HOW TO EVALUATE A MULTI-FAMILY PROPERTY
Looking to get started in real estate investing? Multi-family properties are a great way to make money quickly on real estate. Not only do they offer multiple sources of income in one property, but they can be good opportunities to quickly grow your real estate investment portfolio. It is important to properly understand how to evaluate a multi-family property before investing.
As an investment property, multi-family buildings are built with more than one residential unit. They are designed to accommodate several families in separate apartments and are most popular in areas with high rental demand. As a result, multi-family units are the best type of property for many real estate investors.
There is one drawback, however – property price. Multi-family units are usually more expensive than single family homes. For real estate investors, it’s worth it, and getting started in small apartment buildings can make it easier to make that first investment. Small apartment buildings are a great way to gain experience and put money in your pocket to grow your portfolio versus the slow-growing option of buying and keeping one-family properties.
Not sure you’re ready for a multi-family investment? Check out our blog article “6 Best Practices for Real Estate Investing in Real Estate Wisely” before you begin.
High Demand for Housing
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After a recent decline, multi-family home building is once again on the rise. In 2017, the number of multi-family homes being commissioned fell to 29 percent of homes commissioned. The numbers rose again to 30 percent in 2018. In addition, the number of housing permits increased by 27 percent in December 2018, up to 176,000 from 139,000 the previous year.
Demand for both multi-family houses (usually apartments for rent) and single-family houses (usually for home purchases) is expected to remain strong. Single- and multi-family housing construction still lags behind household demand. In addition, there is a demand for 400,000 to 500,000 housing units to replace damaged or lost housing stock. It is one of the best times to understand how to evaluate a multi-family property.
Housing supply continues to lag significantly behind the demand for both single-family and multi-family buildings. Supply for both single-family and multi-family buildings is limited in many of the 75 largest metropolitan areas. In the 75 largest urban areas, the vacancy rate is less than five percent and shrinking. This indicates significant potential for investment in multi-family properties. Vacancy rates have been falling since 2017, indicating a rapid takeover of apartments for rent and strong potential for investment in apartment buildings to grow if rates continue to fall. It’s important to watch the vacancy rates in the areas you want to invest in, as not all vacancy rates are falling. The higher percentage vacancy rate, the less need for housing there will be.
What Makes Investing in Multi-Family Property Attractive?
One of the best arguments for investing in multi-family properties are the long-term financing options. Many times, an investor can get financing for 30 years. There are several key factors that make this attractive to investors.
First, you are likely to get a lower interest rate with a fixed loan for 30 years. Most commercial loans can be several percent higher than the basic rate.
Second, since your payments are spread over 30 years, the mortgage payment will be less per month, giving you greater monthly cash flow. This is incredibly useful when you are just starting your investment career. Paying off a property will take longer, but you always have the option of paying more than you owe each month. With a 15-year loan, you are required to pay the highest monthly amount no matter what. Being able to pay less is a huge bonus if you ever find yourself in dire financial straits.
Reducing the Risk of Vacancies
The next major benefit of investing in a small multi-family family is the ability to spread your vacancies across multiple units. When you own a single family home and that property is empty, you are responsible not only for covering the entire mortgage loan, but also for additional maintenance costs that most people do not account for, such as lawn maintenance, electricity, water and gas.
Ability to Add Some Sweat
The third benefit of making an investment in apartment buildings is the ability to replenish your capital while you live in the home. Sweat equity is the term people use when they talk about the process of adding value to their home through physical labor – and you’ll understand just how much value can be added by learning how to evaluate multi-family property.
If you buy a building and renovate it with new paint, appliances and fixtures, you are adding more sweat. (You will sweat because you will work so hard to add that value.) This is useful because adding value to your home often allows you to increase your monthly rent, thereby increasing your total income.
Multi-family homes are usually priced as commercial properties because their value depends on the amount of income they generate. When you buy an apartment building, the main indicator of price is the income it generates, while a single family home is often judged by factors such as number of bedrooms, type of backyard fence, garage size, recent neighborhood sales, etc. Many appraisers will use the so-called “income approach” when evaluating a building, along with looking for recent comparable sales in the area. So you can add value to a small apartment building simply by increasing your rent!
