Investing in an apartment or a multifamily property can be an excellent addition to your income stream. Diversifying and managing your investment properties is a great way of reducing risk and earning passive income.
There are many approaches for landlords to perk up their real estate investment portfolio with apartments and multifamily properties. However, such investments are a big commitment compared to managing single-family units. It takes a considerable effort, but it can be a fruitful experience financially.
This article provides some tips and ideas for landlords on how to get started successfully. We have also listed a few things to keep in mind while making such an investment. First, let’s look at the numbers.
As the first step, calculate your projected cash flow to find out how much you will add to your wallet on an ongoing basis. Identify all your expenses and use our free cash flow calculator to find out whether it’s a profitable property. It will help you determine how lucrative is the opportunity after deducting your expenses. This is determined by the location, the price of the property, the condition of the property, and the amount of down-payment. If you are considering a cash purchase, then your monthly outlay is reduced.
Net operating income is the difference between all revenue and all expenses for the property. If this number is positive, your rental investment property will be cash flow positive. Ideally, for every investment, you might want to see a quick return on your investment. However, real estate is a long-term play – depending on your location, appreciation may factor in higher than immediate cash flow.
Use the net operating income to calculate the capitalization rate or cap rate. This will give you a clearer picture of what to expect. All you need to do to calculate the cap rate is to take your monthly Net Operating Income (NOI), multiply it by 12 and then divide that number by the current market value of the property. The range between 5-10% is a good rule of thumb. As a landlord, it is a tradeoff as a higher cap rate generally indicates higher risk and return, and vice versa. Even within the same city, cap rate changes based on the property class. For example, while a Class A property in Detroit may offer roughly a 7% cap rate, a Class C property in the same city may offer about a 10% cap rate. Likewise, a Class A property in a more expensive city might only offer a 2% cap rate.
The perfect way to determine how much a specific multifamily property can make you as an owner is by calculating the difference between expected income and expenses. And simply you can use the 50% rule. If 50% or less of your gross income goes towards the expense of managing that property, then it is a fair deal.
Investing in a multifamily property is a fantastic way to generate larger cash flow as compared to single-family houses. Both have several advantages and disadvantages for landlords. Here are some pros and cons to find out if owning a multifamily property is the right choice for you.
As an investor, the pros of owning a multifamily property include:
Investing in multifamily property is the perfect opportunity to generate an additional income from the investment. You can live in one unit and rent out the others for a stable income, or use it in multiple other ways for generating income.
Changing the roof on a duplex is cheaper than change roofs on two single-family homes. Likewise, maintenance costs on the shared lawn, laundry, etc., will reduce the costs for each unit.
It lessens the chances of economic loss for landlords as at least some of the units will be rented. Even if one unit or apartment is empty for a while, others will still bring income. Even if it doesn’t cover all the expenses, your risk is reduced compared to a single-family home.
Since you own the building, you control the investments and how the property is kept up. This is not possible in a condominium where you own one unit.
While multifamily properties bring in better cash flows and reduce risk, there are a few cons for such investments.
Investing in a good multifamily property can be expensive. It is the largest main barrier for most investors.
A fire or water damage to one unit may impact other units as well.
At any given time, you have to deal with different tenants who have various issues and personalities. Comparatively, this investment requires proper property management skills.
Invest in apartment buildings can be quite a big commitment. However, by familiarizing yourself with some tips, you can make the right investment decision.
It is useful to check property classification (Class A, Class B, Class C). This will help the landlord in deciding which type they would like to own depending upon quality, size, newness, and amenities. Typically, the older buildings with few amenities (categorized in Class C) are generally more affordable, but the hidden costs, such as repairs, maintenance, and improvements, should be taken into account as well. Both the class and interest rates affect the cap rates as well.
Evaluating your return on investment is the trickiest factor that is associated with investing in apartment buildings. Generally speaking, investing in these buildings will be more affordable than managing separate units. However, there are limitations of lower rental income due to their size. Therefore other factors come into play when making the final choice.
Before investing, look at the condition of all apartments in the building. Hire a professional to inspect and identify any hidden issues. Identify the class, condition, and also the tenant types who live in each unit. This helps you to know what you are inheriting.
Investing in apartment building includes the benefit of recurring rental income from each unit. This allows the landlords can create opportunities for growing their real estate portfolio. The most popular advantages are tax benefits and property appreciation.
However, there are a few disadvantages to owning multi-family units. Apartment buildings have higher turnover, and the tenants tend not to take great care of the property. Therefore, the overall management and maintenance costs will be higher than in a single-family home. The upfront investment is also considerably more.
To sum up, investing in apartment and multifamily property brings some unique advantages for the landlords to enjoy. Although the process may seem complicated, with some key skills in real estate investment, you can reap the benefits of investing in apartments and multifamily units.
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