Category: Multifamily Investing

Introduction to Apartment & Multifamily Investing

How many times have you seen a late-night commercial featuring some real estate guru promising to get rich quick returns with “no money down”? While most of us are smart enough to identify these ads as too good to be true, the excitement surrounding investing in real estate, specifically in multifamily investing, is well deserved. For many people, investing in multifamily properties is a pathway to create passive income and financial independence for themselves and their families.

When done properly, this unique corner of the real estate market can serve as a second career, and for the savvy investor could make them enough money to retire comfortably at a young age, kicking back and collecting checks. As with most things in investing however, winning big requires taking risks and doing your homework, so over the course of this article we will dive into the basics of apartment and multi-family investing to give you an entry point into this incredible opportunity.

Multifamily investing is exactly what it sounds like. An investor purchases an apartment building, a duplex, triplex, or quadruplex, and then rents these spaces to multiple different tenants to profit from the income.

For example, there are many kinds of properties that an investor can choose from when deciding on real estate investments. The most common types being apartments, townhomes, condos, duplex, triplex, and quadruplex units. Each of these is described briefly below.

  • Apartments: Apartments are most likely the most familiar type of multi-family unit. An apartment building is a large structure made up of multiple self-contained living spaces. Each apartment has its own kitchen, bathroom, and sleeping / living areas. Apartment buildings can have anywhere from 2 to 200 “units” and costs to purchase range accordingly. An important distinction to make here is that the term “apartment” usually implies that the building owner owns each unit, and the tenant is simply a renter.
    • Condos: A condo, short for condominium, is just like an apartment in that they are complexes of self-contained units that range in size. The key differentiating factor is ownership. Typically, condos are purchased from the building owner, each tenant is purchasing the unit that they live in rather than renting.
    • Townhomes: Townhomes are like the bigger brother of condominiums. Where a condominium tends to be smaller, townhomes tend to be a series of multi-story houses, built with an adjoining wall to the townhome next to it. Like condos, these units are usually purchased by the tenant, while the communal areas like pools, lawns, and other public spaces are owned by all the tenants equally or the company who owns the complex.
    • Duplex: A duplex refers to a property that in many ways resembles a single house, but that has been split into 2 units. Many times, “duplex” describes a single structure with 2 front doors, one leading to the upstairs unit, and the other leading to the downstairs unit.
    • Triplex: After learning what a duplex is, the other “plex” types of properties are self-explanatory. A “triplex” simply refers to a single house structure with 3 units.
    • Quadruplex: As mentioned above, the “plex” property types all fall into the same category, the only difference being the number of units within the house. A “quadruplex”, as the name indicates is a single house with 4 units inside.

So, what is the purpose of multi-family investing. Why would someone want to buy one of these multi-unit properties? As you may have guessed, the primary reason is to make money! As a brief example, a successful multi-family investor would seek to buy a duplex that cost him $1,500 per month to purchase, and then rent each unit out for $1,000 per month. This generates $2,000 in income from renting that not only covers the cost of the mortgage, but it also puts an additional $500 per month into the owner’s pocket. It sounds simple enough, but there is a lot that goes into a successful real estate “deal”.

Aside from simple income, renting out a multi-family property allows an owner to capitalize on his property. Rather than simply owning the building, why not have it generating some income? Each month that you are collecting rent and paying yourself whatever you collect above the monthly cost to you, you are also having an asset purchased in your name that has real value and should appreciate in value over time. This double barrel effect of adding cash to your pocket AND “equity”, or ownership in a property, to your personal assets column has a powerful positive impact on net worth and greatly accelerates a person’s pathway to retirement if that’s something they desire to do. Renting a property, when done successfully, should contribute to your personal net worth in two different ways.

So, if all that sounds good to you, your probably curious as to how someone gets started in real estate investment. You’ve already taken the first step in reading this guide, as the more information you have, the higher your chances of making a successful investment decision. So, step one is to read as much as you can regarding the type of multi-family investing that you’d like to do. The internet is a powerful thing and you can save yourself lots of trouble simply by gathering others experiences and using them to inform your decision making.

Once you feel comfortable, and potentially have consulted with a professional or two, you need to start looking into the methods that you can use to acquire a property. There are many ways that one can go about doing this aside from simply putting down a bunch of cash to purchase a building or a complex. Let’s face it, most of us don’t have hundreds of thousands of dollars in liquid assets that we can sink into a house right now. This is where the concept of financing comes in. Just like you finance a car or take out a student loan to spread large costs out over time, using a mortgage allows you to put a small portion of the purchase price down today, and to pay in installments moving forwards.

The most common method of financing a mortgage is with a 30 year note in which you work with a bank who lends you the funds that you’ll need to complete the purchase. From there you will work with the bank to pay off the loan over time. It is critical to understand this part of the process, because your monthly payment will have a direct impact on your ability to “cash flow” a property. “Cash flowing” a property is real estate jargon for a successful deal. A property that is “cash flowing” is a property that produces an income to the owner above all the costs associate with the mortgage, renovation, and upkeep on the property.

