Make Money With Multi-Family Investments

Published: 08th July 2008
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Buying multi-family homes or apartment buildings is one of the most profitable commercial real estate investments you can make. It doesn't matter whether you decide to live in one unit and rent out the rest of them, or if you rent out all the units and live elsewhere. Investing in multi-family apartments or homes can make the passive income you earn each month increase exponentially, in addition to your net worth. Here's why you should choose multi-family homes and apartment buildings if you want to improve your cash flow and succeed as a commercial real estate investor.

Both of these types of property let you own property that's lower risk than a single family home. They allow you to obtain greater passive income each month, and the building itself appreciates in equity, too. There's a strong, steady demand for multi-family investments among commercial real estate investors who know what they're doing. However, just buying a multi-family building doesn't ensure profits. You also have to choose the correct property.

Deciding whether a property is right for your investments is a matter of evaluating its value versus the income generated by the property. Many people use the cap rate, or capitalization rate, of a property to help them decide this. However, that's not the only factor. Be sure to do your due diligence on the property and review both probable yearly expenses and income potential to help you make an accurate, wise decision. You'll need to be able to identify a stable multi-family building that'll make you a consistent profit.

A multi-family building has many advantages. For one, you'll never have to worry about the entire property being vacant at once. Usually, at least one unit will be occupied, even if one family has moved out. That means you'll always have some income available. Cash flow on a multi-family home or apartment building will also always be higher than on a single-family home. There are just more rents coming in. You get a better economy of scale, too. Instead of replacing roofs on six separate units, a six family building allows you to deal with only one. This market, while desirable, hasn't gotten the attention that single family home flipping has. That means that you'll have less competition on the property you want.

You should also have a good idea of what the local market is like, and be able to estimate both the value of the land as well as the value of the building. You'll have to be able to make both a good marketing analysis and a good financial analysis of the property. Make sure you study all documents in detail, including anything relating to building and equipment maintenance, title deeds, tax returns, insurance and financial records. You should look at existing contracts and utility bills, and any history of litigation against the property or liens on the property. An attorney, who is willing to explain anything you're having trouble understanding, should look at the documents.

You'll also need to make sure you have a higher down payment than if you were purchasing a single family home. Multi-family investments usually require up to thirty percent of the purchase price, where single-family homes may require only ten percent. To qualify for a mortgage on a multi-family investment, you'll be asked to offer a personal guarantee. In many cases, this can be an interest in another commercial real estate property, or in your personal home. Once you're sure your finances are in order, you can present a well thought out offer to the seller of your prospective property.

It's important to manage your multi-family property well. This can be more difficult than managing a single family home. Many investors choose to hire a property management company. This ensures that someone experienced deals with all the possible tenant issues, and allows you to free up your time for investment instead of dealing with various residential issues. However, you'll need to factor in the price of a property management company when you decide whether to buy a multi-family home or apartment building at a given price. A management company adds to your operating expenses and decreases your profits. However, the improved cash flow from a multi-family property means you can afford to hire such a company.

For commercial real estate investors, multi-family properties are one of the best ways to maximize cash flow and profits with a minimal expenditure. They're a reliable source of income that requires less upkeep than single-family homes while providing better rents. Whether you live on site, or just rent out the units in an apartment or multi-family home, you'll soon see why this is a desirable type of investment.

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