Though there are plenty of financial benefits that accompany a single-family real estate investment, the real money is generally found in multifamily properties. It is best to start out with less risky investments when getting into property purchases, but when you have experience under your belt, you may want to consider how a new multi-unit property can boost your profit margins.
Finding the Right Property
Most investors don’t stumble upon the perfect investment. There is a lot of research that goes into investments of any kind, but specifically with developments or purchases that have multiple lease opportunities. There are numerous things to be considered before you ever call a realtor or take a tour of a property. Do some market research to the general price points for areas and opportunities around town that you may be interested in. Once you realize what your interests are, start crunching the numbers to see if your plan is viable.
Determine Property Value
As you consider a property, you need to calculate the true value of the investment. For that to happen, you need to calculate the mortgage payment, total up your down payment, assess potential rental income, determine the price to income and price to rent ratios, factor the gross rental yield, know the capitalization rate, and evaluate cash flow. These numbers can give you an accurate idea of what expenses you will be spending over the life of the investment and compare them to the potential yield by rent and increase in property value over time.
Look for Key Elements
Take into account these variables before making a move on a multifamily investment. These are the factors that could make or break the success of your opportunity.
- What geographic location does it have, and is it a high-yield, high growth area? A building that needs work in a desirable neighborhood is better than a perfect property in a bad part of town.
- How many rental units does it offer? For first-time investors, it is wise to start with two to four-unit properties first.
- Who is selling the property, and what is the motivation behind the sale? A bank trying to offload a property may be more willing to negotiate on the asking price.
- Are there any tax incentives for the property and development prospect? Consider depreciation and tax deductions for repairs.
Once you take these elements into consideration, you will be able to judge if the multifamily investment is worth the time and effort. If done right and with the right property, you may see yourself enjoying financial success for years to come.