3 Tips For Investing In Multifamily Properties
When people think of investing in real estate, they often have a consumer’s perspective. They think single family homes, whether flipping or renting. When some investors start to think big, they may begin to look to multi-families and realize it’s a much different game. We’ve got some tips for you if you’re interested in adding multi-families to your portfolio.
- Find 50
- Cash Flow
- Cap Rate
When you find a property you’re interested in, you’ll want to know how much it’s going to make you. At it’s simplest, we want to know our expenses and our income on the property.
Some expenses to consider are the repairs, and any utilities you’re offering to pay. Some income to consider is the rent payment*, and any fees like parking or storage.
We say “find 50” in reference to the 50% rule where you take 50% of your expected income and use that as your expected expenses in your calculations. That’s if you’re doing quick math before your deep research if you’re unfamiliar with the area so far.
When you calculate that income vs expenses, it’s called your Net Operating Income, or NOI.
We’re looking at properties so we already have estimates of the rates and deals we’ll get on mortgages, so you should know how much you might put down in different price ranges. We’re going to take that estimate monthly mortgage payment and subtract it from our NOI.
That’s our cash flow.
At last we come to cap rate, or capitalization rate, which suggests how fast you’ll see a return on your investment (ROI). These rates neglect to consider a lot, but they’re good metrics to have and if you’re pitching to investors, it’s what they’ll want to see.
(Annual* Net Operating Income / Current Market Value) X 100 = Capitalization Rate
A higher suggests a riskier investment. The lower the cap rate the lower the “risk.” A good area to aim for is sub 10%, though a very low cap rate might mean the yield is subpar, while anything above that and you’ll want to ensure you know all the risks involved with that investment.