Multifamily properties are buildings or complexes that accommodate many families and households in separate housing units. They include apartment buildings, condos, duplexes and triplexes, and townhouses. According to a 2023 report by Statista, the value of multifamily lending reached over $487 billion in 2021.
What are the benefits of a multifamily real estate investment?
Multifamily investment is highly sought after by independent investors, public investors and private firms. Here are some reasons why a multifamily investment is popular in the market. Since there are multiple housing units, one or two members vacating will not make a big dent in the owner’s income. A more stable cash flow is a solid benefit that multifamily housing investment offers.
Even during rough times, multifamily units generate more stable income compared to other types of property. Also, since multifamily units are relatively larger in size, hiring professional property management services is justified. This way, you can get professional advice on your business practices, and free up your schedule for high priority tasks.
How to analyze multifamily investment opportunities?
Real estate investment is a big decision, and often there are a lot of funds at stake. You would want to make sure that you choose a good fit for your investment goals. Let’s look at what you should consider before investing in an investment.
Set goals for your investment
First off, start thinking about what is the objective behind investing. Do you need a stable cash flow now, or is it more important for you to have long term gains, even though current returns are not satisfactory? Sometimes, it could be both, and that is okay too.
At this stage, it is also important to take a look at your financial situation, and ask yourself, “How much risk can I afford to take?” If you are a conservative investor, your goal will be to look for an option that is proven to generate stable income, and is resilient during economic slowdown.
Market research
Find out more about the local real estate market of that property. How has the demand for rental properties been in that location? Are there migrants, students, or people from other cities and towns moving for jobs? For example, if the real estate market is dominated by couples moving in to start a family, that’s good news, it means there is some potential for future growth.
Also take a look at competitors- are housing options limited, or are they mushrooming all over the place? What is the unique selling point of your competitors- is it scenic views, proximity to places of work, supermarkets, schools- all this is an important part of analysing competitors.
Analysing the property unit
Once you have clarity on your goals and capacity to take risk, and the market atmosphere, you can then turn your attention to the specifics of the property you want to invest in.
Cost of investment
The cost of investment is an estimate of the entire amount you will have to invest when you purchase the property. It includes not only the purchase price of the property, but also the cost of repairs, downpayment, and closing cost.
It is a good idea to call in an inspector to check for maintenance and repair needs of the property. It will give you a fair estimate of your repair costs throughout the year. Excessive repair costs and maintenance needs are a red flag- mould, leakages, termites and rust are some things you need to watch out for when you physically inspect the property. Finally, you will also need to take care of legal fees, bank appraisal, and loan application fees, if it applies to you.
Apart from the initial cost of investment, you should also keep an eye on projected expenses, i.e. the bills you have to pay when you start managing the property. These include insurance, utilities like water and electricity, building maintenance, and taxes.
Estimate of income
The main source of your income will be the monthly rent, along with fees for laundry, vending machines, parking, etc. In order to estimate your income by way of rent and other passive sources, you can ask your seller to provide a proforma of expected expenses and income. Historical information, like profit and loss statements, will help you understand the past performance of the property. Moreover, also ask for information about vacancy rates.
Net operating income
Net income is what is left with you when you deduct all operating expenses from your revenue. Operating expenses refers to those expenses that are necessary for running a business, and in this case, maintaining the multi family housing unit. It includes utilities, maintenance, property taxes, insurance, etc. Basically, when you minus operating expenses from your revenue, you get your operating net income.
How is the cash flow?
Most people take housing loans before investing in real estate. So, every month, you will be paying back a part of that loan from the money you make. The cash flow is what remains with you after paying the mortgage on that property. Mortgage usually consists of the principal amount, i.e. payment of the original amount that you borrowed, the interest, and other expenses like premium for home insurance. In simple terms, cash flow is revenue minus mortgage.
Return on investment
Return on investment (ROI) is the money you make over the money you invested in buying the property. So basically, ROI is cash flow divided by the cost of investment. This is the most important number of all. The ROI figure must be positive, for you to consider this a good investment. Tax deductions are one way of maintaining a good ROI figure. Also, the ROI tends to increase over time as the value of the property appreciates.
Exit strategy
Exit strategy refers to what you have planned for this property in the long term. For example, one strategy is long-term ownership, wherein you hold the property for several years. Some investors may want to sell the property for capital gains when the market conditions are appropriate for such a decision. You may make upgrades and changes to the property before selling it, so that its value appreciates.
If you are a potential investor who wants to venture into multifamily unit investments, you will need to do a thorough assessment of your appetite for risk, and your investment options. We hope this article gave you an overview of the various factors that play a role in judging the suitability of an investment.
