Is now the time to start investing in multi-family property?

This is an article submitted to me for publication. While I do not focus on multi-family properties, you may see some similarities in how I analyze single family homes. The links shown are exclusive resources for our Real Estate Investor Bronze Members. Enjoy:

Is now the time to start your investing career in multi family properties? This is a question I’m asked almost daily. Here are a couple of tips to consider if you’re thinking about starting your investment portfolio.

Always determine value consistently. Property investors determine value in different ways. Some simply look at cash flow while other consider the per unit sales price. My advice is to use a CAP Rate formula. CAP Rate, short for capitalization rate, is the percentage rate of return estimated from the net income of a piece of property. Net Operating Income/Value, or sales price = Capitalization Rate. How do you determine “Net Operating Income”? Example; a $300k property with $3k per month income, minus a 5% vacancy percentage, would equal $34,200 in annual income. Annual expenses may equal $11,620. This may include expenses for Advertising, Management, Heat/AC, Gas/Electricity, Insurance, Trash, Taxes, Water and Sewer, Lawn and Snow, Maintenance, Pest Control and/or miscellaneous Supplies. Your net operating income would then be $22,580.00. Dividing this by the sales price would equate to a 7.53% CAP Rate. Most investors strive for an 8 – 12% CAP Rate.

You should also consider the quality of the investment. If it’s a new building, there would be less risk of having vacancy problems as well as major maintenance expenses as might be the case with an older property. Think of it like a high risk verses a low risk stock. With a high risk stock, or property, you would typically look for a larger return, while with a low risk stock, or property, you may look for a lower, or safer, return.

Once you know the CAP Rate reasonably justifies the investment, you should then look at the cost of financing to truly determine your return on the investment. With 25% down, this property could expect a return of 6.16% on your investment. Paying $250k for the same property would change the Cap Rate to 9.03% and increase your return to 12.18%. Using and understanding CAP Rate is essential to understanding your true return. As a rule of thumb, if an investment earns 1% or more of the sales price, on a monthly basis, it may be worth looking into further. If it does not, my advice would be to move on to another property.

Another very important consideration is: do you really want to be a landlord? This is not for everyone. You should treat any investment as a business. The goal should be to generate cash flow and/or equity. Do not make the mistake of expecting to be the “nice and friendly” landlord. Your tenants are your customers, not necessarily your new friends. Treat them professionally and be consistent. They will respect you for it and treat you with similarly. If the rent is due on the first of each month, be sure to collect it and deposit it punctually. Once a tenant learns that you’re somewhat flexible, or that you hold on to their checks, they will surely take advantage of you.

If you are looking for a massive collection of free checklists for buying, selling and renting plus a huge portfolio free investor forms and in both PDF and MS Word for you to use as is or edit for your own real estate investing business, then check out these free resources for Real Estate Investing for our Real Estate Investor Bronze Members.

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