Adding Multi-Family Properties to Your Investment Portfolio
Are you considering adding multi-family properties to your real estate investment portfolio?
Record low-interest rates have created opportunities to start or expand your multifamily property portfolio. Despite record property values, confidence in the real estate market has motivated many to diversify their investments in real estate and start to consider other property types that yield a greater ROI or simply increase their monthly cash flow. As a result, 3- and 4-bedroom multi-family properties have become the most effective way of expanding your growing portfolio before moving on to property types that require commercial loans. These can include larger residential properties with 5 or more units, office spaces, retail, and mixed-use real estate.
With current market conditions, it’s important to consider a few things before jumping in and expanding your real estate portfolio with multi-family property. Investing in multi-family real estate can be more complex than purchasing a home you plan to live in. It adds complexity to the purchase process but also to the leg work necessary to identify, vet, and ultimately invest in a property. It involves understanding not only the local schools, but also trends in the local housing market, job market, and the local rental market. You will need to consider the needs of potential tenants and if you can realistically get market rents in the property’s current location and condition. If not, what kind of investment, beyond the property’s asking price, is necessary to get the market rents that make the deal make sense from an investment standpoint? All of these factors will not only affect the outlook of the property’s future value but also the monthly cash flow of the property.
What are your investment goals with the property?
It is a prerequisite to real estate investment to have this question answered before you choose to invest in a property. Is your priority cash-flow or asset appreciation? In a perfect world, an investor would want both, but real market conditions do not always yield this opportunity, especially since we are in a hot market. This typically means that you are paying a premium to purchase a home now, but you will also likely see higher market rents which will likely raise your monthly cash flow beyond the additional cost of purchasing a property at a premium. Therefore, the emphasis now is on cash-flow vs asset appreciation, as the property’s value is less likely to appreciate at the current pace over the next several years as the market life cycle progresses.
Explore your debt options.
Another factor to consider when purchasing an investment property is to understand the kind of loans that are available to you as an investor. Usually, investors that have less experience owning multi-family properties will want to focus on 2-4 unit properties. Deals that include 5 or more units will require a commercial loan that has a stricter loan to value ratios, down payment requirements, and qualification parameters that must be met before a loan will be approved. Commercial loans rely on the current performance of a property. For this reason, in general, new investors should consider purchasing multi-family property that is at or below 4 units.
Before investing, did you think about how you will add value?
When purchasing a new property one of the first things that you must do is to determine if you’re going to need to make some improvements to justify the asking price of the property. This means that the added expense must be considered in your calculations as well as the long-term strategy you will employ to extract that value. Let’s quickly look at two ways you can add value:
Let’s say you are looking to improve monthly cash flow. The first question you must ask is if the property can demand market rates in its current condition. If so, do those market rents justify the expense and asking price of the property? If not, are there improvements that can be made to ensure it does? If there are improvements that can be made, can you reasonably expect at or above market rates once those improvements are complete?
In another scenario, let’s say your plan is to improve the property and sell it for profit. This means your focus will be on completing renovations and re-selling your property as soon as possible. The question here is if the asking price is reasonable to accommodate the added expense of renovations and can you sell the property with a high enough margin to cover your initial purchase price and added costs. Are you purchasing at the height of the market, and is it realistic to expect the market to continue to rise? These are questions you should have answers forborne out by your investment analysis. This is where having an experienced real estate agent with intimate knowledge of the local market comes in handy!
Why you need an experienced real estate agent behind you
With today’s current markets the purchase of a multi-family property can be extremely challenging due to low inventory. Many cities have limited supplies of multi-family properties, to begin with, and finding the right one can be challenging. Therefore, it is important to very clearly understand the limitations of the area in which you are interested and determine if it still makes sense to invest in that property type.
The best way to accomplish this is to have an experienced real estate agent that understands the local market. A real estate professional who can properly evaluate the asking price of a property and determine if it will yield the ROI you are looking for is invaluable. They must be able to provide you with accurate, realistic projections of profitability based on an intimate knowledge of the local rental market and be able to evaluate a unit’s potential for market rents. This is crucial in your decision process and the right real estate agent can make all the difference in identifying and helping you acquire the property that will be most beneficial to your investment portfolio.
Make sure to reach out to us if you are planning to purchase your first multi-family property or looking to expand your multifamily portfolio. We are the multifamily experts and are best equipped to help you achieve your real estate investment goals!
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Zahn Properties and Lyon Stahl do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.