As a beginner in real estate, you may wonder which kind of property will be the best investment for you. Within the residential sphere, you might think of purchasing a single-family home instead of a multifamily housing investment, as it appears to be a relatively budget-friendly and secure investment. However, that is not true. A single-family property is not cost-effective, has a high vacancy rate, and is a single source of income. It is vulnerable to income instability and value downfalls in real estate.
On the other hand, multi-family homes are less talked about but more profitable investment ventures. If you are not aware of such properties and investments in them, you can take a multifamily investing course from any of the best educational platforms regarding real estate. It will help you gather more information about multifamily properties, dismiss popular myths about them, and help you undertake a successful venture!
Here are some of the things you must keep in mind as a beginner before investing in multi-family units:
- You can always start with small houses and reinvest their profits into buying bigger properties.
If you are wary of making a big investment on your first go, you have the option of starting with smaller properties. Duplexes, triplexes, and quadruplexes are popular among new investors as they are affordable and just as advantageous.
Investing in multi-family units with a higher number of apartments is much easier after your initial acquisition of a smaller property. This is because multifamily houses allow for scalability opportunities. I.e., you can reinvest your profits from one property into another.
- Research in depth before making your final investment decision.
Thorough research before you invest in multifamily properties is imperative for making the best decision. You must look into the location of your desired multifamily property, the state of the building, how much renovation and subsequent maintenance it would require, the state of nearby properties, facilities like schools and parks in the neighborhood, distance from downtown or city center, and so much more!
It may seem tedious, but proper research will save you from potential difficulties later in the investment process.
- Try house-hacking to save money on your personal rent and loan down payment.
House hacking means occupying one of the units in your multifamily property yourself. It allows you to save money that you would have otherwise spent as rent on your residence elsewhere and use the income earned from the rented units to pay the mortgage.
Moreover, when you take out a loan for investing in multi-family units, you have to pay a high percentage of the down payment. Sometimes, it can reach 20%! House hacking reduces the rate of down payment significantly. Some lending institutions have it as low as 3.5% for investors who will live in any of the units of their multifamily property.
- Calculate your expected cash flow, Net Operating Income, and Capitalization Rate.
The success of your multifamily housing investment is determined by the profits earned. You must determine how much profit you expect to make from your real estate purchase. It can be calculated using the following variable:
Cash flow: It is the circulation of money in and out of your bank account pertaining to your multifamily property. You must calculate how much disposable income you will be left with after paying the mortgage and expenses on repairs and renovations.
Net Operating Income: It is the difference between your revenue and operating expenses. A higher NOI indicates a successful venture.
Debt-to-Income Ratio: It is the ratio of your income earned and the part of it you use to pay back your debt. The DTI determines your ability to repay your loan. Hence, you should try to keep your DTI as low as possible.
Capitalization Rate: It helps compare the value of your real estate with other properties. It is calculated by dividing your Net Operating Income by the current market value of your prospective property.
- You may need to hire a professional property manager for your multifamily property.
Managing a multi-family property is not easy if you don’t have prior experience. But with the amount of income you will earn, you can hire a professional property manager to take care of your property. You can rest assured knowing that an expert will take care of the repair and maintenance.
Being a landlord doesn’t mean you have to take care of everything on your own. Professional real estate agents and property managers sell their services to assist landlords in maintaining their properties. You can learn how and where to find the best brokers and managers on the Multifamily Podcast!
- Your tax returns will become complicated, but you will get many tax exemptions and benefits.
The Internal Revenue Service has a whole publication dedicated to rules and regulations regarding residential rental properties. Before you decide to invest in multifamily properties, you must learn about every clause in this publication. You want to ensure that everything you do is consistent with the federal, state, and local laws about residential properties. Therefore, the process of tax returns becomes complex due to multiple regulations.
On the bright side, you are entitled to many tax advantages, such as exemption from depreciation tax, writing off expenses related to your rental income, and capital gains tax in certain cases.
- You can read Multi Family blogs to get more information and read about other people’s success stories for inspiration.
Plenty of information about multifamily housing investment is available on the internet. You can read from reliable sources to expand your knowledge about this highly profitable segment of real estate in the United States.
You can read blogs, listen to podcasts, and go through reviews of other investors. It will help you analyze how lucrative the real estate business is and how much profit you can make with your multifamily property investment. Reading other multifamily real estate investors’ success stories will inspire you to undertake the venture!
When you study a multifamily investing course, you will learn all about the different classes of multifamily properties. It is essential that you choose the class for your investment carefully. You have to manage your budget for renovation and maintenance accordingly.
You can get more information about multifamily properties and how to determine the success rate of your venture on The Multifamily Mindset – a professional company that helps new and experienced investors close lucrative multifamily property deals.
Now you have all the foundational information you need for investing in multi-family units! Book a consultation with a professional agent today!