Winston Rowe & Associates has prepared this article to provide prospective clients with a strategic overview of the mechanics of investing in multifamily and apartment buildings. Winston Rowe & Associates is a national commercial real estate finance firm specializing in no advance fee loans.
For more information about apartment building investing you can go to http://www.winstonrowe.com or contact Winston Rowe & Associates directly at 248-246-2243.
Rental property that has more than one family unit is considered multifamily property. From a duplex (two units), the smallest multifamily property, up from there to larger rental complexes easily consisting of hundreds of apartments.
The advantage of purchasing multifamily properties, not unlike all income property, is that it provides real estate investors with the ability to support debt from the income the property produces. Understood in real estate investing circles as "using other people's money", this idea is crucial to buying multifamily properties profitably and therefore must always be kept in mind because the success or failure of the investment depends on the income the property generates to meet debt service and other obligations required to keep the property.
Enough said. Let's look at three elements that contribute to this principal, and discuss why they are crucial to buying multifamily units profitably.
The key to buying any investment property is for you to establish a sound financing package. You want to obtain a loan that doesn't place excessive burdens on the property, or yourself. Also, given that lenders evaluate multifamily real estate based on income stream and generally structure a loan based on the property's financial strength as well as the investor's, bear in mind the significant role the principal of using other people's money plays in financing the investment.
When applying for a loan on a multifamily apartment, present lenders with clear and concise cash flow reports because you are more apt to obtain a favorable financing package when the property is represented fairly to the lender and the income and operating expenses are shown to be accurate.
Research & Market Analysis:
What tenants are willing to pay to occupy a unit in the apartment is the cornerstone of the investment. Therefore, it's incumbent upon real estate investors to understand local rental market trends for vacancies and rental rates when buying multifamily real estate property. Rental market trends are easy for investors to recognize, just watch the newspaper or drive around the community noting all rental properties that have vacancies.
If you see few for rent ads or signs, or surmise that rents are increasing, it probably signals a shortage of rental units, and a favorable opportunity for you. On the other hand, when lots of rental signs start appearing and rents drop, it could spell trouble for multifamily real estate.
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The best time to own multifamily property, naturally, is when vacancy rates decrease and tenants are standing in line to rent an apartment. Apartment property owners can be more selective about the type of tenant they rent to and establish a positive direction for the complex, perhaps even increasing rents.
On the other hand, when tenants become scarce, owners might have to become less selective about tenants and perhaps lower the rents just to fill the units.Be sure not to neglect a rental market survey whenever you purchase multifamily property. It's always crucial to gauge the rents and vacancy rates.
There might be money to be made in cases where the former property owners have let the property run down and rents had to be decreased to keep the units filled. If these rental properties are in a good area of town or in an area that is returning to a former higher quality, then the remodeling of a rundown apartment complex can be a profitable venture. Just make sure that you ascertain the cost for remodeling and understand what impact it will have on your income stream.
Pure window dressing for the sake of appearances only, unless it has a positive influence on occupancy levels or rents, is typically avoided by prudent real estate investors. So get a qualified contractor to give you a bid on remodeling. Otherwise, what you surmised as surface issues when you were buying the multifamily units could in fact be a costly can of worms.
In other words, look for an opportunity to upgrade the building and raise rents because it can contribute to a profit, just be sure that you know exactly what you're getting into.
Pros & Cons of Buying Multifamily Property:
The most obvious advantage of buying any income property is real estate investors can grow wealthy in the long run. Holding on to investment property and simply letting other people’s money payoff the debt, even if there is no immediate cash flow, is what drives people into real estate investing. Moreover, because multifamily properties serve a basic need in that they provide shelters to those who cannot afford or who do not choose to buy real estate, the downside risk to multifamily investing is limited.
The downside to owning rental property mostly concerns the management problems associated in dealing with tenants. Multifamily properties can be management intensive, and often the reason why investors who purchase rental property hire the services of a professional property management company to deal with the day-to-day issues of running the property. So you can choose to minimize this disadvantage if you care to.
The bottom line is straightforward. Multifamily property provides investors the opportunity to build wealth. Nonetheless, it's similar to investing in any other type of investment property, whether it's land or commercial real estate or apartments, it simply requires you to do it correctly, and with a careful eye on the elements discussed here. Here's to you and your real estate investing success
Winston Rowe & Associates success is measured by their clients' success, and their mission is to be your source for the most appropriate - and advantageous – apartment building financing solution that helps client achieve their goals.
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