When the term real estate is mentioned, it is mostly linked to investment opportunities, and it is seen in financial circles as a credible means of getting legal, enduring and long-lasting value for money. In plain terms, it is said to refer to properties, lands, buildings, and anything you might think of that links land and money together. As unusual as this may seem, this term is said to even include air rights above the property and the underground rights below the land. Many legal struggles have erupted over this in contemporary times; hence, it is imperative to fully define the term which would be a recurring term in this compilation. The word means precisely its literal meaning; it is said to refer to a real entity, a physical property, something that can be seen with the eyes. Most constitutions have now restricted the term to those with legal rights to the property. There are generally four (4) types of real estate, namely;
This comprises of shopping centers, malls, hotels, academic buildings, hotels, and office installations. Apartment buildings are regarded as commercial entities even though they are used as residential spaces. In so far, they are erected to provide income.
This is said to include all buildings and properties used for manufacturing. It also encompasses buildings erected for purposes such as for research, the production, storage and distribution of goods.
In economic terms, this is said to refer to any vacant piece of land, a marked portion, a geographically bounded space, farms, and settlements. Categories include subdivision and site assembly plots, undeveloped and early development or reused land.
This includes both homes under construction, newly constructed homes, and even resale homes. One prevalent category is the single-family homes; Condos, duplexes, bungalows are also included in this category.
Real estate investment is that which is said to be a viable alternative for those who are unable to stand the unpredictability of the stock market. Real estate is also one which is a better investment option for investors who wanted to take their earnings from investing a notch higher. Instead of setting their funds only to be managed by someone else. For an arrangement that was prone to many external factors. One very effective strategy utilized in real estate is rental property investing. This is adopted mostly by investors who want a steady income aside from the slow, trickling, but sudden increases in the value of their leading portfolio. This is one strategy that has been adopted by many investors, including the moguls in the investment world such as Zhang Xin and Donald Bren were said to have built up a large percentage of their fortunes by investing in a range of commercial and residential properties. Some other multimillionaires have also made incredible profits from developing various commercial and residential properties. In terms of residential real estate, one of the types of real estate investments highlighted above, there are two types of properties one can invest in; they are Single-Family and multi-family investing. Single-family apartments are those with only one available building or space to rent. They are mostly residential buildings, but they do not have that much potential for maximized returns compared to multi-family investing. Comparing to multi-family investing, they are commonly known as apartment complexes; that is residential buildings built together with more than one rentable space. Over time, some of the advantages of investing in multi-family real estate settings include;
• You should consider that growing a single portfolio takes less time: The real estate multifamily setting is very comfortable for an individual who wants to build a relatively large property. Taking control of a single 20-unit apartment building is easier than managing 20 different home settings with the possibility of working individually on each property, different realtors, separate loans, while all the back and forth can easily be made by investing in a single multi-residential property.
• Multi-family Real estate investment is more expensive, but it is a lot easier to finance:
As expected, the cost of acquiring a multi-family property would be higher than investing in a single-family setting. But this should not be a bother, as multi-family settings are way easier to handle financially. Securing a single-family proeprty can go for at least $40,000, while a multi-family environment can go up to the tune of millions. And the choice may be obvious, but you might have to reconsider. Getting loans for a multi-family proeprty is far more comfortable than for a single-family property due to the significant cash flow that multi-family properties generate every month. The possibility of foreclosure on a multi-family asset is not as high as that of a single-family property.
• The owner is in a position to make reasonable financial decisions:
This is in the case of real estate investors who do not participate in the actual management of their properties. Instead of monitoring themselves, they seek a competent property manager who does all the work and monitoring. The manager is paid an agreed percentage of the monthly cash flow the property generates. In light of this, instead of splitting percentage margins across different properties, only a single property is considered. This allows for reasonable financial decisions to be made and will enable investors to take maximum advantage of the services property managers offer.
Multi-family investment settings provide a whole lot of opportunities. With these types of investments, it is not advisable to jump into investing without a template or the needed expertise and management capabilities. It is ideal to make your findings before jumping just into any multi-family investment window. Randomly window shopping would not be enough as it requires proper planning and financial evaluation of the about to be acquired property. The natural progression for serious investments in the world of real estate is to start with local family single family properties before moving on up to large scale multifamily establishments. The possibilities with prompt investment in multifamily units are endless and the industry has continued to grow with some positive projections going into the future.
