Investing In Multifamily Real Estate : Ultimate Guide

Investing In Multifamily Real Estate

When you invest in real estate, it’s important to understand what type of property you’re getting involved with. While single family homeownership is one very common type of investment, multi-family real estate is another option that many people explore when they consider this field. 

Investing in multi-family properties can be a great way to earn money, but it certainly isn’t for everyone. Before you begin investing in these types of properties, there are a few things that you will want to consider first.

What Is A Multifamily Property?

Multifamily, or multifamily real estate, are residential properties that have more than one unit.  This can encompass apartment buildings, duplexes, and residential homes with more than one residence on the property. Multifamily properties can be owned and operated by a landlord or managed by one independently of the owner for profits.

There are three basic types of multi family homes that you can invest in:

  1. The duplex/triplex
  2. Four-plexes
  3. Small apartment buildings

3 Tips For Investing In Multifamily Real Estate

Over the past thirty years, multifamily real estate has grown into one of the most popular and lucrative investing opportunities for savvy property owners. Keep these following tips in mind before you start investing in multifamily real estate:

  • Think about long term growth potential 

When investing in multifamily real estate, your goal should be to buy properties that you feel will grow in value. It is important to look for properties that will hold their value over the years and appreciate as more people move into the area. One of the best ways to find these types of properties is by keeping up with economic trends, including things like job growth, population growth and rent rates. The goal of multifamily real estate investment is to make money. You can do this through increasing the rent rates over time or by selling the property at a higher price than what you bought it for. When you invest in multifamily real estate, it is important to have a plan so that you are able to evaluate properties and make smart buying decisions.

  • Think about how you will finance your investment

The first thing to consider is how you will finance your investment. Look at the debt service coverage ratio and cash flow to determine if the property is worth the investment. Ensure that you get a loan that gives you enough time to pay off the loan (instead of getting a short-term loan). The lender will consider your debt service coverage ratio and cash flow in order to approve your loan.

When you’re investing in a multifamily property, it’s important to understand how you will finance the deal. Because it’s a bigger and costlier investment, financing options can be a bit different than those for single-family homes. Here are a few things to consider as you work through your financing options:

What is my down payment? You’ll need to come up with at least 20 percent of the total value of the property for your down payment. If you don’t have that much cash on hand, you’ll need to get financing.

How long do I need my mortgage? If you’re planning on holding onto the property for more than 15 years, it may be difficult to obtain conventional financing because lenders are usually not willing to lend more than 15 years on an investment property. They worry that after that time, they won’t be able to recoup their money if they have to foreclose on the property.

What is my credit score? Lenders will take your credit score into account when deciding whether or not to approve your loan application. If your credit score is below 600, you will likely be unable to finance the purchase yourself and will need a private lender such as an institutional investor or peer-to-peer marketplace lender

  • Consider how taxes affect your investment

Taxes are a critical piece of the multifamily real estate investment puzzle. You need to consider the impact of the tax laws on your investment strategy. This is true even if you’re an individual investor or not a business owner. The tax laws can have a significant effect on the value of your property and the return you achieve.

The most important thing to remember is that you’re responsible for understanding how the tax system affects your property and then planning accordingly. Ignoring this aspect of your investment almost guarantees failure, so don’t let it happen to you.

Things to Check For When Investing In Multifamily Properties

Before you start investing in multifamily properties, you want to be sure that you know what you are getting yourself into. There are certain things that you should look for before making any decisions about investment property.

Now, this isn’t going to be the end-all, be-all list when it comes to investing in these types of properties, but it will give you a good idea of what real estate investors look for when they’re ready to buy a building.

Location 

Picking the right location is key when it comes to investing in multifamily properties. This means locating the right area that has a high demand and low supply. You want to find an area that has a high demand so that your property will rent quickly and easily. Multifamily properties tend to do well in areas where there is a large student population or young professionals looking for their first place away from home. The best way to find these areas is by looking at information provided on popular rental listings.

Cost

Obviously one of the most important factors when it comes to buying property is the cost. The most successful real estate investors can tell you that purchasing a property at the right price is 90 percent of the battle when it comes to making money on real estate. Get a good deal and you can expect that your investment will succeed. However, if you pay too much for your property then it will hurt your bottom line more than help it. So make sure that your initial offer doesn’t leave too much room for negotiation. That way, if someone comes back with a better offer, you’ll have room to negotiate without losing out on the deal entirely.

Potential Income

If you’re looking to invest in multifamily properties, you first need to understand what kind of return on investment (ROI) you should expect. This will determine how many units you can afford, and how much each unit should make in profit. The sites Craigslist are helpful sources for verifying rental prices and income

Expected Cap Rate

The expected cap rate is one of the first things an investor looks at when deciding if they want to invest in a property. The cap rate is the net operating income divided by the cost of the building. For example, if a building costs $1 million and produced $50,000 in net operating income last year, then the cap rate would be 5 percent ($50,000/$1 million). 

