So you want to invest in your first multi-family income property, but are unsure of where to start. The key to the effective purchase of a multi-family property is to know your limits, your potential property, and it’s worth.
Whether investing for retirement or your child’s education, multi-family investing is a great way to earn extra income. Yet it is important to keep your expectations realistic. Some new owners expect their property to immediately begin turning a profit. Unfortunately, that usually isn’t the case unless the owner has made a very large down payment. For many investors it usually takes anywhere from two to five years before a profit is made.
Despite this, multi-family investment is a worthwhile way to make a profit. Before jumping into buying a property a good understanding of the market and the terms used in multi-family real estate is necessary.
1. Understand the Market
It is in your best interest to have an understanding of each submarkets strengths and weaknesses. Talk to a local apartment broker, as well as the Economic Development Council, and Chamber of Commerce to learn which submarket has the potential for the most growth in terms of rent prices or appreciation. While researching each submarket keep in mind that purchasing a property in an area that is popular, close to public transportation, good schools, and shopping is a great selling point for possible renters while potentially appreciating the value of the property. It is also important to know whether you expect to do repairs on the property yourself or hire someone else to do them.
2. Select an Agent to Represent You
Regardless of whether you are a seasoned multi-family investor or a first-time owner, make sure that you have a qualified agent who is an expert in the apartment market—an agent like Marc Thurston. An income property specialist will be able to expertly guide you through your first apartment property purchase, answering your questions with proficient knowledge gained from experience while easily smoothing out any unforeseen problems. Using an inexperienced agent will cost you time and money!
3. What to Tell Your Agent
Once you have done your market research and chosen an income property specialist, alert your agent to whether you are looking for a commercial or residential multi-family property and which submarket(s) you are interested in. The difference between residential and commercial properties is the number of units; residential has one to four units while commercial has five or more units. Knowing what you want is the first step towards owning the property best suited to your investment needs.
4. Finding a Lender
It helps to discuss your financial qualifications with a lender prior to making an offer. Being pre-qualified is helpful with negotiating a deal because the seller knows you are capable of completing the deal. Once you have a property you are interested in buying, the lender will help you determine the down payment.
5. Selecting a Property
When looking for a property, it is essential to have some goals in mind. Purchase price, number of units, location—these are all factors that will help you and your agent find the perfect multi-family complex for you.
Know what quality of property you are in the market for. Do you want a fixer-upper, a “pride of ownership” building, or a “bread and butter” complex? The difference between these three property types is simple. A fixer-upper is a complex that needs work with repairs ranging from a minor problem to a complete remodel. A pride of ownership building is one that you would be proud to own and show off to your friends and family. The returns on “pride of ownership” properties tend to be slightly lower, but you will also have fewer maintenance, tenant, and turnover problems. These properties also attract a higher quality of tenant so they are well worth the investment. “Bread and butter” buildings are just that. These are buildings that are in average condition with a mix of short and long term tenants.
Once you find a property, check its financial statements, rental agreements, and expenses for the last three years. It they refuse to hand them over, run—don’t walk—from the property. Also make sure that you’ll have cash flow to cover expenses such as the mortgage payment, maintenance, and capital improvements. Don’t forget to factor in expense improvements over the projected life of the building.
6. Landlord Laws and You
As a new landlord and multi-family property owner it is imperative that you become familiar with local and state laws governing your property and responsibility as a landlord. Some excellent resources for such information are:
- www.MrLandlord.com – A great source for both new and experienced landlords. Covers a wide variety of information including which forms you will need to your rights as a landlord.
- Landlords Rights and Duties in California by John Talamo – The title says it all. This is the most recent list of laws governing landlords for the state of California.
- The Landlord’s Kit: A Complete Set of Ready-To-Use Forms, Letters, and Notices to Increase Profits, Take Control, and Eliminate the Hassle by Jeffrey Taylor — Another book that simplifies the confusing process of forms, marketing, and other useful information.
- Every Landlord’s Legal Guide by Janet Portman, et al – A handy guide to the ins and outs of being a law abiding landlord.
- www.nolo.com – A great source for any type of legal information with legal advice ranging from multi-family real estate to living wills.
- www.ca-apartment.org – With information ranging from legal advice to forms for download, the California Apartment Association’s website has a large base of information that is useful for experts and beginners in multi-family investing.
7. Will I Need a Management Company?
There are a few factors, like proximity, to consider when deciding whether to self-manage or hire a management company. If you live in San Francisco and your property is in Bakersfield, you are going to need to hire a management company. If the water main ruptures sending thousands of gallons of water into your apartment complex, you won’t be able to do much without a five hour journey to Bakersfield. Simply put, it is unfeasible.
Another thing to consider is work amount. If you regularly work 60 hours a week and own a 100 unit complex, it is impractical to manage the property on your own. If you live locally, have plenty of free time plus a flexible work schedule, it might be worth your time to try self-management. There are many books available that can make this daunting process easy to manage. For more information on property management books, contact your local bookseller. One excellent book is:
Property Management for Dummies by Robert Griswold – A no-frills guide to property management written in plain English.