Multi-family homes or units differ from that of your traditional single family home in a multitude of ways. Generally, multi-family units are purchased with the intent of bringing in rent and are perceived as investment properties. The income producing aspect of purchasing a multi-family unit is what drives many first time real estate investors to consider the prospect of such an endeavor.
Working with an experienced Broker is the most important step in the process of purchasing an investment property. Multi-family units can be especially complicated to purchase without a professional Broker because of the additional factors that surround them. Loans or mortgages for multi-family units are underwritten quite differently than on single family units. This is largely due to the income producing factor of a multi-unit property. Lenders are more often concerned with the viability of the property and less concerned with the credit of the buyer (though good credit is still important!)
There are many things to consider when purchasing such a property, as stated before. The first and most obvious point to consider when investing is who current or prospective tenants will be, and the contracts or leases they will hold with your unit. Knowing how long your tenants will be leasing your property helps you to budget accordingly, considering the reliable income your property will be producing. Of course, with any tenant there are risks, and it is extremely important to consider you’re their creditworthiness to protect your investment. Additionally it is important to consider the cost of maintenance on your new investment, and to budget accordingly for repairs and replacements of features in your units.
Multi-family units are bought for producing income and increasing your cash flow. Therefore, it’s important to consider the different valuation models used in the industry to assess your units’ income probability. The first valuation, the “cap rate” is the annual net operating income before taxes, taken and divided by the purchase price or present market value. This shows the proportion of the income to the purchase price, making it easier for you to validate your purchase in the existing market. The “gross rent multiplier” is the present market value or purchase price divided by the gross operating income or the total you will receive in rent payments. Essentially, knowing your earning potential from the property compared to what you will have to spend to purchase the property will help you determine if a multi-family unit is the right investment for you! To better understand your investment’s potential, keep up-to-date with current vacancy rates, employment rates, and rent cost or cost of living in your property’s area. This will help you to further evaluate your investment.