Rental Property Types Could Buying Multi Family Homes for Sale Be a Bad Idea? by Sylvia Shalhout July 8, 2020July 7, 2020 by Sylvia Shalhout July 8, 2020July 7, 2020 Yes, buying multi family homes for sale could be a bad idea. Let me explain what I mean. Real estate is a good investment. Multi family real estate is, in fact, a good investment. However, certain multi family homes for sale could end up being the worst real estate investments you could ever make. Just because experts often recommend buying multi family homes for investment, that doesn’t mean that any and every multi family property for sale will make for a great real estate deal. Let’s look at some of the instances when buying multi family homes for sale would be a bad idea. The Multi Family Home Is in a Bad Real Estate Market Investing in multi family homes for sale in a bad real estate market is a bad idea. A bad real estate market will make it difficult to rent out the property or even sell it down the line. So what does a bad multi family market look like? Here are a few traits to watch out for: Property prices, taxes, and operating expenses are too high The economy is stagnant or declining, there are few job opportunities, or there is only one major industry that the economy relies on The population is declining There are a lot more homeowners than renters, resulting in low demand for rental properties Landlord-tenant laws are not on the property owner’s side Multi family rental properties do not generate a good return on investment Related: The Bad Housing Market Everyone Should Avoid So, should I buy multi family homes for sale near me? Where are the best multi family markets? To answer these questions and to help ensure you don’t regret your multi family real estate investment, I gathered some of Mashvisor’s data on multi family markets. Here are the best places for buying multi family homes based on average cap rates by city. #1. Manchester, NJ Median Property Price: $79,887 Price to Rent Ratio: 4 Traditional Rental Income: $1,812 Traditional Cap Rate: 14.6% #2. Marco Island, FL Median Property Price: $593,673 Price to Rent Ratio: 10 Traditional Rental Income: $4,981 Traditional Cap Rate: 6.1% #3. Naples, FL Median Property Price: $368,536 Price to Rent Ratio: 10 Traditional Rental Income: $3,177 Traditional Cap Rate: 6.1% #4. Pasadena, CA Median Property Price: $1,513,909 Price to Rent Ratio: 8 Traditional Rental Income: $14,978 Traditional Cap Rate: 5.1% #5. Hemet, CA Median Property Price: $410,314 Price to Rent Ratio: 13 Traditional Rental Income: $2,582 Traditional Cap Rate: 4.5% #6. Bakersfield, CA Median Property Price: $363,422 Price to Rent Ratio: 11 Traditional Rental Income: $2,830 Traditional Cap Rate: 3.7% #7. Anaheim, CA Median Property Price: $1,330,841 Price to Rent Ratio: 15 Traditional Rental Income: $7,158 Traditional Cap Rate: 3.2% #8. Allentown, PA Median Property Price: $211,327 Price to Rent Ratio: 14 Traditional Rental Income: $1,219 Traditional Cap Rate: 3.1% #9. San Bernardino, CA Median Property Price: $674,058 Price to Rent Ratio: 12 Traditional Rental Income: $4,697 Traditional Cap Rate: 2.9% #10. Baltimore, MD Median Property Price: $305,377 Price to Rent Ratio: 18 Traditional Rental Income: $1,377 Traditional Cap Rate: 2.9% Related: How to Choose a Real Estate Market to Invest In Or Perhaps It’s Located in a Bad Neighborhood It’s a very bad idea to buy a multi family home in a neighborhood that you haven’t analyzed. Every city, even those recognized as great places for investing in multi family homes for sale, have bad neighborhoods for real estate investing. What do these neighborhoods look like? Well, they could be areas with high crime rates, very low appreciation rates, poor transit – essentially a place where tenants would not want to live. Keep in mind that you will likely find cheap multi family homes for sale in such locations. But due to the location itself, such investment properties can actually be a bad real estate deal. To confirm if it’s a good idea to buy a multi family property in a certain neighborhood, conduct a full neighborhood analysis. Find out how rental properties perform in terms of rental income, occupancy rate, and cash on cash return. You can do this quickly using Mashvisor’s real estate heatmap. It’s Distressed Beyond Repair Buying a really distressed multi family home could be a bad idea. Perhaps you’ve found a really affordable multi family home for sale. But have you done a home inspection yet or even a walkthrough? Buying multi family homes based on listing price alone is a really bad idea. Just because it fits your budget for real estate investing, that doesn’t automatically make it a good real estate deal. It could be so cheap because it has suffered severe damage or neglect over the years. Even if you’re looking to buy a multi family property to fix and flip or even rehab and rent out, you still don’t want to deal with larger, more expensive issues like structural or roof repairs. If a multi family home for sale is in really bad shape and would require extensive and costly repairs, it could be a bad idea to invest in it. Remember, major repairs also means time when the investment property is vacant or unsellable – this equates to negative cash flow for you. It’s Not a Cash Flowing Multi Family Home Have you done the math? What kind of cash flow can you expect from this multi family home? Real estate investors should always be on the lookout for positive cash flow properties. This is when the rental income generated is more than the operational costs of the multi family rental property. Negative cash flow means that you will have to pay money from your own pocket to keep the multi family home up and running. Although negative cash flow properties are not always a bad investment (if you have a sure-fire plan on how to turn things around), it’s best to try to find multi family homes for sale that you are confident will produce positive cash flow. How can you do this? You need to figure out the kind of rental income and costs you can expect. Either locate rental comps along with their data or talk to local landlords who own similar multi family rental properties in the area. The easiest way is to use Mashvisor’s multi family investment calculator. This calculator uses rental comps to automatically generate rental income and expense estimates. It then takes it a step further and calculates cash flow for you. That way, you can see how much cash flow the multi family home will generate just by checking out the listing on Mashvisor. Find Cash Flow Properties Now You Won’t Generate a Good Return on Investment Buying multi family homes for sale that don’t promise a good return on investment is a bad idea. Not only should a multi family rental be cash flow positive, but it should bring a good rate of return as well in terms of cap rate and cash on cash return. A general rule of thumb is that the higher the multi family property return on investment, the better. Conduct a multi family real estate investment analysis and calculate these two return on investment metrics. You can get this calculation automatically done with Mashvisor’s multi family investment calculator. Verdict: Look for Multi Family Homes for Sale That You Won’t Regret Buying It’s simple really – yes, buying multi family homes for sale can be a bad investment if you invest in the wrong property. Do your due diligence on both the market and the property. That way, you won’t end up regretting your decision to invest in multi family real estate. And don’t forget to turn to Mashvisor for help! Learn more about how Mashvisor can you help you find top-performing multi family homes for sale by reading: 3 Investment Property Search Tools to Find Multi Family Real Estate Start Your Investment Property Search! START FREE TRIAL Cash FlowDistressed PropertiesLocationMulti FamilyReturn on Investment 0 FacebookTwitterGoogle +PinterestLinkedin Sylvia Shalhout Sylvia was the Content Marketing Manager at Mashvisor. As a real estate writer, she has been covering topics for the beginner and advanced real estate investor, helping them make smarter decisions as well as real estate agents looking to take their business to the next level. Previous Post What’s the Deal With the Kissimmee Real Estate Market 2020? Next Post Selling Your Home? How to Find a Real Estate Agent Related Posts How to Buy a Vacation Rental in 7 Easy Steps Multi Family Real Estate Investing: Is This the Right Strategy for You? What’s a Tiny House? 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