Ability for Self-Government
Living in your own apartment building provides you with several key management benefits. The ability to independently manage your building is one of them. Many new investors want to be involved in the day-to-day management of their property, and the best way to get involved is by living in the property you rent.
Live for Free
Let’s be honest, the number one attractive quality for investing in a small multi-family property is being able to live for FREE! And if you don’t live for free, you can live much cheaper than if you bought a single-family home.
How to Evaluate a Multi-Family Property Before Purchasing
You have several options when it comes to buying investment property. Find multiple multi-family properties to compare, and select the one multi-family property that makes the most sense for you. Start by choosing a location and at least three potential properties. After that, you want to shorten it to the one that interests you after careful analysis.
Before we get into the physical process of appraising a multifamily investment property, it is always helpful to first generate curiosity. So, once you have an income property that interests you, start asking a few questions. Make a list of your thoughts or concerns first, then discuss these questions with the owner or agent and look for answers. Your list of questions should include the following:
1) Why is the owner selling investment property (motivated or unmotivated seller)?
2) Why is he or she selling now?
3) Are there a high number of vacancies?
4) Is there potential for increasing the monthly rent amount?
5) What are the management and maintenance numbers?
Of course, there are many more questions you might want to ask the owner, so be sure to write them down so you don’t miss anything.
Study the Numbers
Gathering the numbers is incredibly helpful when learning how to evaluate a multi-family property. To choose the property with the best income, you should know a little about it. The owner will provide you with the figures for current rental income and rental costs, but keep in mind that these numbers are just seller numbers, which doesn’t make them a given. You still have to take the whole picture into account to check if they make sense or not.
Continue analyzing investment property based on the following numbers. Here’s how to value a multi-family investment property using this process:
1) Start by analyzing your ROI. Go ahead and calculate your cashback as well as your maximum bid.
2) Now analyze the cash flow using the data provided by the owner. They consist of rental income and rental costs incurred by rental properties owned by the seller.
3) At this point, you should be able to determine if what the salesperson is saying makes sense.
Many sellers exaggerate when listing their rental properties, so it’s important to run your own numbers to find out if this property is worth the same value as what’s presented to you. Asking the owner for a formal document such as a Profit and Loss Statement or a Balance Sheet can confirm the figures provided by the seller are accurate.
Explore the place
After the deal numbers, what is the most important factor in learning how to evaluate a multi-family property? In fact, location is perhaps the main factor in the profitability of any trade. To do this you need to conduct an analysis of the real estate market in that area. Look at the ratings that the place promises and look at other properties that have much the same qualities and features. Find out the net present value compared to the property price that has been offered to you.
Try your numbers
The process of analyzing investment property and analyzing the real estate market can produce shocking results. As we said earlier, the numbers the seller provides you with are not guaranteed. The moment you know if the numbers are reasonable or not, try to calculate them.
For example, suppose a salesperson asks for $200,000. After performing property analysis and market analysis based on this number, you learn the actual value is closer to $170,000. Will you still be profitable with this property if you pay $200,000? Your main goal in becoming a multi-family property investor is rental income, so you want to own property that’s as profitable as possible.
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Once you have numbers, pick one property that performs best in both the long and short term. Don’t forget to ask your agent for help – this is what they’re trained and experienced in.
Best of luck in your efforts to learn how to evaluate a multi-family property. !
At Veloce Capital, we’re here to help as you take the first steps into real estate investing. We’ll help you set up an entire plan that works for you from start to finish.
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Bykhovskaia, Julia. “Council Post: Five Key Criteria To Evaluate When Doing Multifamily Real Estate Market Analysis.” Forbes, Forbes Magazine, 15 Aug. 2019 ,www.forbes.com/sites/forbesrealestatecouncil/2019/08/15/five-key-criteria-to-evaluate-when-doing-multifamily-real-estate-market-analysis/.
Demeter, Robert, et al. “How to Evaluate the Price of a Multifamily Property.” PropertyShark Real Estate Blog, 31 July 2020, www.propertyshark.com/Real-Estate-Reports/6-easy-steps-for-evaluating-the-price-of-a-multifamily-property/.
McKissock, By: “The 3 M’s of Evaluating a Multi-Family Property Investment.” McKissock Learning, 7 Feb. 2020, www.mckissock.com/blog/real-estate/the-3-ms-of-evaluating-a-multi-family-property-investment/.