When it comes to real estate investing, single-family homes will undoubtedly represent the greater part of your investment focus.
The fundamentals of the real estate investment trade are best learned through hands-on experience in acquiring, renovating, selling, and even establishing a recurring rental property income. With that in mind, the reason why single-family homes are more popular with investors is simple math. As of March 2020, there were 215 million single-family dwelling units and only 38.6 million multifamily units in the United States.
However, at some point, you’ll want to explore multifamily investing opportunities to boost your portfolio. One of the main reasons for doing so is that multifamily properties have lower vacancy rates and hence, a lower likelihood of foreclosure.
If you’re considering getting into the multifamily real estate investing game, review these tips, so you know what to do and what to expect.
Find Your 50%
Before you settle on any specific multifamily property, you need to crunch the numbers and estimate how much it’ll make you as an owner. Of course, you calculate that by finding the difference between the expected income (rent payments, parking fees, storage fees) and expenses (maintenance, repairs, etc.)
In the event that you don’t have complete access to important information, such as a clear neighborhood comp, you can resort to the trusty 50% rule. Take your expected income figure and halve it to give a reasonable estimate for your expense number. Your net operating income (NOI) is the difference between your estimated monthly income and the estimated monthly expense.
Determine Your Monthly Cash Flow
In order to determine what your estimated monthly cash flow will look like you need to factor in your mortgage payments. To calculate how much money will be going in your wallet on a monthly basis, subtract your monthly mortgage payment from the NOI of your prospective multifamily property. If you end up with a decent cash flow figure, your multifamily property investment will be worthwhile.
Calculate Your Cap Rate
To determine how quickly you’ll get a return on investment (ROI), you need to calculate the capitalization rate or cap rate for short. A “safe” investment, such as a certificate of deposit, will typically have a cap rate in the lower range (1-2%.)
To determine the cap rate, you need to multiply your monthly NOI by 12 and divide the resulting figure by the property’s current market value. Keep in mind that a higher cap rate isn’t necessarily a good thing. It denotes a higher return, but also higher risk. A lower cap rate denotes lower returns and lower risk.
It’s always prudent to stick to a cap rate that’s in the 5%-10% range. A lower figure will indicate a property that doesn’t have enough yield, and a higher figure should prompt you to reevaluate all the risks that come with the investment.
It’s also important to keep in mind that the cap rate you calculate at this point doesn’t factor in property value increases, monthly NOI boosts, or tax breaks afforded to multifamily property owners.
Global Capital Partners Fund LLC is a reputable hard money and private mortgage lender based in New York. Their database of international lending partners allows them to finance the acquisition of multifamily properties of all sizes with programs that range from $1,000,000 to $100,000,000 and more.
Call +1-800-514-7350 to speak with their agents and learn more about their services.