Casual window shopping for real estate is nice to do on a Sunday afternoon, but multifamily investing requires much more than browsing your local open house. For investors, it requires a reasonable amount of due diligence that will not only encompass locating a property below market value, but also commencing efforts to analyze and assess its financial sensibility.
Along with the actual hustle of finding so-called property, it takes a combination of things to ensure a quality real estate deal. In most cases, the search will begin by locating a potential property and then comparing purchase prices, short-and-long term costs, and rental estimates. While this will generally forecast a ballpark figure of what investors can expect, it’s up to them to continue their due diligence and refine those numbers to ensure success. Because investing in multifamily properties requires a little more attention than other real estate deals, an investor’s first concern should always be on the numbers. These financial figures will not only expose the true value of an investment property, but reveal its bottom line. In addition to the numbers, there is a selection of underlying factors that can, and will, influence multifamily investing.
For those looking to invest in a multifamily investment deal, the search begins with the following checklist:
The Location
It’s been said many times before, but location is of the utmost importance for real estate investors, and even more so when investing in multifamily properties. With more tenants, each and every unit will need to appeal to renters; location is generally the most desired criteria. When investing in multifamily properties, investors should pay attention to high-growth, high-yield areas where properties are in high demand, well-maintained neighborhoods.
The Total Number of Units
The next step is to evaluate the property as a whole. Investors should take into consideration the amount of units on the property, including the number of rooms in each unit. Beginner investors should begin their real estate search focused on three types of multifamily properties: the duplex (two units), triplex (three units), and four-plex (four units). These types of properties not only offer the most upside with the least amount of risk for beginner investors, but they are generally more affordable.
The Potential Income
The next step is determining the income a property can accrue. Sites like Rentometer.com or Craigslist.org are helpful sources for verifying rental prices and income, but investors should practice due diligence, taking everything into consideration.
For those looking to remain conservative, the 50 percent rule is a general recommendation: 50 percent of a real estate investment’s income should be spent on expenses — not the mortgage. While too mild of a strategy for some, it’s a good rule of thumb for beginner investors.
The Costs
Every situation will differ when financing real estate, especially multifamily properties. For example, the investor may choose to live in one of the units while renting out the other, which would allow them to qualify for owner-occupied financing. This means the income from the second unit will be factored into the lender’s qualifying ratio. Investors need to also consider their credit score when contemplating financing options, as this important number will greatly influence the qualifying process. In general, lenders will look at three components: credit, debt-to-income ratio, and down payment.
The Seller
There is one more question when evaluating potential multifamily properties is: who’s selling the place? Because the purchase price can vary greatly depending on the seller and their motivation, it’s imperative for investors to gain an understanding of who they’re dealing with. A bank-owned property is dealt with much differently than a for-sale-by-owner property, which means there’s potential for cost savings.