How to Buy Multifamily Properties

Published: 10th March 2009
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Multifamily property is very popular investment real estate and therefore should be understood by anyone engaging in real estate investing. Multifamily property is any rental income property that has more than one family unit. The smallest multifamily property would be a duplex (two units) and then ranging up from there to larger rental complexes easily consisting of hundreds of apartments.

Multifamily property (like all income-producing properties) has the advantage of being able to support debt from the income they produce. Understood in real estate investing circles as "using other people's money", this idea must always be kept in mind when buying multifamily property because the success or failure of the rental property depends on the income it generates to meet debt service and other obligations to keep the property. Rental income property virtually prospers or declines based upon "using other people's money".

Okay, let's look at three elements crucial to buying multifamily property and then consider the pros and cons of multifamily property ownership.

1) Obtain Sound Financing

Establishing a sound financing package on the property is paramount to buying any rental property--you want to obtain a loan that doesn't place excessive burdens on the property or yourself.

Because lenders evaluate rental property based on income stream, and generally structure a loan based on the property's financial strength as well as the investor's, always bear in mind the role that "using other people's money" plays in financing the investment. Therefore, when applying for a loan on multifamily property be sure to present lenders with clear and concise cash flow reports. When the property is represented fairly to the lender and the income and expenses are shown to be accurate, the investor is more apt to obtain a favorable financing package.

2) Conduct a Rent Survey

The cornerstone of any multifamily property is the tenants and the rents they will pay to occupy a unit in the apartment complex. It is incumbent upon real estate investors, therefore, to understand local rental market trends for vacancies and rental rates when buying multifamily property.

Luckily, rental market trends are easy for multifamily property investors to recognize. Just watch the newspaper or drive around the community noting all rental properties that have vacancies. If you see few "for rent" ads or signs, or surmise that rents are increasing, it probably signals a shortage of rental units, and a favorable opportunity for you; and vice versa.

When vacancy rates decrease, for instance, property owners can be more selective about the type of tenant they rent to and establish a positive direction for the complex; perhaps even increase rents. On the other hand, when tenants become scarce, owners might have to become less selective about tenants and perhaps lower the rents just to fill the units.

3) Consider Economic Conversion

In cases where the former property owners have let the property run down and rents had to be decreased to keep the units filled, an opportunity to upgrade the building and raise rents might be in order. If these rental properties are in a good area of town or in an area that is returning to a former higher quality, then the remodeling of a rundown apartment complex can be a profitable venture.

Just be careful to ascertain the cost for remodeling and what impact it will have on rental income. Pure "window dressing" for the sake of appearances only, unless it has a positive influence on occupancy levels or rents, is typically avoided by prudent real estate investors. Moreover, get a qualified contractor to give you a bid on remodeling. Otherwise, what you surmised as surface issues when you were buying the multifamily property could in fact be a costly can of worms.

The Pros and Cons of Buying Multifamily Property

The advantage of buying multifamily property (like any income property ownership) is real estate investors can grow wealthy in the long run. Simply by holding onto the property and letting "other peoples money" payoff the debt, even if there is no immediate cash flow, is what drives people into real estate investing. Moreover, multifamily properties serve a basic need, which limits the downside risk in that they provide shelters to those who cannot afford or who do not choose to buy real estate.

The downside to owning multifamily property mostly concerns the management problems associated in dealing with tenants--apartments can be management intensive, though there is a way to minimize this disadvantage. When you purchase multifamily property you can hire the services of a professional property management company to deal with the day-to-day issues of running the property. So you do have options.

Here's to your real estate investing success.

About the Author

James Kobzeff is the developer of ProAPOD - superior real estate investment software since 2000. Create an APOD in minutes! Go to =>

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