What to Consider When You Buy Multifamily Property
Multifamily property is income rental property with more than one family unit. Sizes range from two units (a duplex) up to larger apartment complexes with of hundreds of rental units.
Like any income-producing property, multifamily property is able to support debt from the income they produce, which is understood in real estate investing as “using other people’s money”. Always keep this in mind when buying multifamily property because the success or failure of the rental property depends on the income it generates to meet debt service and other obligations.
Let’s look at three elements you might want to consider when buying multifamily property that each rely upon this principal.
Obtain a sound financing package
The ability to establish a sound financing package on the property is a key factor to correctly buying any income property. You never want to obtain a loan that places excessive burdens on the property or yourself.
Because lenders evaluate rental property based on income stream, when buying multifamily property, present lenders with clear and concise cash flow reports. Properties with income and expenses represented accurately to the lender increase the chances the investor will obtain a favorable financing.
Understand the rental market
The cornerstone of investment rental property is the tenants and rents. Whether a tenant might want to live in your building, and how much they are willing to pay is crucial to your investment. Real estate investors must understand local rental market trends surrounding vacancies and rental rates when buying multifamily property.
Keep a watchful eye on the newspaper or drive around the community noting all rental properties that have vacancies. If you see few “for rent” ads or signs, or surmise that rents are increasing, it probably signals a shortage of rental units, and a favorable opportunity for you; and vice versa.
Consider economic conversion
Where the former property owners have let the property run down to a point that rents had to be decreased just to keep the units filled could mean an opportunity to upgrade the building and raise rents.
Just be careful to ascertain the cost for remodeling and what impact it will have on rental income. “Window dressing” for the sake of appearances only, without having a positive effect on occupancy levels or rents, should be avoided. Moreover, always get a qualified contractor to inspect the building and bid on remodeling. Otherwise, what you deemed as surface issues when you were buying the multifamily property could become a costly miscalculation you regret later.
