What to Consider when Buying a Single or Multifamily Investment?
Many first time investors have the idea that their first investment should be a single family home due to the cost of entry and ease of management, however, this may not always be the best path to go down. One of the main issues that you have to consider is the fact that if the single family homes goes vacant you will have to cover the entire mortgage until you find a new renter, now if you have a duplex, triplex or fourplex that mortgage will be spread out across more units giving you some cash flow to help with the mortgage.
Another reason the first time investors tend to like the single family homes is that you can put a lot less down then you can on a commercial loan and the residential loan can be amortized out over the life of the loan. Residential loans can be on properties that have 4 units or less and can be acquired with as little 5% down, however, commercial loans are on 5 units or more will require at least 25% down and you will need to show a business plan plus as well as management experience and cash flow. When shopping for a commercial loan, be prepared to answer a lot of background questions regarding the property. Some of these questions include:
Who pays the utilities?
What types of maintenance are required?
Numerous questions regarding cash flow will also be asked. Commercial mortgage borrowers should be prepared to provide proof of business revenue and profits as well as a detailed plan for how the commercial property will generate enough income.
Where an investment in a residential property can be attractive is in the maintenance costs, you will have only one tenant in stead of multiple so it makes sense that your costs should be less providing you have a good tenant; however, multifamily properties typically afford synergies of scale (one yard, roof, etc…) so your overall cost per unit vs. rent will be lower.
When deciding on which direction to go with your first investment really look at your appetite for risk as having a home go vacant for a few months and having to cover all the expenses on your investment can be a big drain on your savings.
Mastering Multifamily Maintenance Challenges
Experts weigh in on best practices for finding, training and retaining the skilled maintenance techs that every multifamily property needs.
In the current tight labor market, finding and retaining good multifamily maintenance technicians is often challenging. Emerging operators, in particular, are well advised to look for someone who can do it all.
“If you have a smaller property and you’re a new property manager or a new landlord, you want to have somebody who can really handle almost everything on the property—and those people are worth their weight in gold,” said Joe Killinger, co-founder of Los Angeles-based Pono Asset Management.
Top 5 Reasons To Invest In Rental Properties
They say that more millionaires made their money through real estate then through any other means. There are of course many avenues for investing in real estate, but I’ve always preferred rental properties for various reasons: Real estate investing can be simple and straight forward to get started
- The pathway to investing in real estate can be quite simple, you can start talking to experienced investors, read a few of the thousands of books available to learn the basics.
Once you have the down payment saved and an understanding of property management (or hire a professional to help you manage) you can start.
Ability to invest with leverage- By using leverage you can spread your investment wider and be more diversified. Also, if interest rates are lower than what the current return on the property is, you will effectively be borrowing money for less than what you make on it, thus increasing your return.
Utilizing your connections is a good investment- Utilizing your connections in the real estate industry is key to finding the right investments, in some other industries it might be considered insider trading.
Stability and Predictability- The real estate market is one of the more stable and predictable investments you can make, do the proper due diligence and manage the assets with care and you will find that it will end up better than most other investments.
Multiple ways to grow your investment- With a real estate investment you have multiple ways to help your money grow, rental revenue, tax deductions and appreciation.
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Successful Real Estate Investors Know These Pitfalls
Not Giving It 100%
If you feel you are ready for your first real estate investment and you think it will be an easy source of passive income then I would recommend you sit this one out. There are certain asset classes such as Single Tenant Net Lease investments that have less risk, but most other investments come with a degree of risk and are definitely in need of supervision on a regular basis.
Your first investment is most likely the one that will set you on a solid path so if you do not give it 100% you may end up missing out on the future opportunity to really create some satisfying wealth
Knowing The Numbers
Over the years I have seen new Investors focus their attention on numbers that are less critical to your investing success, you must know what numbers are the true outliers to making a critical investment decision. Here’s some examples.
1) Rent Ratio - The rent ratio is calculated by dividing the monthly rent by total cost of the property (purchase price + financing costs + rehab costs);
2) Cap Rate - Cap Rate = Net Operating Income / Total Cost – This will show you what your investment will generate if you paid cash. Also, a lower cap rate compared to similar properties in the same asset class, with similar rent ratios, may show you that there are areas to decrease your expenses, and thus increase your income.
3) Cash on Cash Return -Cash on Cash Return = Pre-Tax Cash Flow / Total Cash Invested – This is the return you realize immediately on the cash invested. It does not take into account taxes or appreciation that you may receive. You should recalculate this as your investment hold time grows, so that you can take into account the appreciation of the property, so that you are maximizing your returns. It can show you when it is time to sell.
Underestimating Rehab Costs
If you buy an asset that is in need of a rehab you must know how much it’s going to cost, you will need to get multiple bids during your due diligence phase and when you receive your bids you will want to go item by item to compare.
When doing the rehab make sure you do it to your market, you don’t want to put cheap fixtures, appliances or flooring in a high end property and you don’t want to waste money on really high end fixtures, appliances and flooring on a mid level property as you won’t get the return back. Also remember to calculate rehab and capital expenditure costs into your cash investment/return, unless you are financing all of it.
Needed More Experience
This one catches many new investors and it’s also why I highly recommend you mentor with someone that is doing what you want to do before you go it alone.
If you are not confident that you know all the ins and outs maybe consider partnering with an experienced investor, buying your first investment and having to be responsible for tenants is a whole new ball game. I am a firm believer in jumping in the deep in and figuring it out but with a real estate investment there are many variables that can cost you thousand of dollars if you don’t know what to look for.