Multifamily Investing Benefits

The benefits of investing in multi-family real estate are many. It has distinct advantages over direct-ownership single family homes and apartment buildings. the advantages of owning a multifamily property contains:

  1. Multifamily real estate investment eliminates risk of holding a property vacant by providing a stream of renters
  2.  Multifamily real estate allows investors to manage from multiple properties remotely, or even from overseas
  3. Multifamily real estate investments maintain high returns through appreciation, cap rate and tax benefits
  4. Multifamily real estate investments open up a wealth of opportunity for your business. 

Conclusion

If you are looking to invest in multifamily real estate, there are a lot of people who seem to think that it is impossible. There are a lot of people out there that say it is risky and you will never be able to make your money back. This is simply not true. If you do your research, go in and plan properly so that you know everything beforehand and stick to everything, then you can make money with multifamily real estate. Hopefully this article about investing in multifamily real estate was helpful for someone and lead them towards a better opportunity or even helped them just get their feet wet.

Value Add Real Estate Property Definition And Strategy

Value Add Real Estate

Value add real estate (also known as “value-added”) is a property investing strategy that refers to any investment that provides an increase in asset value. In the most basic terms, it refers to improvements made to a property that increases its market value above historic levels and beyond what might have been expected from simple capitalization of rental income.

What is value add property

Value add real estate is a type of real estate investment that focuses on buying underperforming assets with the goal of improving their performance. It is different from core real estate, which aims to generate stable cash flow and consistent returns, and from opportunistic real estate, which focuses on investing in assets with the highest potential returns.

Value-added real estate investing can take many forms, but it generally involves investors purchasing properties for less than their full value and increasing their earnings through improvements or other changes.

Value-add real estate is a strategy in which an investor purchases a property that has the potential for greater value through renovation and repositioning, or through improved management. Examples of value-adds include:

  • Making cosmetic improvements, such as painting walls, replacing flooring or upgrading fixtures
  • Making major improvements, such as renovating kitchens, adding new bathrooms or finishing a basement
  • Converting a single-family home into multi-tenant units, or vice versa
  • Adding an addition to the house (like an extra room or a garage)
  • Developing the land around the property
  • Upgrading amenities, like a pool or club house
  • Developing commercial space in a residential building
  • Converting office space into retail space

The value-add approach is popular with investors because it provides the opportunity for higher returns than those typically associated with core properties. Value-add properties are often distressed or low quality, so the investor can purchase them for a lower price than similar properties that do not present any investment challenges. The risk associated with value-add investments is also higher than that associated with core investments, although well-managed value-add portfolios have some of the highest returns in commercial real estate.

Benefits value add real estate

The benefits of value-add real estate investment are numerous and can include:

  • An increase in rental revenue from higher rents and/or improved occupancy
  • Decreased expenses from lower vacancy, better management, improved operations, reduced turnover, and more effective maintenance practices
  • Increased net operating income (NOI) that drives up property value
  • Stronger cash flows due to higher NOI
  • Improved resale value that makes it easier to sell the property when the time comes
  • Potential for increased returns on investments
  • Ability to recognize results as improvements are made
  • Potential for tax benefits through depreciation and capital cost allowances
  • Improved cash flow during renovations and after completion

Risks in value add real estate

Value-add real estate investing is appealing to many investors, with the potential for higher returns over core opportunities. But the risk and rewards of value-add come with a tradeoff. Value-add properties are typically less cash flow stable, more management intensive and more exposed to market fluctuations than core assets.

Here are some of the risks involved in value-add investing:

Management Intensive – Value-add properties typically require more hands-on management than core investments. This may be from ongoing capital improvements or from leasing up vacancies or redeveloping vacant space.

Highest Risk – The riskiest investments are typically those that need significant improvements, redevelopment or rebranding in addition to leasing up vacancies. These properties will likely not generate significant income until renovations are completed and there is sufficient occupancy to cover operating expenses. 

How can real estate investors add value to properties?

Ingenuity and creativity are required for value-added investing. Investors must have the ability to recognize opportunities that others may overlook. Any decision that boosts revenue while cutting costs might be considered a value-add. The more of these opportunities an investor identifies, the more value he or she will be able to deliver to both investors and apartment tenants.

Finding older, unrenovated apartment complexes with below-market rentals is the most typical method. The rentals have been raised to market value once the flats have been renovated.

When the local real estate market for that property is recovering or expanding, a value add investment is usually the greatest option. This might happen after a recession, as the market begins to recover. Property values and rent may still be modest at this time.

Conclusion

The concept of value-added investment is intriguing and timeless. One technique for multifamily apartment complex investment is value-add real estate investments. It can be a profitable investment depending on your risk tolerance and investment timeline

Value-add performance will become increasingly dependent on investors’ market understanding, flexibility to adapt, and adherence to a disciplined strategy as rent growth stabilizes and interest rates rise in the future..

Interested in learning more about Value add real estate investing?

Give us a call or check out some of the other free resources we have available at Growth Capital Group.