Apartment Buying, Buying Multifamily apartments, investing in multifamilies, cash flow

Any rental income property that has more than one family unit is considered multifamily property. The smallest multifamily property being a duplex (two units) and then up from there to larger rental complexes easily consisting of hundreds of apartments.

The advantage of purchasing multifamily properties, not unlike all income-producing properties, is that it provides real estate investors with the ability to support debt from the income the property produces.

Understood in real estate investing circles as “using other people’s money”, this idea is crucial to buying multifamily properties profitably and therefore must always be kept in mind because the success or failure of the investment depends on the income the property generates to meet debt service and other obligations required to keep the property.

Enough said. Let’s look at three elements that contribute to this principal, and discuss why they are crucial to buying multifamily property profitably.

Obtain sound financing

The key to buying any income property is for you to establish a sound financing package on the property. You want to obtain a loan that doesn’t place excessive burdens on the property, or yourself. Moreover, because lenders evaluate rental property based on income stream and generally structure a loan based on the property’s financial strength as well as the investor’s, bear in mind the significant role the principal of using other people’s money plays in financing the investment.

When applying for a loan on a multifamily property, present lenders with clear and concise cash flow reports because you are more apt to obtain a favorable financing package when the property is represented fairly to the lender and the income and operating expenses are shown to be accurate.

Conduct a rental market survey

What tenants are willing to pay to occupy a unit in the apartment is the cornerstone of the investment. Therefore, it’s incumbent upon real estate investors to understand local rental market trends for vacancies and rental rates when buying multifamily property. Rental market trends are easy for investors to recognize, just watch the newspaper or drive around the community noting all rental properties that have vacancies. If you see few for rent ads or signs, or surmise that rents are increasing, it probably signals a shortage of rental units, and a favorable opportunity for you. On the other hand, when lots of rental signs start appearing and rents drop, it could spell trouble.

The ideal situation to own multifamily property, of course, is when vacancy rates decrease. Property owners can be more selective about the type of tenant they rent to and establish a positive direction for the complex, perhaps even increasing rents. On the other hand, when tenants become scarce, owners might have to become less selective about tenants and perhaps lower the rents just to fill the units.

Be sure to conduct a rental market survey when purchasing multifamily investment property and carefully gauge the rents and vacancy rates.

Consider economic conversion

There might be money to be made in cases where the former property owners have let the property run down and rents had to be decreased to keep the units filled. If these rental properties are in a good area of town or in an area that is returning to a former higher quality, then the remodeling of a rundown apartment complex can be a profitable venture. Just be careful to ascertain the cost for remodeling and what impact it will have on rental income. Pure window dressing for the sake of appearances only, unless it has a positive influence on occupancy levels or rents, is typically avoided by prudent real estate investors. So get a qualified contractor to give you a bid on remodeling. Otherwise, what you surmised as surface issues when you were buying the multifamily property could in fact be a costly can of worms.

In other words, look for an opportunity to upgrade the building and raise rents because it can contribute to a profit, just be sure that you know exactly what you’re getting into.

The pros and cons of buying multifamily property

The most obvious advantage of buying any income-producing property is real estate investors can grow wealthy in the long run. Simply by holding onto the property and letting other peoples money payoff the debt is what drives people into real estate investing, even if there is no immediate cash flow. Moreover, multifamily properties serve a basic need, which limits the downside risk in that they provide shelters to those who cannot afford or who do not choose to buy real estate.

The downside to owning rental income property mostly concerns the management problems associated in dealing with tenants. Apartments can be management intensive, and often the reason why investors who purchase rental property hire the services of a professional property management company to deal with the day-to-day issues of running the property. So you at least have the option to minimize this disadvantage.

The bottom line is straightforward. Multifamily property provides investors the opportunity to build wealth. But it’s not unlike the investment you would make in any other investment property, whether land or commercial real estate, it simply requires you to do it correctly, with a careful eye on the elements discussed here. Here’s to your real estate investing success.

Written by: James Kobzeff