If you’ve never considered multifamily property investment, now is the time. Although there are several real estate channels you can choose to grow your investment portfolio, multifamily is among the best.
It doesn’t matter whether you are interested in leasing, wholesaling, or flipping multifamily property–one of the benefits of multifamily investing is that you can reap handsome returns from the venture. You can expect an average annual return of up to 9%.
As a new investor, you may not have the confidence or knowledge on multifamily property investment. This short guide provides the basics of what to know before buying a multifamily home property and the steps you should take when evaluating a potential investment.
Factors to Consider Before Selecting Investment Criteria
1. Self-Evaluation
This is the first step to take before investing. So, how do you analyze real estate multifamily investing? It involves looking at your strengths, weaknesses, and goals and choosing properties best suited to those factors.
These factors may vary, but the basics include access to capital, skillset, experience, and knowledge, where you live, personal preferences, and risk tolerance.
The same process is necessary if you are investing with partners. You will need to assess the strengths and weaknesses of the team. This step ensures that you invest in properties suitable for all the partners and not just one.
For example, you may want to invest in property in a particular geographical area. After scrutinizing the area, you’ll be able to determine the amount investors are paying for units in the area.
Then, you’ll have to gauge the expected returns and see if it tallies with the expectations of each investor. In addition, the number of units you get for the amount of capital each partner pays should also meet their expectations.
With self-evaluation, there are no set rules on carrying this task out. Be objective with how you view personal strengths and weaknesses.
2. Competitive advantages
The multifamily industry is highly competitive, and the competition only gets stiffer the greater the number of units you aim for. Use the earlier personal assessment to determine your competitive advantage over other investors.
What is it that you’re uniquely good at? Or is there something you are willing to do that other investors won’t? What unique factors can you introduce to give you an advantage over other investors?
Scrutinize your answers to this and compare them with your assessment. Try to find the sweet spot that balances your strengths and the unique advantage over competitors.
Photo by Sangga Rima Roman Selia on Unsplash
Say, for example, that your biggest weakness is no capital and limited experience. Your strength is determination and a willingness to learn. Instead of aiming for larger projects that may require more capital and expertise, you can choose to start on smaller projects within the local market.
Pick a distressed property if you have the skills or grit for it. These types of properties may fall within your financial budget, seeing as the owners of such properties tend to be more open when it comes to striking a deal.
On the other hand, you have an investor who has more than enough capital but with little time on their hands. They can search for stable multifamily properties managed by a third party and employ turnkey investment strategies.
While the returns on such properties are lower, this investment strategy is more stable. Because of the hands-off approach, such an investor can even take up properties that are halfway across the country.
Between the distressed property and the turnkey strategies sit another investment strategy called value-add. Value-add is a property that needs repairs or remodeling to reach its full potential.
3. Goals and Vision
When investing in multifamily property, it is vital to have specific goals and a clearly defined vision. If you haven’t, do so, and if they’re outdated, update them, as you will need to know the target.
Growing your investments requires a mindset shift. The type of multifamily properties you purchase and their success depends on whether the investment criteria align with your vision and goals.
After looking at self-evaluation, competitive advantages, and your goals and visions, it is time to look at the investment criteria.
Investment Criteria
1. Location
The geographical location is the first and most important factor when choosing multifamily property investment criteria.
Most of the markets are either extensive or narrow. You have the option of selecting from a specific region or state, cities, or even neighborhoods within particular cities.
Significant markets are known as primary markets, while smaller ones are secondary markets. Multifamily properties in primary markets cost more than their counterparts in secondary markets.
When selecting a market, some factors investors need to look at include:
- Proximity to your primary residence: It’s easier to monitor projects closer to home.
- Population: rural areas have lower prices and less competition. Urban areas have better jobs, and lenders and investors prefer the latter. Some lenders even have a minimum population threshold.
- Crime: some cities have higher crime rates than others, affecting a property’s ability to appreciate over time. Although crime is present almost everywhere, choose relatively safer neighborhoods.
- Job growth: high job creation and low unemployment rates spur economic growth by creating opportunities. Job growth leads to an increased demand for units, including multifamily properties.
- Other factors: such as housing market, demographic, valuation levels, supply, landlord-tenant laws, and proximity to retailers.
Even though it seems overwhelming, most investors pick only a few of these factors.
2. Property
There are several factors to consider regarding the type of multifamily property you want to invest in, including:
- Type: these multifamily types include high-rise, mid-rise, walk-up, garden-style, student housing, and subsidized housing.
- Class: the classifications for these multifamily properties depend on overall condition. The highest quality starts at A, and the lowest is class D.
- Age: some investors tend to look for properties that fall within a specific year range from completion of construction.
- Price: as you define the criteria, you’ll need to determine your price range, depending on your access to funding.
- Size: the number of units you invest in depends on the price per unit and the target price range.
- Occupancy: some investors don’t shy away from taking properties with low occupancy. The only challenge with this is lending restrictions and limited cash flow.
Final words
The criteria mentioned above are not final. It is common for investors to set their criteria based on priorities and opinions. The information aims at guiding new investors on the steps to buying a multifamily property while building their investment portfolio.
The most basic criteria every budding investor should familiarize themselves with include how to gauge the value of the property using location, age, and crime statistics.
