How to buy your first multifamily investment property as multifamily buildings tend to be more capital intensive yet offer benefits for real estate investors.
Real-estate investing is one of the most reliable methods for wealth creation. While many novice investors start by purchasing a single-family home, once you gain experience, you may consider expanding into multifamily properties. Multifamily buildings tend to be more capital-intensive, yet offer intriguing benefits for investors.
Here’s a step-by-step look at how to buy your first multifamily investment property.
What Is A Multifamily Investment Property?
A multifamily investment property is a residence with more than one housing unit that you intend to rent to tenants. A building with one residence is known as a single-family home – the typical detached home you see in most suburban neighborhoods. Anything larger is known as a multifamily property, which can range from a duplex or triplex to a large apartment building with 100+ units.
Due to the higher earning potential, multifamily investment properties tend to be more expensive. But they can also offer various benefits to investors, including more stability and tax incentives. So, if you want to expand your portfolio, you may consider investing in a multifamily investment property.
How To Buy Your First Multi-Family Investment Property
Follow along as we uncover a step-by-step guide on how to buy your first multi-family investment property:
- Decide On Your Financials: Before you scout potential investments, take stock of your financial situation and decide how much you can realistically afford. Multifamily properties are often more complex investments because you’ll have multiple tenants and units to maintain. So, if you need to finance the purchase, you’ll need a clear business plan and a proof-of-funds letter to be approved for a loan. You may also join a group of investors and pool your funds to purchase a property to take some of the burdens off yourself. But before doing so, you must analyze your finances and set a realistic budget, so you don’t get in over your head.
- Do Your Research: Next, you should start researching different markets and types of multifamily properties to find a wise investment. Multifamily properties include duplexes, triplexes, townhouses, high-rises, low-rises, condominiums, bungalows, mixed-use buildings, and more. Each property type offers unique advantages and disadvantages, so do extensive research on the different subsets of multifamily housing and study the local market to identify good deals.
- Choose A Lender and Get Pre-Approved: Once you’ve done your homework, you’ll want to seek preapproval from a lender to show that you have the funding to make a purchase. Before doing so, you’ll want to gather all your financial documents and draft a simple business plan to prove to lenders that you know what you’re doing. You may not have a particular property in mind yet, but let them know what you’re looking for, what kinds of expenses will go into the renovation or management of the property, and how soon you expect to turn a profit. It also helps if you have previous experience as a real estate investor to show that you know the risks and challenges of owning income-producing property.
- Find A Real Estate Agent to Work With: Once you’re pre-approved, you’ll want to enlist the help of a real estate agent. Multifamily purchases are often more complicated than single-family homes because there are more factors to consider. There may be zoning concerns or tax implications that you should understand before making a decision that may not be immediately apparent. If you’re new to multifamily investing, you may not understand whether a building is over- or underpriced. So, enlisting the help of a real estate agent with experience purchasing multifamily properties can be a huge help.
- Narrow Your Search: You may start with a wide net to see what’s out there, but eventually, you’ll want to narrow your search until you find the perfect property. It helps to identify three to five properties that may work for your budget and business plan and then crunch the numbers to see which offers the most potential value.
- Estimate Profits and Losses: Once you have a few potential candidates, you’ll want to estimate the profits and losses. If any properties need renovations before they can be rented, you’ll want to estimate those costs. You’ll also want to calculate the ongoing maintenance costs and general losses due to vacancies. Then you’ll evaluate the property’s potential monthly or yearly income by multiplying the number of units by the average rent for a comparable building in the area. Finally, you’ll subtract the estimated expenses from the profits to determine the potential cash. You can do these calculations on your own using online tools, or you can enlist the help of your agent, general contractor, property manager, or another real estate professional.
- Make an Offer: When you’ve found the perfect building, you’ll want to submit an offer as soon as possible. Like a single-family home, you’ll submit an offer letter to the seller stating the price and any other requests or stipulations you have. The seller will consider your offer and either accept it, deny it or make a counteroffer. Depending on the market, you may submit several offers before finding a deal that makes sense for your bottom line. But if you have the necessary funds and make realistic bids, you’ll eventually land a deal.
- Close On the Property: After you and the seller agree on a price, all left is to sign a purchase agreement and close on the property. You’ll have time to do your due diligence and look for any red flags that may lead you to return to the negotiating table. Buying a multifamily property is a serious investment; you’ll want to have it inspected thoroughly, so you know it’s a smart purchase. But if everything checks out, you’ll do a final walkthrough and then schedule a closing where you’ll sign the necessary paperwork and hand in the funds.
While purchasing a multifamily property may initially sound intimidating, it’s fairly straightforward if you do the research and know what to expect. Although it’s slightly more complex than purchasing a single-family home, it offers increased earning potential and greater stability, among other benefits. So, if you’re an investor looking for a new challenge, consider adding a multifamily investment property to your portfolio.
About the author:
Ryan Zomorodi is co-founder and COO of RealEstateSkills.com, an education platform that has trained thousands of students to start and grow real-estate investing businesses. Ryan is the managing editor of the Real Estate Skills blog, ranked as the No. 1 real-estate wholesaling blog on the web. He has over 10 years of investment and management experience, including acquiring over 100 homes for flip, wholesale, and rental across a dozen states.