Could Buying Multi Family Homes for Sale Be a Bad Idea?

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

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.

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