Lets now take a more in depth look at the different methods that an investor can use to secure funding and move forward with a purchase. Aside from a simple bank loan or traditional mortgage, the government has many attractive programs for investors who are purchasing for the first time as well as for investors who are seeking to renovate properties. While this guide is not long enough to cover a comprehensive list of all the financing methods which exist, we will look at the most common and explain the costs and benefits associated with each.

While some real estate transactions are completed in full at the time of purchase, this is very rare. Obviously if someone has enough money sitting in their bank account to purchase their desired property, they are perfectly able to do so. Investors who are looking for true no money down strategies could approach what is known as a “hard money lender” someone with lots of cash who can buy a property outright. They will usually require their own method of repayment and will take a portion of the profit from your deal. This strategy is good for beginners who can find a passive partner. They put up the money, you find the deal and work out all its moving parts.

While this strategy is not totally uncommon, most of the time some sort of long-term payment is arranged at the time of sale. Most transactions involve an upfront payment of funds called the “down payment” followed by a series of monthly payments made up of some principal (the actual loan amount) as well as interest (the fee that you pay for borrowing the money).

Securing a loan will require a check of your credit history, an evaluation of your income, and your ability to make payments moving forward. If you are not able to put 20% down at the time of purchase, many institutions will require an additional monthly fee for “PMI” or mortgage insurance due to the increased risk of the loan for the bank.

For first time borrowers who may have less credit history or income, an FHA loan, short for Federal Housing Authority, can be helpful. This is very common tool used for first time buyers looking to break into investing as well. This is a special type of loan offered to first time home purchasers through the federal government that allows them to put as little as 3.5% down on a property. FHA loan standards are also lower due to the backing of the federal government, meaning lower credit scores and incomes may be eligible to receive the loan.

Once you have researched your preferred financing method and have started working with a mortgage broker to see what you qualify for its time to begin looking at properties. The research done on the front end of your real estate deal could make or break you. The more time you spend analyzing and understanding the features of the piece of property you are purchasing, the more likely you are to be successful in your first venture. Typically, investors look for a few qualities of property, although like many things in investing broadly, this comes with some risks.

Look for properties in good locations, with good schools nearby or near a downtown commercial hub. When selecting a multi-family investment property, you must put yourself in the shoes of your future tenants. When evaluating a home, imagine who might live there, this will give you a better idea of the potential challenges you might face in renting. Will you be marketing to college students each summer and trying to fill your property? Or will you be renting to families with young children. Will you be renting to long term elderly tenants? Study the demographics and behaviors in your area and use this information to inform your purchasing decision, especially if you’re a first-time buyer.

For the true rookie to real estate investing, one of the most common methods of getting started is referred to as “house hacking”. This strategy involves purchasing a duplex or other multi-family property, living in one of your units, and using the other units as rental income to offset your monthly rent costs. Many house hackers can live for next to nothing each month while having a lifetime asset purchased for them. This strategy is a great starting point as you will be able to be on site 24/7 to learn about upkeep, maintenance, and to keep an eye on tenants.

Aside from the intangible aspects of a property like location and local culture, many spreadsheets and applications are available for free online to do more concrete analysis of a property. Find one that works for you and evaluate your potential investment from a number’s perspective. How much are similar units renting for? Will you have to account for vacancy throughout the year? What about a savings fund for potential repairs? Try to factor in things like cost of garbage removal, cable, and internet. At this point you will be able to decide if you offer these services as a package with your property or if you should leave those to tenants to pay.

At this stage you can also evaluate the cost per square foot and some other metrics of your investment to see what kind of deal you may or may not be getting. While in the research stage it is important to ask lots of questions and seek guidance from others who have more experience. At the end of the day more people putting their heads together usually leads to a better result.

Done properly, multi-family investing can allow someone, with relatively little money down, to create a passive stream of income for themselves, all the while purchasing real estate that will most likely increase in value indefinitely over time if its kept up and monitored. Given the potential rewards, the risks are great. Before jumping into anything its important to understand that a bad real estate transaction can permanently hobble you financially. A purchase involving a house that needs thousands more in repairs than anticipated, or one that goes unrented for extended periods of time can send investors into bankruptcy and completely derail your financial plans. Investors should steer clear of complicated transactions their first time around and should only proceed after consulting with several professionals.

One of the most difficult aspects of multi-family investing is the family part. You occasionally will deal with tenants who do not pay on time, who destroy your property, and who can make managing your property a nightmare. Forums across the internet are full of stories of “tenants from hell” who appeared to be perfectly normal before destroying their units and worse. Carefully vet any tenants who you agree to rent to, its difficult to get someone out of their unit once an agreement has been signed, once again, careful research on the front end could save you lots of headaches. Ultimately your name is on the deed and anything your renters do while on the property will come back on you if not dealt with properly.

To summarize the article in a few lines, multi-family investing is a challenging and potentially risky endeavor. It requires time and patience to find good deals and executing them is even more challenging. For those who can navigate these challenges however, a potential life changing income source, and long-term wealth building can be attained. To learn more about investing in real estate, and to get into more detailed guides, click here for our FAQ page, or here to subscribe to our monthly newsletter.

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