Multi family investing is one of the best real estate opportunities there is. However, in order for it to be so, you need to learn how to evaluate a multi family investment property in the first place.
Before buying a multi family home, there is a whole process of evaluation that every real estate investor goes through. In fact, this process is the secret for always getting your hands on the best investment properties. So, without further introduction, here is how to evaluate a multi family investment property the right way:
Related: What You Need to Know Before Buying Multi Family Homes for Investment
How to evaluate a multi family investment property: What is a multi family home?
As a form of investment property, multi family homes are buildings with more than one living unit. They are made for multiple families to live in separated units and are most popular in areas where there is a high rental demand. As a result, it has been the best type of property for many real estate investors to invest in.
Perhaps the one major benefit of this type of property is the multiple income streams it provides. This also makes it a great way of making money in real estate fast as well as a good opportunity for growing a real estate investment portfolio in no time. However, the single downside would be the property price. It is typically more expensive than single family homes, but for real estate investors, it is worth it.
Related: The Ins and Outs of a Multi-Family Investment Property
How to evaluate a multi family investment property: Look up a few multi family properties
Buying an investment property begins with having a few options on hand. Therefore, you want to look up a few multi family properties to compare and choose the one multi family property that makes sense the most. So, start by picking the location and choosing at least three potential properties. After that, you want to cut it down to only one that you are interested in to thoroughly analyze.
How to evaluate a multi family investment property: Ask questions
Before we get to the physical process of how to evaluate a multi family investment property, it is always a good idea to build up curiosity first. So, once you have income properties you are interested in, start asking some questions. Make a list of whatever thoughts or concerns you have first. After that, address these matters with the owner/agent and seek some answers. Your list of questions should include the following:
1) Why is the owner selling the investment property (motivated or unmotivated seller)?
2) Why is he/she selling now?
3) Why are the vacancy rates high?
4) Is there a potential for increasing the rent?
Of course, you might have many more questions you want to ask the owner. Therefore, make sure that you write them down so that you do not leave anything out. In order for you to pick the best income property, you should learn a little about it.
How to evaluate a multi family investment property: Examine numbers
Because multi family homes make for the best rental properties, you want to make sure you examine the numbers first. Sure enough, the owner will provide you with numbers for the current rental income and rental expenses. But, keep in mind, these numbers are merely the seller’s which does not make them a given. Thus, you still have to take them into account to check whether they make sense or not. Therefore, you want to proceed with the investment property analysis based on these numbers. Here is how to evaluate a multi family investment property with this process:
1) Start by analyzing the return on investment. Go ahead and calculate the cash on cash return as well as the cap rate.
2) Now, analyze the cash flow using the data the owner provided. These consist of the rental income and the rental expenses the rental property’s been experiencing under the seller’s ownership.
3) At this point, you should have some way of determining whether what the seller is saying makes sense.
The reason you want to do this is that many sellers exaggerate when presenting their rental properties for sale. So, bottom line, find out whether the property is as worthwhile as presented to you!
Related: Understanding Multi-Family Investment Property Returns and Benefits
How to evaluate a multi family investment property: Examine the location
Location is what comes next in how to evaluate a multi family investment property. As a matter of fact, location is perhaps the major profitability factor in any deal. For this, you want to conduct a real estate market analysis. Essentially, you look at the appreciation rates the location promises. Also, you look at other properties that share almost the same property features. In other words, you want to look for real estate comps. Find out the net present value in comparison to the property price you were offered.
Real estate comps are a great way to answer many of your questions. However, “how much should I charge for rent” is the one that matters the most. Sure enough, they will help you with that. A good way to find these comps is with a home appraisal. Another way would be using Mashvisor’s rental property calculator. It will save you a whole lot in terms of time, effort, and costs.
How to evaluate a multi family investment property: Try out your numbers
Now, through the process of investment property analysis and the real estate market analysis, you might get some shocking results. As we have said before, the numbers a seller provides for you are not a given. The moment you find out whether the numbers are reasonable or not, try to crunch the numbers you have come up with.
For example, let’s say the seller is asking for $200,000. You have performed the property analysis and the market analysis based on this number. However, you found out through comps that it is actually worth $170,000. So, now what you need to do is try out the number you have as well. See if anything changes and if the profit is still in place if there is any at all. After all, it is not a single family home you are looking at which makes it more complicated. Your main goal of becoming a landlord is the rental income. So, you want your property to be as profitable as possible.
How to evaluate a multi family investment property: Pick the best
By now, you realize that we are getting you to evaluate three different multi family properties to eventually choose the best. Therefore, the previous steps are the ones that will help you with making the right decision. Once you have your numbers ready, choose one property that shows better indicators in the long-run as well as the short-run. You can also ask your agent to help you with the whole thing as they are qualified for that.
Finally, when it comes to evaluating investment properties, Mashvisor is the source. Start by signing up to our website and enjoy the best real estate investing experience ever!