So, why is it that some real estate investors end up losing money with a negative cash flow property as a result of getting involved in multi family real estate investing?
There are many factors that can lead to a loss when investing in real estate: a downturn in the real estate market, poor rental property management, etc. I would say one of the most common reasons happens to set real estate investors up for failure right from the beginning. It’s the inability to properly evaluate multi family investment properties.
A lot goes into the process of buying multi family property for investment. So much, that a real estate investor can sometimes end up with a dud if he/she doesn’t know how to pinpoint the best real estate investments. Don’t get off on the wrong foot in multi family real estate investing. Instead, learn how to evaluate multi family investment properties.
The Multi Family Real Estate Investment Deal
As mentioned, there are many reasons a real estate investor can fail when investing in real estate. One of them is not evaluating the real estate investment deal. Finding a multi family real estate property below market value is a great thing. But, real estate investors should always stop and think: “Why is this multi family property below market value? What’s wrong here?”
Related: 6 Questions to Ask Yourself Before Buying Multi Family Homes for Investment
Motivated Seller or Dud of an Investment Property?
If you’re simply dealing with a motivated seller who needs to unload the multi family investment property for personal reasons, then that would make for a good real estate investment deal. However, real estate investors can become motivated sellers when their multi family investment properties are not bringing in enough rental income. This, on the other hand, would make for an awful real estate investment deal. You’ll end up with a terrible multi family property that drives you to be a motivated seller down the line.
To learn more about how we will help you find the best real estate investment deal, click here.
This is why multi family real estate investment analysis is required. Of course, if you can find issues with multi family investment properties and you know the solution to turn it around, then go for it. But, you can never be sure until multi family real estate investment analysis is complete.
Multi Family Real Estate Investment Analysis
Multi family real estate investment analysis does differ from that of single family homes for sale. So, whether you are new to real estate investing altogether or dipping your toes into multi family real estate investing for the first time, pay close attention here.
Keep in mind: Multi family investment properties that have 4 units or less (residential real estate investments) are treated much in the same way as single family homes. This is true when it comes to financing as well as how to evaluate and find the value of such multi family investment properties. Here, we will focus on multi family homes for sale with 5 units or more (commercial real estate investments).
The Perfect Location for Multi Family Investment Properties
Real estate investors enjoy relative stability in the real estate market, compared to say, the stock market. Still, the choice of real estate market affects the success of multi family investment properties. There has to be demand for this type of real estate investment. The only real estate markets where you’d be sure to find high demand for multi family investment properties are those with a strong economy and job and population growth.
Good or Bad Real Estate Market? Where’s the Proof?
You may have found what you think to be a great real estate market for multi family real estate investing, but where’s the proof? The proof is in the real estate market analysis. If a real estate market will, in fact, contain some of the most profitable investments in real estate, then real estate market analysis will prove this to be so. Through real estate market analysis, you can find out the kind of cash on cash return, cap rate, rental income, and overall return on investment you can expect with multi family homes for sale in that location.
This kind of data is most easily obtained with a rental property calculator, specifically a multi family investment calculator. A multi family investment calculator uses traditional and predictive analytics to show a real estate investor how a real estate investment has performed and will perform in the future.
To learn more about our rental property calculator which includes a multi family investment calculator, click here.
To simplify things, we can show you a few great real estate markets with multi family homes for sale that promise a great return on investment. Mashvisor’s multi family investment calculator suggests investing in multi family homes for sale in:
Los Angeles, CA
Long Beach, CA
Somerset, NJ
Las Vegas, NV
Columbus, OH
Where’s the proof? With Mashvisor’s multi family investment calculator. Try it out for yourself.
To start looking for and analyzing the best multi family investment properties in your city and neighborhood of choice, click here.
Classification of Multi Family Investment Properties
The next step for evaluating multi family investment properties is looking at both property and location classes. Take a look at the major characterizations of both multi family investment property and location classes A-D:
In order to ensure you end up with the most profitable investments, the real estate investment property should be found in a neighborhood class that is equal to or higher than the class of the property.
For example, a Class A investment property will be profitable only in a Class A neighborhood. A Class B investment property will do well in either a Class B or Class A neighborhood and so on.
How can you evaluate the classes of multi family investment properties and their neighborhoods? Continue multi family real estate investment analysis, specifically the investment property analysis. Investment property analysis will reveal the state of the neighborhood as well as the cap rate, condition and age of the property, cash flow, and needed repairs- all of which are needed to identify the classes of multi family investment properties and their location.
While a home inspection will help a real estate investor evaluate repairs and other such details about the investment property, what about the numbers?
Related: Learn How to Invest in Multi Family Homes for Sale
Multi Family Real Estate Investment Analysis – The Numbers
Two numbers that a real estate investor will focus on while trying to evaluate multi family investment properties are the cash flow and the cap rate.
What is Cash Flow?
Cash flow is the amount of rental income generated by multi family investment properties minus any accumulated expenses. The standard cash flow formula is:
Cash Flow= Total Income – Total Expenses
When evaluating a multi family property for investment, this means that you’ll need to figure out the expenses as well as the rental income.
What kind of cash flow do the most profitable investments have? A positive cash flow. Choose a multi family property for investment that will bring in more rental income than the expenses. If the investment property you’re evaluating is currently showcasing signs of a negative cash flow property, see if there is an obvious remedy. If not, move on.
What is a Cap Rate?
Cap rate (capitalization rate) is a common metric used to measure the return on investment. It compares the amount of income to the price of the multi family real estate property. The cap rate formula is:
Cap Rate= Net Operating Income/ Property Price
What is a good cap rate for multi family investment properties? Cap rate depends on a lot- the property type, the location, the level of risk, even interest rates. When you are looking for the best real estate investments, aim for 5% and above.
Related: Understanding Multi Family Investment Property Returns and Benefits
Multi Family Investment Calculator
Calculating cap rate and cash flow for each and every multi family property you wish to evaluate will take a lot of time. Why not use a multi family investment calculator instead? It will give you the data for real estate market analysis and perform the key calculations of investment property analysis. Try Mashvisor’s today and evaluate multi family real estate with accuracy and ease.
To start your 14-day free trial with Mashvisor and subscribe to our services with a 20% discount after, click here.
The Best Multi Family Investment Properties
So, after learning how to evaluate multi family investment properties, what do the best ones look like?
- Located in a profitable and growing real estate market
- Property class in same or higher neighborhood class
- Positive Cash Flow
- Cap Rate is greater than 5%
These are 4 of the most important elements when evaluating multi family investment properties. Look for all 4 and you’ll find success in multi family real estate investing!
Related: How to Generate Passive Income from Multi Family Real Estate Investing