How To Invest in Multifamily Real Estate?- The Millionaire`s Blueprint

1. Deciding the Budget For Your Multifamily Property Purchase

When buying your first multifamily property, the initial consideration is your budget to buy a multi-family real estate. 

Are you going to purchase 100% cash or require to obtain a mortgage? If it’s a complete cash purchase, your budget is already sorted. Simply go out and find deals in your budget. But if you are to finance the purchase, your budget should accommodate the down payment and closing cost for the multifamily property. You should additionally also account for the property improvement costs in your budget. 

Generally, obtaining a mortgage requires you to put 20% down and between 3%-6% in closing costs. Do not have a budget for putting 20% down? Consider house hacking and acquire an FHA Loan by just putting 3.5% down. FHA loan is a special type of home loan originated for owner-occupied properties. 

Read: How to come up with a Down Payment when you have no money to buy your Multi Family Property?

2. Understanding The Type of Multi-Family Property To Suit Your Investment Needs

Your budget pretty much defines the type of multi-family real estate you can buy. Apart from budget, what type of multi-family property should be more suitable according to your investing needs is what you need to understand. Because in real estate, budget is not much of significance as there is always a way to fund the deal if it’s a great deal and with good numbers. 

Should you consider the apartment complex or a plex, especially if it’s your first multi-family purchase? It is the duplex, triplex, or fourplex that will be much suited to you. And the reasons are pretty straightforward. 

• Apartment buildings are great for cash flow but cost significantly higher and mostly require a commercial loan
• You can easily obtain a residential mortgage to buy a plex.  
• More number of plexes as compared to apartment buildings. More chances of finding a good deal. 
• Better Quality of Tenants in Plexes compared to Apartment Buildings and you require more sophisticated property management companies to handle the tasks. 
• Lower Tenant Turnovers in Plexes Compared to Apartment Buildings
• You can easily manage up to 4 Units or can hire a qualified property manager to manage the property for you. 

As an investor, you must get cash flow and appreciation from your investment property. What else is also important is an exit strategy from your investment. You necessarily not be selling your property in the coming few years. But what if you are required to sell? Your investment shall be able to get you an exit. And apartment buildings are comparatively less liquid as the prospective buyer base would be significantly less than plex multi-family properties. 

3. Choosing The Right Location For Your Multi-Family Real Estate Investment

It is the location of your rental property that is of utmost importance if you are to become successful in rental investing. So what you should look for when deciding the location of your next multifamily purchase?

• Cap Rate: 

The Cap Rate allows you to determine whether the location you are choosing will be profitable or not. Cap Rate is simply a percentage of Annual Net Operating Income to the Average Price of the Comparable Property in that Area.  

A 6%-7% cap rate is generally considered good for considering that location. Cap rates below this mean the rental yield is low compared to the price of the property in that area. 

Tip: Cap Rate allows you to narrow down to the potential location for the property but your purchase should not solely be based on this calculation. Instead, you should do a proper rental cash flow analysis of the property to determine its profitability. 

• Return on Investment:

A good return on investment on a multifamily property is about 8%-12%.  You should get a cash-on-cash return between this range on the amount you are investing out of your pocket. Return on investment is the most important detail to understand profitability, after all, your money should work for you to generate good returns. 

• Average Vacancy Rate and Turn Around Time: 

It is important to know the average vacancy and turnaround time of comparable properties in the area. A prolonged vacancy can hurt your bottom line and can affect the profitability of your business. Check if there are a lot of vacant units and if their average turnaround time is more than 2-3 weeks, you should maybe consider some other location. 

• Understand The Proximity 

It is always a sensible idea to understand the proximity of your property to places like offices, grocery stores, and restaurants. Narrowing to such a location will allow you to have tenants on your property much faster and easier. 

4. Check Your Credit Health For Multi Family Home Financing

You must check your credit health before you apply for a mortgage for multi-family home financing. A minimum credit score of above 580 is required if you are to obtain an FHA Loan by putting 3.5% down.  With less than a 580 credit score, you are required to come up with at least 10% down. And if you are to obtain a conventional loan, a credit score upwards of 620 is required by most lenders.  

• Credit Score 580 and above: 3.5% Down Payment With FHA Loan
• Credit Score Less Than 580 and Not Below 500: 10% Down Payment With FHA Loan
• Credit Score Above 620: Conventional Loan with 20% down

Tip: It is always advisable to go for a conventional loan if your budget allows 20% down. The FHA Loan may require to put in significantly less but has higher closing costs and requires you to pay Mortgage Insurance Premium.  

The next thing in line is to know your debt-to-income ratio. The debt-to-income ratio signifies how much your current income is going towards paying for your current financial obligations. A DTI higher than 30% has fewer chances of getting approved.

5. Compare With Different Lenders

It is always a good idea to compare quotes from different lenders. Don`t hesitate to negotiate for the best offers and narrow down to the one that offers the best rates and low closing costs. The Multifamily loan rates are ranging between 4.83% to 8.30% with up to 30 Yr amortization schedule. 

Furthermore, you can choose between adjustable interest-rate loans and fixed-rate loans. And for what duration do you need the loan, 10 years, 15 years, 20 years, or 30 years?

An adjustable-interest loan is often recommended if you are obtaining a loan for a longer duration. In a longer duration, the interest rates will go lower. But if you are obtaining a loan for a shorter duration and getting good rates, it’s always a good idea to close on a fixed rate. 

Read: What Should you go for a 15-Year or 30-Year Mortgage?

6. Work With a Realtor and An Attorney To Close Your Multi-Family Purchase

Working with a professional realtor is critical for finding great deals and attractive multifamily opportunities. A professional realtor will be able to provide important information upfront without the need of wasting time on unwanted deals. A good realtor shall provide you with 

• Rent Rolls
• Any Lien attached to the Property
• Seller Appraisal Report
• Condition and Maintenance of the Property 

A professional realtor charges between 5%-7% of the deal amount out of which half amount has to be borne by the buyer and another half by the seller. Don`t hesitate to work with the realtor as they can save you from potential red flags in the deal that usually go unnoticed by the buyer`s attention. Also, stay away from working with part-time realtors. 

After you narrow down to a deal, it’s now time to close on your multifamily deal and get the title in your name. For that, you need a closing attorney. A closing attorney is responsible for closing the real estate deal and overseeing that everything goes well from paper works to contracts. 

It is always advisable to work with an attorney as every state has different rules when it comes to closing real estate deals. And some states necessarily require you to work with an attorney to close your real estate deal.