Multi-family properties have the potential to be excellent investments due to economies of scale. Regardless of what your goal is behind buying an apartment building, there are quite a few things you must consider when purchasing. Remember, the following points aren’t exhaustive by any means. But they should certainly get you started and put you on the right track.
The first step before look for or placing multi-family property under contract is looking at your financing option and what you qualify for. Having a pre-qualifiction/pre-approval or term sheet in your hand when submitting an offer is invaluable. Most sellers will not even look at your offer without one. It is easy to know what you qualify for and commercial loans are available for both seasoned professionals and first-time investors. There are different multifamily financing options, all with their own unique interest rates, loan terms, qualifications, and down payment requirements. Each property and purchaser is unique and so is the specific loan program that best fits your objectives.
Conventional mortgages are offered by traditional lending institutions and are usually long-term permanent solutions. Many of the mortgage loan terms can even include renovation money into your mortgage. There are alternative options as well such as private mortgages, conventional mortgages, or government-backed loans. Other commercial loans include portfolio loan and short-term multifamily financing.
Other financing options such as security backed lending, bridge loans, or commercial hard money loans may be a good option depending on property condition and how long you expect to own the property. Each type of loan will have its own positive and negative attributes and stipulations, and some may be a better fit for you than others.
The cash flow of a property is vital. It hinges on quite a few things such as the rents, occupancy, delinquencies, mortgage payment amount, property expenses, management expenses. If you’re looking to make money from your purchase and have a viable investment for the years to come, all of these factors have to be considered to have a positive cash flow and Net Operating Income (NOI). It also depend on your capital contribution on your investment which will affect your total cash flow returns. When looking for a commercial property always consider the value you can add. It can be increasing the rents which are below market rents, lowering the building maintenance expenses, managing the apartment building yourself, plans of adding additional units, adding more amenities for the tenants to enjoy and feel at home so your turn over rate is minimized, etc.
If you’re looking at the property from a long term equity standpoint and your cash flow in the near future is not a significant concern, then you could consider acquiring a property with needed repairs or potential for growth in value in the future.
Location is key, not just for multi-family properties, but for any real estate purchase. Quite often, the money paid for a real estate purchase is for the land, or the area the property is located. Location, Location, Location. A multi-family property purchase is no different.
The location would not just determine how steadily the value of the property grows, but it would also play a role in attracting tenants, occupancy levels, rents, management, and tenant retention. Location affects property value significantly and needs to be considered. When looking into a multi-family property, be sure to do your research on the surrounding area to make sure you there are no potentially foreseeable changes that could affect your property value and cash flow.
A multi-family property purchase can be more expensive than most other types of real estate acquisitions requiring larger down payments. Moreover, the cost of maintenance and repairs could be considerably much higher too. If your accustomed to estimating on residential properties it does not translate so smoothly into commercial properties. Make sure your calculations are correct with a 5 – 10% buffer for unforeseen expenses.
Seeking bids is important when in your inspection period if acquiring and if you already own the property always obtaining 3 bids ensures you are getting the absolute best pricing and professional service. Keeping an account for reserves is an excellent idea. If you’re not experienced in producing a proforma or a projection schedule, educate your self and hire an expert to review your numbers.
Besides the initial property cost, the other costs that you could potentially incur with acquiring a property should also be considered and evaluated. A property purchase could entail a range of additional costs such as rehabilitation costs, property improvements, adding additional amenities, property taxes, renewable energy infrastructure setup, etc.
If you are not aware of these additional expenses right off the bat, you may be in for a not-so-pleasant surprise if you plunge in unprepared. Remember, a property purchase should be seriously looked into only if you have a holistic view of the associated financials. Hire a professional to inspect plumbing, electrical, roofing, and structural before making any decision.
There are pros and cons to multiple tenant. On the positive side, there is more potential for profit since you will be receiving rent payments from multiple tenants. On the flip side, the potential for non-payment, property damage, eviction costs, and building repairs also multiplies. With the greater potential for profit, comes increased financial risk and increased liability. Ensure you have a plan and reserves for each of these situation and more importantly you must expect for this to occur. It isn’t if it occurs but be ready when it does occur.
As fore mentioned, we are just scratching the surface here. There is so much more to learn about financing and purchasing a multi-family property. If you’re serious about buying a multi-family property or any commercial property, It is important to first contact a us before you even begin to search for a property so you know what you can qualify for and have a term sheet available when submitting offers. Email us or call us right away to get pre-approved/pre-qualified.