If your portfolio is stuck in a rut, or you’re not seeing the type of returns you’d like with single-family properties, investing in multifamily real estate may be the trick to turning things around. Because multifamily buildings house multiple units under one roof, investors often see higher returns with less risk.
There’s a lot to know before diving into this type of investing though. Look through the guide below to learn how to stay profitable when breaking into the world of multifamily properties.
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Several different calculations will enable you to analyze the benefits of various investment opportunities. By first understanding your own goals with investing, you can identify which calculations are most relevant for your situation. If you’re unsure which formulas will be most valuable for you, looking at the calculations for each will give you a comprehensive view of a multifamily investment opportunity’s potential profitability.
| Return on Investment (ROI) |
Calculating your potential return on investment can give you a general view of a property’s profitability. ROI = Property’s Equity / Total Costs Check out our comprehensive guide to calculating ROI when investing in multifamily real estate – as well as other investment opportunities – to further understand the ROI calculation under varying circumstances. |
| 50% Rule |
The real estate 50% rule can help you determine if your cash in will exceed your total cash out each month. The basis of the rule is that you should collect enough rent to put 50% towards operating expenses. Estimated Monthly Operating Expenses = Property’s Gross Rent x 50% This rule is best used in conjunction with other formulas but can be a deciding factor as to whether or not you move forward with a given opportunity. For example, if the mortgage payment for a given property is $5,000, but the gross rent is $7,500, that leaves only 25% to go towards operating expenses and profit. Therefore, it may be in your best interest to invest in a different property. |
| Capitalization Rate |
The capitalization rate of a multifamily property can give you a more comprehensive look at an investment property’s health, regardless of the financing method used. Capitalization Rate = (Net Operating Income / Property Value) x 100% Higher capitalization rates indicate greater risk, while lower rates indicate less risk, but lower returns. A good cap rate is anywhere between 5% - 10%. |
| Cash Flow |
Cash flow is one of the most basic ways to identify the utility of a given property. Despite how simple it seems, calculating cash flow can help you identify all of the expenses associated with the property in question, which can help you make the best use of your investment capital. Cash Flow = Total Income - Total Expenses If you’re unsure of every possible expense you may encounter as a new real estate investor, many online calculators are available to do the calculations for you. |
The formulas above are just one way for you to know how to value a multifamily property. Additional considerations include the property’s classification (residential or commercial property), any existing liens, and the number of units, among others listed below.
No matter what’s happening in the housing market – location will always be one of the top things to consider before investing in multifamily real estate. If you can provide an enticing living space near schools, shopping centers, and parks, you’ll likely experience fewer vacancies. And when those vacancies do occur, you’ll have an easier time filling them with high-quality tenants.
When investing in multifamily buildings, keep an eye out for the following near said investment:
Additionally, you’ll want to ensure the investment is in a strong labor market. One way to analyze this is to review population growth year over year, as well as by looking at what types of companies are in the vicinity. Also consider the less appealing aspects of a neighborhood and how those may affect tenant turnover rates – is the property close to a noise-polluting airport, freeway, or train tracks?
Finally, and perhaps most importantly, consider how safe the real estate units are. Whether your target market is young families, mid-career singles, retirees, or a mix of tenants in different stages of life, safety appeals to the masses. The safer your property and its neighborhood are, the better your investment will be.
Every successful multifamily investment strategy contains an evaluation of the expenses associated with a potential investment property. Failing to review these costs can significantly reduce your projected ROI. Review the general costs you’ll likely encounter below:
If you aren’t satisfied with your potential profits after weighing the costs and benefits of several different real estate units, it may be time to look for properties in a new location or consider building a new multifamily real estate development. Building vs buying has its own pros and cons, so be sure to thoroughly research the process before getting your feet wet.
Multifamily properties are, by nature, more expensive to purchase than single-family investments. While not every multifamily investor will have to finance an investment opportunity with a loan, many choose to anyway as it can aid in maximizing profits.
As a basic example, let’s say investor A and investor B both have $150,000 cash. Investor A decides to pay $150,000 cash to purchase a mixed-use building, while investor B decides to finance a similar property with a small balance commercial loan and only pays $30,000 for a down payment. Investor A now has all of her money tied up in one property, while investor B still has the funds to acquire additional properties. In the long term, investor B will likely acquire properties at a quicker rate and therefore generate passive income more rapidly.
If you choose to finance your investment with a loan, partner with a trusted real estate lending company, such as Revolution Realty Capital. Having funded over $1 billion in direct capital loans and with over 40 years of experience, you’ll be on your way to maximizing profit in no time.