If you’ve got an itch for buying multifamily homes, I don’t blame you. One property, multiple tenants, more cash flow. Cha-ching. In this post, I’m going to cover how to start buying and investing in multifamily properties including the good, bad and the ugly that comes along with it. Buckle in, and let’s get started.
What is a multifamily property?
Just so there’s no confusion, I want to quickly define a multifamily property. I’m going to borrow (steal) Wikipedia’s definition…
Multifamily residential. Multifamily residential (also known as multidwelling unit or MDU) is a classification of housing where multiple separate housing units for residential inhabitants are contained within one building or several buildings within one complex. A common form is an apartment building.
In addition to apartment buildings, you’ve obviously got duplexes, triplexes & fourplexes. When it comes to buying multifamily homes, duplexes are probably the most common. Ok – with that out of the way, let’s move on to more exciting stuff.
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Where do you find multifamily properties for sale?
You can easily find multifamily properties on sites like realtor.com, Zillow and the like. However, why not hire a real estate agent to do all the leg work for you?
In case you’re not aware, as a buyer, you don’t pay a dime for the services of a real estate agent. That’s right. 100% free. This is because the seller pays all agent commissions (usually) when a property sells. So, why not get some free professional help.
Furthermore, agents have access to local MLS databases (think Realtor.com on steroids), and they can do much more refined property searches. Want to find triplex foreclosures, or how about multifamily properties that have been on the market 100+ days?
Additionally, agents can set up emails to go out daily, weekly or on whatever cadence you like informing you of what’s on the market.
Finally, agents can obviously help you submit and negotiate offers, so get an agent. Ok – enough about agents. Let’s move on.
How do you finance a multifamily property?
Multifamily properties are financed just like any other investment property. If you’re thinking of getting a government backed-loan like FHA, VA or USDA to finance your multifamily purchase, however, that may be tough or impossible unless you’re planning on living in one of the units.
I recommend working with a portfolio lender for financing. These tend to be your smaller local banks.
Now, you’ve got two routes to go when it comes to financing. One option is to have a bank help you with the purchase via a purchase mortgage. Basically, you make a down payment of 15%-20% of the purchase price, and the bank finances the rest.
Another option is buying multifamily homes with cash, rehabbing with cash, and doing a cash-out refinance with the bank. Check out my post on investment property loans for more of a detailed explanation on this topic.
Benefits to buying multifamily homes
Like most things in life, multifamily properties come with advantages and disadvantages. Let’s review a few of the benefits.
Income approach & value
There are different approaches appraisers use to value properties. For single-family dwellings, the sales approach is usually used. Basically, an appraiser would consider other similar properties that have recently sold to help determine the value of the subject property.
With the income approach, often used in multifamily valuations, NOI is a main consideration in determining the property’s value. NOI stands for Net Operating Income. NOI is calculated by taking the annual income from a property (rent + other income like laundry, parking, etc.) and subtracting operating expenses.
Because rent is a main factor in NOI, you have a lot more control over the property’s value. If you’re good at attracting quality tenants who will pay a premium for rent, you can dramatically influence the properties value.
Simply put, with multifamily properties you can house more tenants compared to single-family. You could have 2 fourplexes or 8 single-family properties that house the same number of tenants.
I think it’s safe to say that in most markets, there is less of a demand for multifamily compared to single-family. For this reason, you may be able to negotiate better on multifamily compared to single-family.
Common issues with buying multifamily homes
So, we’ve highlighted a few of the perks that come with buying multifamily homes, so now let’s look at a few of the disadvantages.
In my experience, disputes between tenants is possibly one of the biggest irritants. Tenants complaining about noisy neighbors, parking wars, pets that don’t get along and any other bickering between neighboring tenants will find its way into your life since, after all, you’re the landlord for everyone!
Less cash-flow compared to single-family
Multifamily properties also don’t typically cash-flow as well as single-family properties. This is because tenants typically aren’t willing to pay as much for a multifamily unit compared to a single family home.
One thing to pay attention to when considering buying multifamily homes is whether or not each unit is on its own meter. If all units share one meter, then you’ll have no way of knowing usage and utility costs per tenant. Your only option, at that point, will be to include utilities in the rent and hope that your utility estimates don’t come short.
Multifamily properties, like single-family properties, can be a great way to invest in real estate. In this post, I’ve give you several advantages and disadvantages that come along with owning and managing multifamily dwellings.