What to Look for When Investing in Multifamily Properties

Investing in real estate can help you build your wealth, particularly investments in multifamily properties. Multifamily investments are expected to reach $148 billion in 2021, as the rental market remains strong. 

Multifamily real estate can be a profitable investment, but you need to choose your properties wisely. There are several things you need to look for when investing in real estate of any kind, including multifamily properties. 

A Great Location

Location is arguably the most important thing to consider when investing in real estate, particularly with multifamily properties. There has to be sufficient demand, or you run the risk of having a low occupancy rate. 

A property may hit all of the other marks – excellent price, well-maintained, etc. – but your investment will bring you little or no return if you struggle to find tenants.

Research is the key to finding a good location. Look for high-growth, high-yield areas. If you plan on managing the property yourself, consider choosing a desirable location that’s close to home.

Income Potential

Estimating a property’s income potential can be challenging, but it’s a necessary part of the due diligence process. Take advantage of online tools to verify local rental prices, and make sure that you take everything into consideration.

Many beginner investors follow the 50% rule, which estimates operating expenses to be 50% of the property’s gross income. These expenses are in addition to the mortgage payment and can include:

  • Maintenance/repairs
  • Property taxes
  • Utilities
  • Insurance
  • Property management

Use this rule to find properties that offer favorable income potential. 

The Size of the Property

If you’re just getting started with real estate investing, you may want to consider a property with just a handful of units:

  • Duplex (two rental units)
  • Triplex (three rental units)
  • Four-plex (four rental units)

For beginners, these properties have lower risk and greater affordability compared to large multifamily properties with hundreds of units.

Renovation and Maintenance Needs

Unless you’re purchasing a new property, you will likely have to renovate before you begin renting units. Consider the property’s maintenance and rehab needs carefully. The price may be attractive, but extensive repairs can quickly make a property unprofitable.

When evaluating multifamily properties, consider bringing a professional, experienced contractor along who can help you estimate the cost of repairs and renovations.

Even if the property is well-maintained, the units may be outdated.  In this case, you will need to consider and estimate the cost of renovating the units. 

Fire Safety Measures

Fire safety may be the furthest thing from your mind when looking at multifamily properties, but it’s an important thing to consider. Multiple families will be living in the building, which increases the risk of fire. 

Properties with sprinkler systems, fire escapes and intelligent fire alarm systems are worth considering. Make sure that the property also meets all local fire codes.

In addition to being a safer home for your tenants, properties with fire safety measures are also cheaper to insure.

Multifamily properties are big investments with the potential to offer big returns. If you’re investing in real estate, multi-unit properties can prove to be lucrative. Keep these points in mind when evaluating properties as part of your due diligence process.

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