Entrepreneurs tend to be good fits for real estate investing. This has something to do with their creativity, ingenuity, and stomach for risk-taking. And if there’s one type of real estate investing that’s more appealing than the rest, it’s multifamily properties.
The Benefits of Multifamily Real Estate Investing
As the name suggests, a multifamily piece of real estate is housing where there are multiple units. These units are typically all owned by one person, but leased out to different tenants. Examples include large apartment buildings, duplexes, and triplexes. The benefits of investing in multifamily properties include:
- Cash flow. More rent checks equal more cash flow. There’s also the added benefit of being able to stay above water, even in the midst of turnover and vacancies.
- Easier management. It’s much easier to manage three units that are all in the same building than it is to manage three properties spread out across town.
- Flexibility. With a multifamily property, you have the option to live in one unit and rent out the rest. This can essentially provide you with a free place to stay. Or, if you prefer, you can rent out all units and live somewhere else.
- Easier financing. Generally speaking, lenders see multifamily properties as less risky than single-family rental properties. The risk is spread out, which lowers your chances of defaulting.
These are just some of the perks of investing in multifamily real estate. The more you learn about this type of investment, the more appealing it’ll become.
4 Tips and Principles
Whether you’re a first-time investor, or you have experience investing in other types of real estate, here are a few tips and principles to help you find success in the multi-family niche.
- Finding Properties
The most important step in any real estate investment is the purchase. You make your money when you buy, not when you sell. This means if you overpay, the deal will never work out in your favor.
The biggest challenge with multifamily housing is that the inventory is lower than with single-family homes. There simply aren’t as many for sale. If you’re impatient, this can cause you to make a bad investment when something does eventually end up on the market. Practice patience and do your due diligence. Pressure never makes an investor smart.
- Financing
Most of us aren’t cash investors. Assuming you won’t be buying a bunch of real estate in cash, you’ll need to get the money from somewhere. This also means you’ll need to meet certain lending criteria.
In addition to satisfying a basic loan-to-value (LTV) ratio and debt service coverage ratio (DSCR), most lenders will also require a debt yield ratio (DYR) of at least 10 percent in order to make a deal viable. Here’s a really simple debt yield guide that explains exactly how this ratio works within the context of real estate investing.
- Maintenance
When you have three units in an investment, as opposed to just one, you also have three-times the toilets, garbage disposals, AC units, etc. Naturally, this increases the burden of upkeep and maintenance.
Rather than adopting a reactionary approach to maintenance, it’s wise to invest in preventative maintenance. Not only will this save you time – you can do all units on a schedule – but it’ll also save you money by preventing small issues from becoming major problems.
- Managing Tenants
Finding and screening tenants is only half the battle. You’ll need to make sure your investment is in a good location with little crime. I use a heat map software and color code the zip codes based on the crime rate. One of the most important aspects of successful multifamily real estate investing is retaining good tenants. Make sure you’re building relationships, holding them accountable (no late checks), and meeting their requests (within reason). It’s typically cheaper to keep a tenant at the current rent rate than to secure a new tenant at a higher rent. Turnover is rarely as easy as it seems on the surface.
Conclusion
Multifamily investing is just one type of real estate investing. You can invest in single-family homes, commercial properties, offices, retail space, warehouses, raw land, mobile home parks, etc. The key is to find the type of investment that fits your skills and offers the best possible return on investment for your money. For many, multifamily real estate is the answer. For others, it can be found in a different niche. Give it a try and see what you think.