Should You Invest in a Multi-Unit Home?

For the investor, multi-family homes can lead to more income and faster access to financial freedom. However, they are not without their challenges.

Cost of a Multi-Family Home

Like any property, the cost of a multi-family home depends on several factors, including location, condition, age of the property, and more. Generally, a multi-family unit (a rental section of the property) is on par with neighboring single-family homes, at least in terms of cost per square foot.

Financially, you will need to budget for costs such as:

• Down payment
• Closing costs
• Property inspection
• Renovation and repair costs

One way to save money — at least in the initial phase of investment — is to live in one unit and use owner-occupied financing for the property. This allows you to benefit from lower down payment requirements that are often not available to investors.

Regularly, you will need to cover things like:

• Property insurance
• Ongoing repairs and maintenance
• Property management (if you choose to delegate it)
• On-site security
• Lawn care and maintenance of common areas

You will want to estimate these costs as accurately as possible before deciding to purchase a multi-family home (and before setting your rents); however, remember that they may change over time.

Insurance amounts can fluctuate, and repairs can be minimal one year and extremely costly the next. Make sure you have a good financial cushion to cover these unexpected costs, should they arise.

Red Flags for a Multi-Family Home

Choosing the right property is the first step toward ensuring a successful multi-family investment — and this is harder than it seems. Multi-family properties have high values, and you may have to sacrifice location or property condition if your budget is particularly tight.

Here are some provocative signs to avoid when searching for your investment property:

• Narrow margins: Look at the overall financial picture: property costs, operating and maintenance expenses, and all other related costs. Compare this to the potential income. Remember that you may not be able to operate at full capacity immediately — or ever. If the margins between costs and profits are narrow, it may not be worthwhile. An unexpected repair or a high vacancy month can send you into the red. Be sure to calculate potential cash flow and ensure you have a good financial cushion in case of an emergency.
• Poor repairs: Always have a qualified building inspector assess the property before making any decisions. If there are defects, ask a contractor to estimate the costs to fix them. If repairs have already been made, ask the inspector to look at the quality of those repairs. If the work was poorly executed, it may signal other problems ahead.
• Unusually high rents: Just because the property achieves high rents now doesn’t mean it will always sustain them. Remember that the housing market is cyclical, and make sure you have healthy margins in case those rents decrease during a downturn.

You may also want to consider the building class for an idea of what is in store. Classes C and D are older homes of low quality and may suffer from some neglect or maintenance issues. Their locations may be less than ideal, indicating potential crime or rent collection problems.

Best Practices

The right team can help you avoid some of these red flags and focus on the best property for your investment goals. This should include a local real estate agent experienced in multi-family homes, an investor-friendly mortgage lender, and a real estate attorney — in most cases.

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• Considering hiring a property manager: A property manager can help eliminate the daily hassles and headaches associated with your investment in multi-family homes. They will collect rents, manage any repairs, and communicate with tenants on your behalf. Property managers can be particularly helpful if you invest in an area you are not familiar with, as they often come with local knowledge and expertise.
• Getting to know the history of your property: Request copies of all current contracts, expense and income statements, utility bills, rent payments, service contracts, and more. Ensure all of this aligns with your expectations for the property, and investigate any discrepancies or suspicious activity. You should also talk to the tenants living in the property to gain honest feedback about the property and its previous management.
• Having a financial cushion: Ample cash reserves are essential in multi-family property investment, especially if you have a large property with many tenants. Assume that you will always have some vacancies and that some tenants will fail to pay their rent regularly or on time. Make sure you have enough funds to cover the mortgage, maintenance, insurance, and other property costs in case any issues arise.

Conclusion

It is difficult to find multi-family properties as easily as single-family properties, so it may take some time to find one that meets your needs and fits your budget. Be thorough in your research, check reputable investment property websites, and inspect every property you consider carefully. A commitment to diligent study is essential if you want to ensure that you are making a profitable and successful investment.

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Source: https://www.thebalancemoney.com/should-you-invest-in-a-multifamily-home-4584197

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