartment complexes often offers a high possibility of consistent rental revenue inflow. Multi-family properties can be transformed into a steady source of passive income if you hire an efficient property manager. This strategy can also attract lucrative tax benefits such as deductions on maintenance and insurance expenditures.
What are the Disadvantages of Multi-Family Property Investment?
One of the biggest concerns for small investors venturing into multi-family real estate is the cost of owning: there’s a higher initial investment and (often) additional maintenance costs incurred in the long run. Alternatively, you can opt for a rent-to-own property if you do not have a good credit score to get a loan to cover your initial investment costs. In recent times, competition has intensified within the multi-family real estate space, which might make it harder for new entrants to gain a level playing ground.
Five Essential Tips for Successful Multi-Family Real Estate Investment
Consider the following for a successful multi-family real estate investment:
1. Start Small and Safe to Build Big
While high investment can lead to a higher rate of return in certain scenarios, it is always advisable to start with small and safe investments when testing the waters in unfamiliar territory. You can choose a familiar property to easily gauge the market valuation after any essential repairs and the possible rate of return on the investment. If you’re not familiar with any properties for sale, you can rely on the expert advice of professional real estate consultants. Weigh your options and decide if you can manage the property yourself, find a hybrid property management solution, or hire a full-time property manager.
2. Evading the Bad Mortgage Trap
Even if the property aligns with your investment criteria, to ensure expected ROI, you should aim to avail yourself of a loan with a feasible interest rate. If your property only has two to four rental units, you would generally qualify for a conventional multi-family mortgage, a conforming loan that should meet Fannie Mae and Freddie Mac guidelines.
You can also look for federal loans such as the Federal Housing Administration multi-family loan. Portfolio and short-term loans are also available to multi-family real estate investors. Make sure you have a long-term plan aligning with your income streams to manage debts incurred for the investment properly. Also, consider mortgage closing costs while investing in any real estate property.
3. Aim for Property Appreciation
A good long-term strategy to reap high returns on your initial investment is to target value appreciation. Regardless of other influencing factors (such as the property’s location), owning a well-maintained apartment complex and completing timely renovations could bring about a surge in its demand and value in the long run. Though upkeep investments might seem like a financial burden initially, they have the potential to take in huge returns. Keeping a long-term vision for your property investments is essential to ensure sustained value appreciation. Moreover, return on renovation can also be gained through tenants by charging them for additional amenities being provided.
It is imperative to assess the growth potential of a location before investing in multi-family real estate properties. For instance, transitional neighborhoods like those in Virginia Beach have high growth potential that could reward you with high future returns for comparatively low investments.
Multi-family property rentals need not always be long-term. If your property is located at a high-demand “hot spot” like Virginia Beach, then short-term rentals could potentially bring in exorbitant returns. However, you need not devote your property entirely to short-term renting since it is more volatile, despite the high returns. Ideally, you can assign select units as short-term rentals while ensuring safe and assured revenue inflow from long-term tenants in the other units. Before assigning units as short-term rentals, conduct the necessary research to gauge whether short-term rentals are feasible for your property. If not, the vacant rental units might lead to financial woes.
5. Set Aside a Contingency Fund
Multi-family properties require regular upkeep to ensure abidance by habitability laws and to foster a healthy environment for the tenants. These can include move-in, move-out, seasonal, and drive-by inspections. You can easily formulate a general estimate of regular maintenance costs. Still, unforeseen expenditures can arise in certain situations involving property damage and unexpected or long rental unit vacancies. A portion of your rental revenue should ideally go into maintaining a contingency fund for your properties.
When it comes to determining how much your rental property will cost or collect, you don’t have to guess. Use this Rental Property Cash Flow calculator and this corresponding blog post to invest with confidence.
The Bottom Line
Multi-family rental property investment offers several advantages over investing in single-family properties. Moreover, multi-family rental properties are less risky since they promise the investor multiple revenue streams. But remember, as, with all investments, you should perform due diligence to nullify unwanted risks associated with the property investment.
Kristina White is the Marketing Director at Zero Down. Kristina loves to contribute informative articles in the real estate sector. She proactively keeps herself updated on the changing trends in the housing industry. In her spare time, you’ll find her reading novels and solving crossword quizzes.