Interested in investing in a multi-family property? From the ins-and-outs to the advantages, here’s what you need to know.
When it comes to real estate investment, many automatically assume that single-family homes rack up the majority of market buyers. But where do multi-family properties fall on the spectrum, and what should you know about investing in a multi-family property?
First and foremost, multi-family property investment compounds the investor’s potential for increased cash flow and ROI. Multi-family properties blend the lines between residential and commercial investment. The investment in such properties allows the investor the opportunity of a more stable income stream by reducing vacancy rate risk.
Approaching Multi-Family Property Investment
Without sugar-coating the logistics, it’s safe to say that multi-family investing requires a good deal of effort. For investors, it requires steadfast due diligence that will not only encompass locating a property, but also commencing efforts to analyze and assess its financial feasibility.
Along with the actual due diligence of finding property, it takes a combination of analytics and processes to ensure a quality real estate investment. In most cases, the search will begin by locating a potential property and then working with a seasoned property advisor to determine the property’s value by considering the potential operating expenses, short-and-long term costs for unit rehabilitation/repairs and unit rental estimates for the current condition and after any potential value and opportunities, among other aspects. By teaming up with an experienced and qualified property advisor who is familiar with the market area, the process is much more likely to run a smooth course and produce the desired results.
Your property advisor/consultant will work with you to address the following points to better assure a beneficial investment.
Location is of the utmost importance for investors, and even more so when investing in multi-family properties, as it will be one of the most coveted criteria for future residents. Valbridge consultants work in coordination with investors to determine accurate, impartial, and unbiased property valuations via a detailed process of market research into neighborhood demographics, census, household trends in income, and employment trends in the area. All of this research is looking toward high-growth potential, gentrification of changing demographics, consumer demand, and well-maintained neighborhoods.
Potential Income Opportunity
Since the goal is to provide a sound investment with excellent tax benefits and future profits, it will be important to analyze the future income potential of a property. Among other things, the income potential takes into account total number of residential units within the development, rental rates of competitive properties in the market area and historical property performance from the standpoint of maintenance, operating expenses, vacancy rates, and rental rates.
Every situation will differ when financing real estate. For example, the investor may choose to occupy one of the units while leasing a second unit, which would allow them to qualify for owner-occupied financing. This means the income from the second unit will be factored into the lender’s qualifying ratio. In general, lenders will take into consideration the investor’s credit, debt-to-income ratio and down payment plan.
The debt service coverage ratio (DSCR) will be an important factor also. The DSCR is a risk factor that calculates how many times the net operating income (NOI) will cover the debt payments (principal and interest). By example, if the NOI is $10,000 and the principal and interest payment is $8,000, them the DSCR is $10,000 divided by $8,000, which equals 1.25. This is a reasonable DSCR that allows the lender and borrower a safe degree of risk in maintaining the property and making the payments each month.
Advantages of Investing in Multi-Family Properties
Control Over Asset Value & Appeal
When it comes to multi-family properties, investors have control over their assets and the future potential value of the property. For example, each and every community improvement that impacts the multi-family resident (say, installing a communal pool, installing granite counter tops or new appliances) holds the potential of increasing the value of the entire property and each unit individually as it increases the rental rate and potential cash flow.
The same goes for landscaping and exterior painting, along with renovations to community and individual unit spaces. The ROI on those improvements can be far greater than that of a single-family building investment. You can also reposition the building to appeal to different residents. For example; your multi-family property might service seniors seeking an independent living property or high earning professional executives, among other demographics. This can directly affect unit rent rates and could propel them far above neighboring properties. The specialization of a property improves cash flow and net profit, which will increase the value of the entire building. However, it is necessary to have a sound analysis of incremental costs for such renovations versus feasibility of such improvements to consider how the rental rate may increase.
With a multi-family property investment, investors can generally operate 50 units for a lesser investment than trying to buy 50 single-family homes. Looking at the circumstances side by side, labor, technology, material, and marketing costs are all lower with a multi-family building. Plus, managing the wealth of paperwork is undoubtedly less consuming. Additionally, one seasoned property advisor will be able to assist you throughout the entire investment process, as opposed to the possibility of having to work with multiple entities if you were to invest in a number of widespread, single properties.
Efficient Exit Potential
Multi-family properties offer a variety of exit strategies for investors heading into the unforeseeable future. Investors have the option to sell outright or convert units to condos and sell them off as individual, private properties.
Investors might choose to offer the building on seller financing terms and create new note assets. Or they might choose to refinance to recoup original capital and expand again. Bottom line? The possibilities are endless.
Property Management Potential
Some investors might not enjoy the actual management of their properties, or simply do not have the bandwidth to do so. Instead, they will outsource the responsibility to a third-party property management company. A property manager should handle all employees who operate the property who will market and screen tenants, collect rent payments, handle evictions, and oversee the maintenance of the property.
Many investors who own multiple single-family homes do not have the luxury of contracting a third-party manager because it would not be a financially sound decision due to their small portfolio. The amount of money that multi-family properties produce each month, however, give owners room to take advantage of property management services without the need to significantly cut into their margins.
Where Does Valbridge Fit In?
At Valbridge, we work together with investors interested in capitalizing on multi-unit properties, among other commercial outlets. Our appraisers/consultants evaluate multi-family properties based on objective criteria, in-depth due diligence and knowledge of local markets, and time-tested experience and judgment.
We identify and analyze the variables that affect value, often seeing what the competition might overlook. We work with our partners to provide independent valuations and advise clients on sound, multi-family property real estate investment decisions, including buy-sell-hold and lease-own alternatives.