Real estate investing is a vast business that offers different investment opportunities depending on the investor’s needs and preferences. Most real estate investors focus on single family homes because they are more affordable and easier to finance and manage. But at some point, adding multi family homes to your investment portfolio will certainly boost your cash flow and rental income.
Success in multi family homes investing is strongly related to the effort one makes in evaluating the real estate investment and the amount of due diligence that will assess the location and financial sensibility of the real estate investment. Therefore, we recommend using a bunch of real estate investment tools that will simplify the process of finding and evaluating multi family homes. Before talking about these tools and how to use them when investing in multi family properties, it is important to explain what multi family homes are.
What are Multi Family Homes?
Multi family homes are real estate properties that contain two or more units within one complex, with each unit having its own private space. Multi family properties can be apartment buildings, townhouses, condominiums or duplexes. Investing in multi family homes is a favorable strategy among experienced real estate investors thanks to the bigger cash flow when compared to single family homes.
Best Tools for Investing in Multi Family Homes
#1 Location
You have probably heard this a million times already, but location is the most important factor when buying an investment property, and even more important when buying multi family homes for investment. Since you are looking for more tenants, the location of your multi family property must appeal to renters. Furthermore, investors should pay attention to population growth and job growth in the location they are considering, as these factors determine housing demand.
Traditional property searching methods can be exhaustive, as you will need to gather information about each neighborhood or city you want to invest in. This includes property listings, rental income, and occupancy rate. A wiser alternative would be using a property finder tool like the one Mashvisor offers. Mashvisor’s property finder tool can provide you with all these calculations for each investment property that you can see on the map. You just have to compare different locations and match the results with your investment criteria.
tip: narrow down your search to 3-5 real estate properties using the property finder tool.
Another alternative for finding the best location for investing in multi family properties is heatmap analysis. So, what is a heatmap analysis? This revolutionary real estate investment tool allows you to see data in the form of colored visuals on a map. Mashvisor’s heatmap analysis is one of the leading tools available in the market today. The benefits of the heatmap analysis are not limited to finding the best location to invest in multi family homes, but also to visually perform a multi family real estate investment analysis.
Related: How to Find Investment Properties with Heatmap Analysis
#2 Cap Rate, Cash Flow, and CoC Return
Both cap rate and cash flow are tools to evaluate the performance of a real estate investment. Cap rate, short for capitalization rate, is an important real estate metric that measures how quickly you will get a return on your investment. To calculate the cap rate, you need to estimate the net operating income (NOI) and divide it by the current market value of the rental property. Estimating the net operating income for multi family homes can be tricky. Therefore, it is advised to use the 50% rule. Estimate your monthly income then divide it by 2, then deduct the estimated monthly expenses (repairs, maintenance, taxes, etc.…) to obtain your net operating income.
When investing in multi family homes you should aim for a cap rate in the 5% -12% range, a lower cap rate may not yield enough, and a higher cap rate is usually associated with higher risks.
Cash flow calculation, on the other hand, brings mortgage payments into the equation. Calculating cash flow tells you how much money you will be putting in your pocket at the end of the month. As a rule of thumb, any real estate investment should yield a positive cash flow – the higher it is, the better.
Cash flow = NOI – Monthly Mortgage Payments
Cash on cash return is another important rate of return used to evaluate a real estate investment’s performance. Cash on cash return calculates the cash income earned on the cash invested in a real estate property.
Related: What Is a Good Cap Rate vs. What Is a Good Cash on Cash Return
Mashvisor’s investment property calculator, also known as rental property calculator, is a tool that every real estate investor must have. When searching for multi family homes for sale, this great tool can help you filter out properties according to your investing preferences. Mashvisor’s investment property calculator provides all the metrics mentioned above (cap rate, cash flow, and CoC return) for different rental strategies; traditional vs Airbnb.
To start your 14-day free trial with Mashvisor and subscribe to our services with a 20% discount after, click here.
#3 Neighborhood Comps
Looking at neighborhood comps is an important step when performing property valuation. Why should you perform property valuation? Simply to know if you are paying a fair price for the investment property and to determine how much rent to ask for you multi family rental property. This process is called comparative market analysis or real estate market analysis.
To learn more about comparative market analysis and how to use it to evaluate properties, read “How To Perform A Real Estate Market Analysis“
Where to Invest in Multi Family Homes
The following is a list of the best locations to invest in multi family homes in the U.S in 2018. These markets offer the best opportunities for real estate investors as they have a growing population, high rental income, and low vacancy rates.
1- Los Angeles, CA
Median Price: $831,560
Airbnb Cap Rate: 0.97%
Traditional Cap Rate: 1.19%
Airbnb CoC return: 0.97%
Traditional CoC return: 1.19%
2- San Francisco, CA
Median Price: $1,546,319
Airbnb Cap Rate: 1.26%
Traditional Cap Rate: 0.85%
Airbnb CoC return: 1.26%
Traditional CoC return: 0.85%
3- Boston, MA
Median Price: $852,782
Airbnb Cap Rate: 1.15%
Traditional Cap Rate: 0.91%
Airbnb CoC return: 1.15%
Traditional CoC return: 0.91%
4- Portland, OR
Median Price: $559,915
Airbnb Cap Rate: 0.32%
Traditional Cap Rate: 0.86%
Airbnb CoC return: 0.32%
Traditional CoC return: 0.86%
To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.