Many financial experts believe that real estate is a sound investment that’s almost guaranteed to be profitable. When looking to purchase a home, a lot of people buy single-family residences that they intend to live in and don’t consider the possibility of later renting them out.
Those who consider the purchase of a home to be an investment opportunity often look into multifamily properties. Some investors purchase multifamily properties with the intention of living in one of the units and renting out the others as a source of income. Still others purchase multifamily properties purely as an investment with no intention of ever residing on the premises. Either way, purchasing a multifamily property is a great way to build wealth. However, there are a few things to consider before deciding if purchasing a multifamily property is the right decision.
Decide What’s Best for Your Situation
If you’re considering the purchase of a multifamily property, it’s important to assess your current situation and future plans. While there is no one-size-fits-all approach, the pros and cons of such a major purchase must be weighed so that you can make the most informed decision.
One of the chief considerations is financial. If you have credit issues, such as a low credit score or a high debt-to-income ratio, purchasing a multifamily property may be difficult or impossible. If you are able to get approved despite your financial challenges, you will likely have to pay a higher interest rate, which can adversely affect your cash flow on a monthly basis. If you’re interested in paying for the property with cash, you will certainly need to ensure that your finances can withstand such a large purchase. Take an honest look at your complete financial picture, and make sure you’re prepared for emergencies and home repairs that aren’t covered by a homeowner’s insurance policy.
Another aspect to consider is how you will use the property. Will you live in one of the units? Will you rent out all of the units? Is the property zoned for commercial, residential, or mixed use? These are just some of the questions you should ask yourself before deciding if a multifamily property is the right choice for you.
Know Your Financing Options
Once you’ve determined that your budget can withstand the purchase of a multifamily property, the next thing you need to explore is what kind of financing options are available. On the surface, it may seem impossible to buy a multiunit rental property, as they tend to be a lot more expensive than single-family dwellings. However, with proper research, it may not be as difficult as you think.
One way to offset costs and maximize available funding is to consider living on the property, at least for the first few years. According to one real estate expert, if you purchase with the intention of living on the property, the potential rental income from the other units can actually improve your chances of qualifying for a loan. For example, if you purchase a two-unit property with plans to live in one unit and rent out the second unit for $1,000, the rental income will be added to your current monthly income and will be considered additional qualifying income by the lender.
If you are unsure of the approximate amount that your units can bring in, sites such as rentometer.com can give you an idea of what the going rate is for similar rentals in the area. You can also check online classified sites to view typical rental prices in your city. While both will only provide you with a ballpark figure, you will at least have a number on which to base your decision.
A Word of Caution
If you decide that buying a multifamily unit is right for you, you still need to consider some of the associated pitfalls. Depending on the geographic location of the property, your choices may be quite limited. Certain areas have fewer multifamily dwellings to choose from, and if your heart is set on a certain area, you’ll need to ensure that the type of property that you want is available.
Some cities have a concentration of multifamily dwellings in urban or downtown areas, which means you need to consider how well the location will work with your lifestyle. If you work far from the area, the commute time could be excessive. Also, if you think you may want to start a family in the coming years, you may need to rethink your decision to live in a multifamily property because these units are usually smaller than single-family homes.
In the course of your research, you should also familiarize yourself with landlord/tenant laws in the area. This is important because a new owner needs to understand the rights they have, as well as tenants’ rights. In many states, the landlord has more rights than the tenant, but it’s best to be clear on what those rights are and how they are enforced.
The Future Is Bright for Multifamily Real Estate Investing
Buying a multifamily property is a huge investment that should not be undertaken without forethought. Overall, market trends indicate that investing in multifamily properties is a sound investment. Recent survey data indicates that millennials are buying homes less frequently and are more likely to rent for longer periods of time. In addition, data shows that baby boomers entering retirement are selling off their single-family homes in favor of multifamily dwellings.
Once you get past any initial financial challenges, purchasing a multifamily property can prove beneficial. In fact, most real estate experts say that securing financing on a multifamily property is easier than for a single-family dwelling because lenders view it as an investment opportunity. With proper research, finding a multifamily dwelling that suits your needs will be that much easier.