Buying multi family real estate investments can be the best way to make money in real estate. Higher rental income, risk mitigation, and property appreciation are among the many reasons real estate investors are attracted to this type of income generating asset. But like any other type of investment property, multi family rentals can be tricky to handle and you can end up losing your money if you are not well prepared. In this blog, we outline everything you need to successfully get started with multi family real estate investments.
But First, Why Should You Invest in Multi Family Homes?
We mentioned a few of the reasons property investors go for multi family homes but let’s dive a little deeper into it.
Multi family real estate investments guarantee high potential for increased rental income as a result of having multiple units in one property. So if you want to build your wealth quickly in real estate, it might be a good idea to consider investing in a multi family rental. The more units you have, the more rent you can collect. More units also mean increased risk mitigation in case of vacancies.
Economies of scale apply to multi family rental properties given that one property is able to generate multiple cash flows and rental incomes from multiple units. So multi family real estate investments are a great way to leverage your money, time, and effort when looking for the best rental property to buy.
Now that you know the potential benefits of investing in multi family properties, here are 3 things you need to get started.
Financing for Multi Family Real Estate Investments: Do You Have the Money?
You probably don’t have the cash to fully pay for a multi family rental property, but that’s okay. Despite being more expensive than single family homes, multi family rentals are actually easier to finance due to the fact that only one loan is needed to finance a multi unit property. It is important to point out that multi family properties with 2-4 units are considered residential properties while properties with more than 5 units are considered commercial properties in the eyes of a mortgage lender.
So, what are your options when it comes to financing multi family investment properties?
1- Conventional Mortgage
A conventional mortgage for buying a multi family property is offered by banks and mortgage lenders. Such mortgages have terms of 15-30 years and are used to finance multi family real estate investments between two and four units. A down payment of 20% or more is typically required from the real estate investor.
2- Government-Backed Multi Family Mortgage
For real estate investors wishing to live in one of the units, a government-backed multi family mortgage or an FHA loan is a feasible option since a small down payment is only required. You can practically buy a multi family rental with no money because the down payment can be as low as 3.5%.
Learn More: Financing a Multi Family Property: A Beginner Investor’s Guide
Managing Multi Family Real Estate Investments: Do You Have the Skills?
Managing a multi family rental can be complicated, especially if you have to deal with every problem each tenant has. Fortunately, economies of scale can make the property management of multi family rentals cheaper than that of a single family rental so having the skills is not a requirement. More rental income from a single property makes professional property management financially viable when it comes to managing multi family investments. Paying 4-7% of your rental income can save you the hassle of collecting rent every month and having to deal with tenants’ issues.
Finding Multi Family Homes for Sale: Do You Have the Right Tools?
There are two key aspects to finding multi family homes for sale that are the most profitable investments: the location and the earning potential of the property itself.
The location of multi family real estate investments is the deal breaker here. Limit your search to cities that have low unemployment rates and above average population growth. You can also check the health of the tourism in the location of your interest. A multi family property in a city that’s a popular tourist destination can be used as an Airbnb rental, allowing you to earn more money per night compared to using a traditional rental strategy.
The chosen investment property has to be able to give you a good return on investment. For this, it needs to be producing high rental income and positive cash flow.
So how do you go about finding the best multi family homes for sale in the right locations? You need the right tools and Mashvisor can help! Our real estate investing tools use predictive analysis to provide you accurate real estate metrics for thousands of properties. Let’s take a look at two tools that can help you choose a good location and the best investment property.
1- Finding Investment Property Using a Heatmap Analysis Tool
Mashvisor takes online neighborhood analysis to a new level. Once you select a city, the heatmap tool gives color rankings for neighborhoods with investment properties for sale based on listing price, rental income, average Airbnb occupancy rates, and cash on cash return. That way, you can compare neighborhoods and find the best place to invest in real estate.
Mashvisor’s Heatmap Analysis Tool
2- Analyzing Properties Using a Multi Family Investment Calculator
An investment property calculator is an invaluable tool when it comes to performing multi family real estate investment analysis. The tool provides multiple calculations such as cash flow, cap rate, and cash on cash return as well as average occupancy rates. Having these real estate metrics simplifies the process of finding the best multi family real estate investments by allowing you to compare the performance of different investment opportunities at the same time.
Mashvisor’s Investment Property Calculator
To get access to these different tools and more, start our your 14-day free trial now.
Related: Learn How to Evaluate Multi Family Investment Properties
A Few Things You Need to Know Before Getting Started
While it is true that multi family real estate investments are an easy way to make money in real estate, the competition in the multi family rental market is often fierce. Despite the decline in competition when you shift your strategy from single family homes to multi family homes, the type of competition changes. In other words, you will most likely compete with more experienced investors, which makes it difficult for beginner real estate investors to find good deals and negotiate offers. So, it’s important to stay on top of the trends in the market to know how to stay competitive. You may also want to consider working with a real estate agent.
Related: Interested in Multi Family Investments? Keep These Trends in Mind
In addition to the tough competition in the multi family rental market, regulations may exist for commercial properties. A property with 5 or more units is considered commercial real estate. If you’re going after this type of property, educate yourself on the regulations to avoid legal issues.
It’s true that investing in multi family properties requires more experience than investing in single family rentals. But if you learn to do it right, it can surely be fruitful. To keep learning, hop on over to our real estate investment blog!