If you’re thinking of investing in real estate, multifamily properties are a great option. According to CBRE, a commercial real estate investment company, multifamily properties generated, on average, an annual return of 9.75% between 1992 and 2017.
Whether you’re looking at investing in an apartment building or a simple duplex, it’s important to understand the basics of multifamily home investing.
Location is Everything
In real estate, location is the most important thing to consider, and it’s arguably even more important with multifamily properties. Apartment buildings have several units, and you’ll need to occupy those units if you want to succeed. There needs to be sufficient demand for rentals in the area.
So, how do you determine whether a location is desirable for rentals? There are several factors to consider, including:
Check out the rental market. How many rental listings are there? This is a simple way to gauge whether the market is oversaturated, or whether you’ve found an opportunity to fill a need.
If you’re finding a lot of listings in the area, the market may be oversaturated. Sure, demand is there, but competition is fierce. This means that you’ll have to lower your rent prices to compete, or deal with high vacancy rates.
Rental markets with fewer listings may indicate demand but room for competition.
If you can’t find any listings, that’s not a good sign. This may mean that there isn’t sufficient demand for rentals in the area.
Price to Rent Ratio
The price to rent ratio is another great way to gauge rental demand. It shows which is more affordable: homeownership or renting.
If the price to rent ratio is high, this means that it’s more affordable to rent than it is to buy a home. In these areas, the renter population is likely higher than the homeowner population.
Local Job Market
If the local job market is booming, there is a good chance that demand for rentals is high, too. High-growth job markets attract people looking for employment opportunities, and these individuals will have to live somewhere. Chances are, they’ll be looking for a place to rent – at least initially.
These are just a few of the metrics you should look at when determining whether a property is in a desirable location.
Consider How Many Units the Property Has
Multifamily properties come in many sizes. Some have just a few units, while others have hundreds. When evaluating properties, you must consider how many units the property has and whether you can handle the management of those units.
If you’re just getting started with investing, it may be more practical and manageable to look at properties with two to four units maximum. These properties are typically more affordable, come with a lower risk and offer the most upside.
Determine Whether the Property Is Profitable
Profitability is the name of the game when investing in real estate, so it’s important to estimate how much income the property can generate.
Websites like Craigslist and Rentometer.com can help you estimate rental prices and potential income. But it’s important to remember that expenses are involved in managing multifamily properties. As an investor, it’s your responsibility to do your due diligence before investing in a multifamily property.
The 50% rule is a good one to follow if you’re new to investing. This rule states that you should spend 50% of the property’s income on expenses rather than its mortgage.
These are just a few of the basics of investing in multifamily properties. Always remember to do your due diligence when evaluating properties, and it’s often better to start with smaller properties, such as a duplex or triplex, before moving on to bigger and more complex investments.