A multi-storied, multi-family property, with each individual unit showing an open balcony, decked with in-door plants and seating

In the case of land investments, there is no uncertainty that single-family homes will signify the lion’s share of focus. Learning to collect, renovate, sell and even build a recurring rental property income is a fantastic way to learn the basics of the real estate investing trade.  But, at some point in time, you’ll desire to explore multi-family unit investing and add it to your portfolio. A simple reason for that is, investing in multi-family properties lets you increase your profit while lowering vacancy rates. 

A multi-family project often referred to as a multi-dwelling unit (MDU), can be a type of house with two or more units under one roof or a few buildings in a single collection/complex.

Investing in a multi-family property is altogether a different experience when compared to investing in single-family properties. Here are some tips that will help you to obtain a deeper sense of how to buy property in multi-family real estate, and what things to keep in mind while you get started.

A true investor always focuses on the numbers while making a multi-family property deal, as he/she knows it is quite different compared to other real estate deals. These financial numbers will expose the bottom line of an investment property, as well as reveal its real market value.

Know Your 50% 

The best way to browse through possible deals is to crunch the figures and approximately plan what proportion of a chosen multi-family property will cost you as an owner. You do it by calculating the difference between expected incomes and expenses. When you don’t have access to any relevant information, such as a clear neighborhood comparables you may have to use the 50% rule. As per this rule, your estimated expenses are always half of your predicted income. The difference in your projected income  and the expected expense of the month is the net operating income (NOI). 

Learn How Your Cash Flows

By calculating your estimated monthly cash flow, the expected mortgage payments are considered into the equation at the next level. You would like to deduct the mortgage payment of the month from the NOI of your considered multi-family property to determine what amount of money you will be putting into your wallet on an ongoing basis. This calculation will give you an idea of your estimated cash flow, which in turn will help you decide whether or not to invest in the desired property.

Figure Out Your Cap Rate:

This is the third decisive calculation, which determines how fast you will get a profit on your investment. It is very essential to have two things in consideration: The cap rate ranges as low as 1-2% which is considered to be a safe investment.

The cap rate that you are going to estimate does not take into consideration the factors such as a rise in property value, increase in NOI of the month, or the tax breaks that are levied upon the owners of multi-family properties. To estimate the cap rate, take your monthly NOI (multiply it by twelve to obtain the yearly amount) and divide that amount by the current market value of the proposed property. Also, it is not always true that a higher cap rate will always be better. A high cap rate usually signifies high risks with higher returns, whereas a low cap rate, indicates a low risk and lower returns.

The best way is to go for a cap rate within the 4-10% range. You may not get a satisfactory profit below this, while the risks are extremely high above this value, so you need to make sure that you know exactly what risks are associated with the investment. 

 What Are The Things To Investigate Before Investing In Multi-family Properties?

Casual real estate shopping is fine if you do it in your free time, but multi-family investing requires much more expertise than just looking at your local open house. For investors, it needs their utmost attention to be able to not only help them find a property below market price but also to initiate attempts to do research and evaluate its economic sensibility. 

Along with the hustle of locating a property, it takes many things to ensure a high yielding real estate deal. In most of the cases, the search begins by locating a property and then comparing the investments, maintenance costs, and rental valuations. While this will usually calculate a ballpark figure of what investors can await in return, to ensure success, it’s up to them to maintain their due attention and refine those amounts. A true investor always focuses on the numbers while making a multi-family property deal, as he/she knows it is quite different compared to other real estate deals. These financial numbers will expose the bottom line of an investment property, as well as reveal its real market value. There are a variety of factors that can impact multi-family investing, in addition to the numbers. 

For those who are interested in investing in a multi-family property investment opportunity, the search opens with the following checklist:

1. The Location 

When investing in multi-family properties the location is of the utmost importance for land investors. Generally, location is the most desired criteria for tenants. Investors should concentrate on high-growth, high-yield areas when investing in multifamily properties, where properties are in demand. 

The next step is to evaluate the property with its total number of units. Investors should always take into account the number of units on the property. Amateur investors should start their real estate exploration centered on three varieties of multi-family investments: the duplex, triplex, and fourplex, that is, two units, three units, four units, respectively. These kinds of properties are generally more affordable, and they offer the most substantial profit with the smallest amount of risk for investors.

2. The Income Potential of the Property

The next step is to determine the income that an investment can accumulate. Sites like rentometer.com or Craiglist are excellent sources for examining rental charges and income rates. Those who want to be conventional, the 50 percent rule is said to be the best recommendation: 50 percent of a real estate’s profit should be used on the other expenses but not on the mortgage. While it may sound too easy of a strategy, it’s a good rule for an amateur just starting as an investor.

3. The Costs 

Every situation will always be different in  multi-family project investment when financing a property. For example, the investor may prefer to live in one of the units while putting the opposite unit on rent, which allows it  to qualify as an owner-occupied property, which means that the benefit of the second unit will be divisible into the owner’s qualifying ratio. The credit score of the lender is also an important factor to be considered, as it is going to influence the process of qualification. In general, people interested in investing in the property will check three things out: deposit, debt-to-income ratio and credit. 

4. The Seller 

One of the few other questions when evaluating properties is: who’s selling the place? The investors must have an understanding of who they’re working with because the purchase price can depend a lot on the merchant and their motivation to sell. A property owned by the bank is looked at very differently as compared to a property on sale by the owner, which is generally less expensive.

Investing in a Single-Family OR Multi-Family Property

In the world of land investing, one of the good debates is always around the question of whether to invest in single-family or multi-family properties. While they both offer many overwhelming benefits, a different exit strategy for investors is represented by all the investing methods, including income earned and management style, which means that both the investing methods have their own pros and cons. It depends on the investor and their budget of investment.

 Keep reading if you are interested in solving the debate of Multi-family vs single-family property investments.

Greater Cash Flow: If the one-family property makes a single monthly salary, why not invest in a multi-family property producing multiple sorts of monthly income? In addition to this, the property owners have a choice to live in one unit and give the other units out on rent for income. A multi-family property is often utilized in multiple ways. Because it mainly consists of passive income retirement investing.

More Control than Value: The worth of the property directly depends on the income it generates, which means higher the revenue generated, greater is its worth. Because there are many units in multifamily properties, this provides the investor with multiple income streams.

The Top 10 Markets For Multi-family land Investing: 

1. Los Angeles, CA 

2. Seattle-Tacoma, WA 

3. Boston, MA 

4. Minneapolis-St. Paul, MN 

5. Oakland, CA 

6. Portland, OR 

7. San Francisco, CA 

8. San Jose, CA 

9. San Diego, CA 

10. New York City, NY

 How Design Everest can help

If you're an investor in California looking at investing in a multi-family project, Design Everest can be a valuable asset to your enterprise. If you have an existing multi-family property, consider getting an on-site evaluation, and look into retrofitting. If you want to build a new multi-family building, then perform a feasibility study. 

Our team of professionals offers a full suite of services you and your clients can rely on. Our experienced members have been in business for more than 14 years, during which we've gained plenty of knowledge and nurtured countless relationships. To learn more, contact us at (888) 512-3152.

*Note: The content published above was made in collaboration with members of Design Everest.


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