Purchasing multifamily apartments is one way that commercial real estate (CRE) investors can build up and diversify their investment portfolios while providing housing to those who might not be able to purchase a house.
Multifamily investments can be especially prudent in high-interest rate environments, squeezing prospective homeowners out of the market and into rentals. More rental income for apartment owners means more cash to pay debts and realize profits.
Let’s look at how CRE investors can successfully add multifamily apartments to their portfolios.
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The State of the Multifamily Market in the US as of Q2 2022
In the first quarter of 2022, the multifamily market saw high demand among real estate investors. Even though the economy has seen some rough patches, multifamily investments appear to be going strong into the second half of 2022.
Borrowing costs are increasing, and many cities are constructing new buildings. Therefore, vacancy rates are predicted to stay close to what they’re currently at or increase slightly, opening up opportunities for new investors to break into the market.
That said, let’s dive into some considerations for purchasing multifamily apartments.
1. Is it right for you?
Multifamily investments can bring in additional passive income, but doing so is easier said than done. While most certainly possible, investing in multifamily as a newcomer or an inexperienced investor is best complemented with the right team and resolve to succeed.
Therefore, aspiring multifamily investors should decide if investing in a multifamily property is genuinely right for them.
It would help if you keep the following in mind when considering multifamily investments:
- Your investment doesn’t stop at the first transaction. In other words, multifamily properties require much in the way of property and tenant management. You’ll also need to keep an eye on problem tenants and ensure your buildings are up to code and safe to live in.
- Commercial real estate deals tend to be long and complex. Multifamily sales may take several months to close, driving up fees and other expenses as you ride it out.
- Contracts and agreements need to be drafted the right way the first time. This is where assembling (and compensating) the right commercial real estate team is extremely important.
Lastly, investing in multifamily apartments is a marathon, not a sprint. It’s okay to make a few mistakes along the way, but learning from them and preventing them from happening again truly matters.
2. Work With a Broker & CRE Attorney
Although it’s never a bad idea to self-educate on the commercial real estate industry and investing best practices, it’s always a good idea to assemble the right team to help compensate for your weaknesses.
Two ideal candidates come to mind: a commercial real estate broker and a commercial real estate attorney. Brokers can use their experience and accessibility to exclusive market data to provide you with properties that may not even be listed on the market yet. They can also help you negotiate deals and land the best possible terms.
Commercial real estate attorneys can help you with any particular legal issues that you come across, such as those found within leases and title documents.
You can do anything, but you can’t do everything. Hiring the right help will go a long way for your multifamily apartment investments.
3. Narrow Down Your Search to a Handful of Properties, Then Just One Property
When looking for multifamily apartments to invest in, you should work with your broker to select a handful of properties that interest you the most, then narrow down that selection to just one or two.
Let’s take a look at some things to consider about a property:
- The property’s location;
- The number of units in the property;
- The cost of the units’ rent;
- Other sources of income, such as laundry machines;
- How tenants will split specific bills with the landlord;
- The cost of property taxes;
- The property’s current condition;
- The cost of insurance; and
- Other expenses that the landlord will be in charge of.
An experienced real estate broker can help you with these criteria.
Work With Your Broker to Conduct Thorough Market Research
Your commercial real estate broker has exclusive access to accurate local market intelligence and more training and experience than other agents. However, trying to conduct market research yourself may get overwhelming; this is where your CRE team steps in yet again.
From information obtained during the 2014 Consumer Financial Literacy Survey, we know that most people wish they could receive advice from professionals on everyday financial decisions. So understandably, when investing in multifamily apartments, an investor could also benefit from a broker’s professional advice about the market.
4. Get Your Financing Options in Order
Not all investors have the capital to buy a property with cash, so financing will be the most realistic route. Therefore, it’s essential to carefully consider which type of loan and lender will lead to the best possible return on your investment.
Understandably, the down payment on a multifamily property is much higher than on a single-family home. However, the exact down payment also depends on whether or not you plan to live in the complex.
Finally, some lenders enforce regulations and restrictions on how much they can loan to whom and why. For instance, some online lenders will only provide financing for a maximum of two-unit properties, so keep that in mind.
Get a Pre-Approval Letter
When applying for a mortgage loan, receiving a pre-approval letter is a standard process. However, to begin this process, you’ll need to provide your lender with proof of funds or a document/bank statement showing you have the finances to handle this loan.
Your mortgage lender will give one of three responses to your application: pre-approved, denied, or pre-approved with conditions. This pre-approval letter shows sellers that you are serious about purchasing a property and have the funds to handle the purchase.
A pre-approval letter includes the following:
- Purchase price;
- Loan program;
- Interest rate;
- Amount of loan;
- Amount of down payment;
- Expiration date; and
- Address of the property.
Pre-approval letters can speed up your property hunting process as they provide more credibility to potential sellers.
5. Don’t Forget About Future Property Expenses
In a perfect world, investing in multifamily apartments ends at property closing. Landlords could sit back and watch the passive income roll in. Unfortunately, this isn’t the case, and it’s essential to be adequately prepared for the property and tenant management afterward.
More time and money investments go into your multifamily properties after you’ve made the official purchase. These expenses can range from fixing any issues with the building to simply updating the property to increase its value in the future.
Consider Hiring Property Management
In some situations, you can benefit from hiring property management, but doing so vastly depends on your everyday involvement in the property. For example, if you prefer to be hands off with your investment, you might hire a property manager to find tenants and run the regular day-to-day operations.
Managing the property yourself may be more cost-effective if your investment doesn’t house many units, but managing a property is no simple task. Hiring a property manager may be the wiser choice if you live far away from your property or can’t keep up with the management’s demands.
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