Buying your first multifamily property is an exciting prospect, but it’s important to walk into the process with a great deal of information before you dive into a purchase. This includes knowing what you want and having a plan, understanding the importance of location, being able to see the rental potential of a property, and knowing how to protect yourself from bad decisions.
Pay attention to the property type
The type of property can have a huge impact on a number of things, including whether you qualify for a commercial loan for a multifamily investment, how much you qualify for, and what kind of income potential you're looking at. For instance, let’s compare a triplex to a multi-unit apartment building.
For starters, the triplex is considered residential, whereas the apartment (or any other residence with five or more units) is commercial, and this means different financing terms, qualification process, responsibilities, income potential, and more. It’s a good idea to have a plan going into the buying process that lays out what kind of property you want, how many units you're looking at, what kind of responsibilities you want to take on, and whether you want to deal with a residential or commercial lender.
Location, location, location!
You’ve heard it before and you'll hear it again: location is one of the most important elements to consider when it comes to real estate, and that includes multifamily investing. Location is especially important with residential properties, because the location will not only be a considering factor in the appraisal of the home, but it will also dictate the rental demand and the amount you can charge for rent.
Number of units and the rental income potential
In general, the more units your property has, the more potential there is to generate property cash flow. Even though you may charge less rent per unit in a fourplex than you would in a duplex, the two additional renters will still generate more income over the year.
Furthermore, the detrimental effects of a vacancy are much lower with higher-unit properties, because even if you have one vacant suite, you're still generating income from the other three units in a fourplex, whereas one empty unit in a duplex will be harder to carry.
If the rental history isn't there, then the property isn't worth it. For instance, maybe the affordable and below-market fourplex seems like a great investment until you find out that the current landlord hasn’t been able to rent out a single suite in over a year. Always ask about the rental history of the property, including details about the current tenants’ leases.
The importance of an inspection
When you find a property you like, an inspection is crucial before closing. Not only will the inspection tell you whether the property is actually worth the asking price, but it will also point out any major structural problems with the property, and give you an idea of how much you'll have to spend on repairs. This is integral to your final offer, because you may want to renegotiate—or walk away entirely—based on the results of the home inspection.
Your first multifamily property is an exciting step in diversifying your portfolio and making investments for your future. When you come up with a plan, decide what you want, and find some properties you like, contact us to get the application started for your commercial or multifamily loan.