How to Buy Multifamily Property to Build Wealth
By: James Kobzeff
Rental property that has more than one family unit is considered multifamily property. From a duplex (two units), the smallest multi family property, up from there to larger rental complexes easily consisting of hundreds of apartments.
The advantage of purchasing multifamily properties, not unlike all income property, is that it provides real estate investors with the ability to support debt from the income the property produces. Understood in real estate investing circles as "using other people's money", this idea is crucial to buying multi family properties profitably and therefore must always be kept in mind because the success or failure of the investment depends on the income the property generates to meet debt service and other obligations required to keep the property.
Enough said. Let's look at three elements that contribute to this principal, and discuss why they are crucial to buying multifamily units profitably.
Obtain sound financing
The key to buying any investment property is for you to establish a sound financing package. You want to obtain a loan that doesn't place excessive burdens on the property, or yourself. Also, given that lenders evaluate multifamily real estate based on income stream and generally structure a loan based on the property's financial strength as well as the investor's, bear in mind the significant role the principal of using other people's money plays in financing the investment.
When applying for a loan on a multifamily apartment, present lenders with clear and concise cash flow reports because you are more apt to obtain a favorable financing package when the property is represented fairly to the lender and the income and operating expenses are shown to be accurate.
Conduct a rental market survey
What tenants are willing to pay to occupy a unit in the apartment is the cornerstone of the investment. Therefore, it's incumbent upon real estate investors to understand local rental market trends for vacancies and rental rates when buying multifamily realestate property. Rental market trends are easy for investors to recognize, just watch the newspaper or drive around the community noting all rental properties that have vacancies. If you see few for rent ads or signs, or surmise that rents are increasing, it probably signals a shortage of rental units, and a favorable opportunity for you. On the other hand, when lots of rental signs start appearing and rents drop, it could spell trouble for multi family real estate.
The ideal situation to own multifamily property, of course, is when vacancy rates decrease. Apartment property owners can be more selective about the type of tenant they rent to and establish a positive direction for the complex, perhaps even increasing rents. On the other hand, when tenants become scarce, owners might have to become less selective about tenants and perhaps lower the rents just to fill the units.
Be sure to conduct a rental market survey when purchasing multifamily investment property and carefully gauge the rents and vacancy rates.
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