Who said buying a multi family home for investment is only for the experts? With this guide, you’ll be able to make the best real estate investments with multi family homes.
The process of buying an investment property differs based on the decisions you choose to make as an investor. For those of you choosing residential real estate, the options only expand from there. The two main investment types you’ve probably always seen compared are single family homes and multi family homes. Most beginners will opt for single family homes when getting started with real estate investing. However, those of you looking for some serious cash flow are going to want to invest in multi family real estate. We will agree, the thought of buying a multi family home could be quite intimidating for some, but it shouldn’t be. Buying a multi family home is easy with this three-step guide.
Related: What You Need to Know Before Buying Multi Family Homes for Investment
#1. Know What to Look For
Buying a multi family home for investment requires much more than just browsing local open houses. When searching for multi family homes for sale, you want to put in the most effort to ensure a quality deal. Buying a multi family home for investment isn’t like buying any other income property; this is on a much larger scale. You need to know everything there is to know about multi family real estate investing so that you get your money’s worth, especially first-timers. Remember that you’re looking for an investment which can build your real estate investment portfolio. Here’s a quick list of what to focus on:
-
Location
This applies to any type of real estate investment, but location is one of the most important factors when buying a multi family home. You need to invest in a location which will attract tenants to all your units. Of course, vacancy also depends on the number of units your multi family home has. Finding tenants for a duplex isn’t the same as doing such for an apartment building. When buying a multi family home, investors should pay attention to high-growth, high-yield areas where properties are in well-maintained neighborhoods in high demand. You can search for multi family homes with Mashvisor’s heatmap tool. Choose which metrics are most important to you in a real estate investment, and our tool will highlight the best neighborhoods.
-
Potential Income
This is also a key element to look out for when buying a multi family home. After all, making money in real estate requires a stable cash inflow. Generally speaking, any smart real estate investor would search for a sustainable income property with a comparable rental income high enough to cover monthly expenses and have profit left over.
If you choose a certain property but don’t know how it competes with the rest of the market, make use of Mashvisor’s tools. Our investment property calculator will provide you invaluable insight on any property you want to analyze. Do you have questions about Mashvisor? Click here to read our FAQs and learn about our tools.
-
Property Costs
This is what most real estate investors are scared of. Financing real estate differs depending on, not just the investment type, but also the investor’s personal financial situation. Everything differs from the type of lender you choose to the type of real estate investment loans you can get approved for.
Anyone wondering right now how to buy a multi family property with no money need not worry. The truth is, multi family properties are a lot more expensive than single family properties. However, a loan for a multi family property is more likely to be approved by lenders than the average single family home loan. This is simply because banks look at the bigger picture. They know that multi family homes have less of a likelihood of foreclosing than single family homes. In general, lenders will look at three components: credit, debt-to-income ratio, and down payment.
#2. Choose the Right Lender
You’re going to want to look for a lender that specializes in multi family properties. Because it could be difficult to find a specialist in your local area, it’s best to search for lenders online. One of the most popular online lenders for multi family properties is Visio Lending.
Here’s a list of criteria for choosing a lender when buying a multi family home:
- Rates: Compare rates between lenders and aim for the most competitive one.
- Terms: Make sure to pay attention to the terms of the loan you’re choosing. Some loans could offer short terms of 1 to 3 years while others may offer long terms up to 30 years.
- Property Condition Allowed: When buying a multi family home, always check on its condition before getting a loan. If the property needs to be rehabbed, make sure your lender offers rehab loans. This could really make a difference.
- Areas Covered: This one should be the first thing you check with your lender. Make sure the lender actually lends in your state.
#3. Calculate Your Cash Flow, Figure Out Your Cap Rate
We mentioned income and expenses briefly above, but here are a couple more details about two key investment metrics: cash flow and cap rate.
- Cash Flow: The type of loan you get affects this part. Here, the estimated mortgage rates enter the equation when trying to calculate monthly cash flow. The basic formula for finding monthly cash flow comes together by subtracting your monthly mortgage payment from the NOI (net operating income) of your potential multi family property. Knowing this estimate will help you determine whether or not the investment will be worthwhile.
- Cap Rate: This is a key return on investment metric in real estate investing. Usually, the lower the cap rate (1-2%), the safer or less risky the investment. The higher the cap rate (10-12%) the riskier it is, and the higher the expected returns. To calculate the cap rate, multiply your monthly NOI by 12 (to get annual NOI), and then divide the annual number by the property price.
There are definitely other important metrics to consider when buying a multi family property such as the cash on cash return, and vacancy rate. However, cash flow and cap rate are two good indicators of a strong potential investment, so start with them.
If you’ve gone through this guide step-by-step and have covered all the things we mentioned, you should definitely be a lot more equipped for buying a multi family property. So what are you waiting for? To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.