Aside from the boundless, timeless opportunities presented by real estate multi-family investing, investors generally do not shift from single-family real estate investment to multi-family investing. Some reasons precede most decisions. Some of the reasons alluded to the shift include the fact that it saves time; this is generally the biggest perk of investing in multi-family properties. Opinions have agreed on the singular point that it allows for efficiency in management and increases the possibility of making better, informed decisions.
Another primary reason is it allows for better control. Real estate investors all agree that investing in multi-family units allows for more control. Control to mean that since net operating incomes drive a lot of multi-family real estate investments, buyers tend to also look at it as a business, and as for the operator, you can effectively drive the net income which directly translates to the value one can get out of that.
Nearly everyone has the dreams of investing in a credible venture that would steadily bring in income. Real estate also affords that opportunity, but there are certain factors, qualities that an investor is expected to possess and how certain factors can influence a potential investor’s decision in the long run. These perceived factors are highly influential in the decision-making process. Some of these factors are:
As mentioned earlier, the typical progression among real estate investors is from starting with smaller, scattered single-family units then gradually easing into large scale multifamily units that can house multiple families, with a central factor still on making a stable profit. It is known that once this progression is made, there are specific ways of making a significantly higher income by looking for off-market deals. Newer and larger multifamily settings are listed with a competent broker coupled with some assured online sources. These multi-family settings typically classified from the more modern class A units to the much older class D units. In descriptive terms, a value-adding multifamily unit generally is hard to find, as they are not readily advertised or listed. However, searching for class B off-market multifamily properties are considered as viable alternatives. The more massive and more complex the property a real estate investor is looking for, the harder it is to find on the market. To identify and acquire top-notch multi-family investment opportunities, one has to be creative. Many of the deals involved in landing these properties are built on forming enduring relationships with partners or one investor to the other. Another is through extensive networking, and if you are referred from one investor to the next. As mentioned earlier, finding quality multi-family housing units remains a severe challenge. Many cites in the United States are opening up and attracting real estate investors. In real estate, plenty of programs exist for when a potential investor is searching for single-family housing units. But this is not the case with multi-family settings. It is advised that thinking outside the box is required in these instances; to locate functional multi-family units suitable for investing in.
Every investor seeks to make maximum profit on whatever venture that eyes are set upon. You would not want to dabble into an idea without considering its Dos and Don’ts. Here are a few tips that are sure to come in handy when you are looking for a multi-family real estate opportunity.
This is highly crucial, as estimated mortgage dues are part of the equation in this step. Calculating your estimated monthly income or cash flow, be sure of the money you want to invest in your chosen portfolio, then subtract the monthly NOI agreement from your potential property. The simple calculation highlighted above would help to determine your cash flow estimate, and in the long run, learning if investing at that particular point in time would be worth it.
Before investing in real estate, multi-family properties for that matter, be sure to calculate your limit rate. To determine your limit rate, the simple thing to do is to take the monthly NOI, multiply it by 12 which is the number of months in a year to get the annual number and then proceed to divide that amount by the total mortgage amount. The main thing to understand as regards to the limit rate is to know that increases in the amount do not readily translate into better fortunes. It may indicate risk and a higher return. One common thing brokers do is to capture a rate between 5-10% and anything smaller, the investment may not have enough income. You want to be sure you fully understand all the risks associated with investing.
One of the best ways of analyzing potential investment opportunities is to check out the numbers to determine the protenital gross income. This is done by calculating the difference between the expected rent and projected expenses in owning the setup. When one does not have to know all information about a potential property opportunity, only what one has to do is to use the 50% rule. The difference between the estimated revenue and projected monthly expenses is the net operating revenue and it is USUALLY around 50%. This is a very rough estimate.
Taking random walks or a drive through the neighbourhood is seen as means by which one can come across a property begging for an investor. This is not always the case as finding the ideal estate requires much more than random navigation. Investors need a credible groundwork to analyze and evaluate the financial consequences of investing in a property. The following checklist should be considered before investing in a real estate opportunity;
• The seller
• The total number of units.
Be sure to do your groundwork before considering investing in a multi-family property.
Charles Carillo is the founder and managing partner of Harborside Partners. He has extensive knowledge in renovating and repositioning multifamily and mixed-use commercial real estate. Prior to launching Harborside Partners, Charles founded an online payment processing company with partners and clients in 4 continents across the globe. Charles holds a BS from the Connecticut State University.