Investing in Multifamily Properties: A Step by Step Guide

Multifamily investing might be a nice addition to your portfolio. If you want to start investing in multifamily properties, watch our video guide.

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VIDEO TRANSCRIPTION:
 
8 Tips For Investing In Multifamily Real Estate:

1.) The first thing any investor should do when presented with an investment opportunity is to “find their 50%”. This easy calculation will roughly estimate a property’s profit potential and help an investor decide whether or not a deal is worth pursuing. Here’s what that means: As an investor,  you will receive rent payments from your tenants, but you should always expect to spend 50 percent of that income on maintenance and repairs. The 50 percent that is left, will be your estimated NOI (or net operating income). 

2.) Tip number 2 is to use your estimated NOI to calculate your cash flow and further investigate how worthwhile the potential deal could be. To clarify, your cash flow is the actual money that you will be putting into your pocket on a monthly basis. To find this number, simply subtract the property’s monthly mortgage from your NOI.

3.) Once an investor has calculated the NOI and cash flow of a potential deal, they should work to figure out their capitalization rate (or cap rate for short). Calculating this rate will answer the question “how long will it take to see a return on my investment”.  There are two things to remember about cap rates. 1: the cap rate for a “safe” investment is usually in the low 1 to 2 percent range; and 2: the cap rate you calculate will not take into account any increases in property value, boosts in monthly NOI, and the many tax breaks that multifamily property owners receive.

To find your cap rate, multiply your NOI by 12 to find your annual NOI, then divide that number by your mortgage. A high cap rate usually indicates a higher return on a riskier investment, and a low cap rate usually indicates a lower return on a safer investment. A “good” cap rate will usually fall between 5 and 10 percent.

Crunching the numbers on a multifamily property will help you make a smart investment, but how do you find potential investments in the first place? Our next tips will tell you what you should be looking for in multifamily properties.

4.) Tip number 4: Pay attention to location. If you have any experience in real estate, you’ve likely heard the phrase “location, location, location”, which is one of the most important factors prospective tenants will consider. A good location will show high-growth potential, high yield, have high demand, and will be well-maintained. 

5.) Once you find a multifamily property in a great location, you need to consider the number of units in the property as well as the number of rooms in each unit. Investors should focus on duplex, triplex, and four-plex multifamily properties. These types typically offer the most return with the least amount of risk, and are generally more affordable.

7.) As an investor, it’s always important to remember to calculate all costs associated with financing your investment; and this will vary from deal to deal. For example, if you decide to live in one of the units in your property and rent out the others, a lender will factor that into their qualifying ratio. Your credit score will also influence the qualifying process. A lender will look at four things: credit, debt to income ratio, the size of your down payment, and your deal’s projected monthly cash flow. 

8.) Our last tip for multifamily investors is to always identify the seller of the property you are considering. For example, there is potential to save money when you purchase a bank owned or for sale by owner property but these property types will follow different processes. Remember, every property’s purchase price will be affected by the motivation of its seller, and investors will better know what to expect from the deal if they are fully aware of the seller’s circumstances.

[joshhaney]

I have 3 rentals and have multiple friends with many more. No one I know uses the 50% rule. It's way too high. If someone is spending 50% of rent just on maintenance and cap expenses they are either renting way too low or bought a straw house.

I find 25-30% is closer on a c+ to b rated property

[Iam.Tajane]

I love animated videos like this one it helped me to follow the video better ! Thanks for the info

[jayt]

Ty for the video. My question is where do you go to check if a property is zoned for multi-family use?

[laurasimpson]

Great Job I like the way you explained the process

[princessnikedecency]

Is it better to purchase from Banks instead of Individuals?

[eugeniekerstin]

Great stocks and I just bought in on them, but I'm interested in making short term profit, let say turn a $150K to $500k in 6months, I'd appreciate tips on how what stocks to buy to make this much profit.

[graysongetz]

So is it safe to assume that part of that 50% allocated to expenses would include an expense for property management?

[esweee]

Cap rate = NOI*12/Mortgage? why mortgage? shouldn't it be the value of the property?

[Walina]

Why would you divide NOI by your mortgage? That is not a cap rate.

[lewispi]

I am new to this and learning. Thank you for this video it helped me understand so much more. Have a great journey

[facemuch]

this is literally the worst vid on this subject

[LoneVocalist]

Does that 50% include insurance and management company costs?

Great video btw. I'm a visual person so I lean better this way.

[MetalBum]

Cap rate was done wrong. It’s NOI/price

[stanmoney]

I didn't think a townhouse was considered multi family house!

[jojosantos]

What software do you use for this video? ty

[caenterprisellc]

I'm not going to give away all my real estate portfolio strategies, but multifamily is one.😁

[geminigirl]

how can i invest in multi family real estate without a down payment.!?

[mathia.]

this video was very helpful thanks for all the tips