Multifamily properties continue to be one of the strongest assets in a real estate investor’s portfolio. Their inherently high cash flow and scalability are great benefits they provide over single family units, not to mention the many other reasons to own multifamily real estate. If you’re new to real estate investing, or are considering a multifamily home for the first time, you may have some questions about purchasing or managing one of these properties. You definitely want to be getting a good deal from the start, but you also want to ensure that your investment is profitable down the line. To help you understand how to get the most out of your multifamily property, we’ve compiled a list of some useful tips.
Renovate to increase the rental income of individual units
A common way to increase the profitability of multifamily homes is through renovation. That’s because you can significantly increase the value of a rental unit with a relatively low amount of effort. To achieve this, you should focus on simple but cost-effective upgrades like a fresh coat of paint, or updates to bathrooms and kitchen areas. You may also want to consider updating the exterior of a home. Either method will have you increasing the value of the property, and this translates to a higher monthly income from the rental units.
Research rents in the surrounding area before you buy
One of the first things you should do before you pull the trigger on a multifamily property is find out how much cash it can actually generate. To do this, you’ll need to do some research on your own. By looking up rental pricing for homes in the same area as your selected property, you can find the upper and lower limits fairly easily. Ideally, you’ll want to find a property with a similar age, and with units that are about the same in terms of size (square footage) as your selected property. If you’re lucky enough to find one of these properties, you can assume the amount they successfully charge renters will be very close to yours. Then you can determine your monthly costs, and see how much cash the property can generate for you each month.
Calculate your Cap Rate
Another thing that you’ll want to do is calculate the Capitalization Rate of your property. The Cap Rate is useful because it essentially tells you how profitable the home is given the cost to acquire it (the market value of the property). To find the Cap Rate, first you’ll need to determine the monthly Net Operating Income (NOI) of the property, which is just the property’s income (rent) minus its’ expenses for the month. Take this number and multiply by 12 to find the yearly NOI. Then subtract any other yearly expenses from this amount, including things like property taxes, insurance, and maintenance costs. Finally, take that number and divide it by the market value of the property to find your Cap Rate.
Let’s use an example to give a clearer picture. Say you’re looking to purchase a two-unit property for $300,000: each unit generates $1200 in rental income, but the property also has a mortgage payment of $1000 every month. $1200 x 2 = $2400 but minus $1000 is a monthly NOI of $1400. Take $1400 and multiply by 12 months for a yearly NOI of $16,800. Property taxes, insurance, and maintenance costs combined to a total of $4000 for the year bringing your amount down to $12,800. Now take $12,800 and divide by $300,000 (the home’s market value) for a Cap Rate of 4.26%. A healthy cap rate is generally somewhere between 4-10%, making this a pretty good investment!
Location is always a factor
There’s one piece of advice you’ll find across all types of real estate investing: location is very important. That’s because if your property is located in an area nobody wants to live in, you’ll have a hard time selling the property or renting it out. Be sure to research the neighborhood of your selected property, how safe it is, and if people are generally moving in or out. Your best bet is to take a drive and see the property and surrounding area for yourself. If you wouldn’t live there yourself, or if the area gives you a bad feeling, it might be best to avoid investing in that home.
RCN Capital
RCN Capital lends to real estate professionals, commercial contractors, developers & small business owners across the nation. We provide short-term fix & flip financing, long-term rental financing, and new construction financing for real estate investors. RCN Capital also has flexible and competitive loan options available. Connect with us today to discuss financing options for your next multifamily investment.