7 Ways Invest in Multi-Families for Free
Multifamily properties can come attached with a hefty purchase price, causing some investors to shy away. However, when managed properly, these type of properties present an opportunity to earn a great amount of cash flow and offer strong returns. The purchase price need not present a barrier to entry; there are several ways to invest in multifamily properties for those who don’t have a ton of cash, including the methods below:
Well you’ve realized it’s time to get some multi-family properties; we’re proud of you. We’re going to consider some of the ways you might secure funding for that purchase.
- Private Money
- Equity Shares
- Material Sales
- Hard Money
- Repair Allowance
1. Private Lenders
Private money lenders are people, usually within your network, who will provide the capital needed to get a project you propose to them completed. It’s often the case that people have investments sitting idly, even those who know how lucrative real estate gets.
We have the chance to win together, and let them reap the benefits of real estate, by having them tag along with our deal. Once you start the process, it will perpetuate itself.
You only need to do what you do consistently well, and you’ll unlock opportunities of larger scopes. Once you have direct experience, investors will better trust your competence.
Real estate boils down to that— competence. We all see the raw numbers of investing in real estate, it comes down to who is actually going to do The Thing well.
2. Equity Shares
With private lenders there are all kinds of deals to finesse, while the common one is that they get a set percent return on investment on a set schedule. With equity shares, we see a new dynamic that you may want to enter with caution.
You’re going to promise the investor equity in the property equal to the amount they give you plus interest. It’s called “interest” because it helps you determine how interesting your proposal is, so keep in mind that the investor would love for you to do all the work and give them all the money— negotiations are crucial.
You’ll want to make sure that the investment is worth your time and is the lowest possible interest rate to get them on board, so negotiate something that works best for you and then the investor. It’s a great investment for them since they get equity in a property’s cash flow as well as a percent of the sale profit.
It’s something you want to enter having done your research because you might back yourself into a financial corner where you’re doing work for discounted prices. The idea of owning property without having to do anything is ideal to the money people so they only need to trust your competence.
3. Material Sales
We’re including material sales despite their uncommon nature. It is when someone funds your down payment on the basis that there is some resource received in the purchase that they will gain ownership of upon closing.
An example is a third party giving you the money for a multi-family because they want to harvest the trees and minerals in the backyard. Another is if you buy a property on the water with an investors money who agreed to fund the down payment on the condition that they get one parking space on your dock deeded to them.
The idea is to find opportunities attached to your property that go beyond what people might notice at first glance. There are always opportunities if you look carefully, just remember to keep yourself from backing into any corners.
4. Hard Money
Hard money lenders (HMLs) are private lenders who do things differently from your standard private lender. They agree to lend to people based on the property’s value instead of the lendee’s credit score.
The catch is they set very high interest rates and fees, so you’ll have to know for a fact going into the deal that it’s lucrative. Imagine a loan shark wearing an Adidas sweatsuit who’s willing to help you get your start in real estate because you made some bad credit choices in your teenage years.
5. Repair Allowance
It’s easy to overlook repair allowance unless you’re already considering renovations. The idea is to have an inspection done to create a cost list of repairs, then to have that money given back to you at closing so long as the sellers agree.
With that money you could do those repairs yourself, have a team of contractors do it, or you could go secure another property to parlay.
6. House Hacking
When you rent out part of a property you live in, that’s what The Youth call “house hacking.” If you rent a room, or rent the house and live in the garage while your shower at the gym and cook on a hot plate, you could have a down payment secured within months.
We’ll admit crowdfunding is a lot to deal with, unless you use your imagination. A crowdfunded project might mean you’ll have to pitch to many investors, or it might mean getting a solid group together.
Buying a multifamily with a group of people you know and trust is a great idea so long as you’re all emotionally intelligent. There are also sites like GoFundMe and others that connect you with a wealth of people looking to put money towards projects.
You’ll have to have a strong pitch, which necessitates that you know what you’re doing. You’ll want to understand the entire deal on a conversational level, meaning you could pull all the information about the entire deal from your brain rather than flip through the PDF you made.
When pitching to investors you’ll have to remember that they’re likely entrenched in the field and will pick up on any B.S. you’re putting down. Always know what you’re talking about, and stay willing to admit you will find any answers you’ve yet to acquire.
Best Multifamily Home Loans
There are plenty of ways to finance multi-families. These are some of the best loan options:
- Conventional Multifamily Mortgage: Any traditional lender is willing to invest in a multi-family between 2-4 units, so long as you have a 20% down payment available. Once you get to 5+ units, it’s considered commercial property..
- Federal Financing: An FHA loan is a great way to get into real estate, so long as you do it right. These loans make it possible to acquire property for 3.5% down, plus a premium paid on the remaining loan amount which brings costs to about 4-5% of the total cost of the property.
- Portfolio Loan: These are used to get multiple properties at a time. They’re usually used by investors who want to secure up to 10 properties at once, and are possible although difficult to secure by anyone who’s just getting started.
- Short-term Financing: A short-term investment, like a hard money loan, is a pile of capital that you’ll want to refinance as soon as possible. It’s usually used by people who are low on liquid assets and want to secure a property fast, for whatever reason.
Pros Of Buying Multifamily Properties
Before deciding to add a multifamily property to your investment portfolio, you should take the time to weigh the pros and cons to decide if it is right for you. There are many benefits to investing in a multifamily property that attracts investors to pursue these opportunities.
We figure if you’ve come so far, you already know the benefits of multi-family investments. We’re going to go over some to make sure.
- Recurring Income: Every month that your units are occupied you’ll get rent checks. If you plan to put that money back into the business you started when you got the property because we all know to start an LLC or S-Corp when getting into business for yourself, then you’re in even better shape.
- Income Diversity: If you have multiple units then they might carry each other through any periods of vacancy, because they’re in the same realm of investments— real estate. They’re different properties which means they’re standalone investments and therefore are diversified.
- Low Maintenance: It’s much easier to have all the units you’re managing under one roof, that way maintenance costs are restrained to one location and anyone improvements made will improve the whole thing. If you plan on managing your properties yourself then the closer they are to each other the better— you might even buy the whole block.
- Multiple Income Sources: In addition to rent income, there are other things you might earn income from. You could openly charge for utilities or parking, or you could offer to pay for it and just include those expenses in the rent.
- Performance-Based Financing: Ideal for people with bad credit. These loans give you the opportunity to acquire property based on how it will perform over time financially.
Cons Of Buying Multifamily Properties
There are plenty of benefits to owning multi-families, which means there are prices to pay. We figure you know these as well, and it’s heavily subjective so we’ll cover some of the points you might want to:
- Management: Managing multiple units is a job that people get paid a good amount of money to do. By owning property and doing that yourself, you’re trading your time and energy for the money you would pay a property manager, which is a pro/con depending on who you are as a person.
- Higher Turnover: Tenants stay in multi-family homes for an average of 2 years. That’s fast, relative to single family homes, but if you have an agent’s license you might even get a broker fee each time you acquire a new tenant so it’s situationally a pro/con.
- Tenants Neglect Property: People know they’re staying for a short period of time, so they might care less about the condition of the property or the life quality of other tenants. Screen well, especially if it’s owner occupied, but remember fair housing practices because they’re there to help anyone who’s moral compass is shot.
- High Cost Of Maintenance: A unit might have a leaky faucet, or a water heater might blow out for the whole building. The costs of upkeep multiplying by # of units is a possibility you’ll want to consider when setting aside emergency funds or similar accounts.
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