Are you ready to expand your real estate portfolio beyond fix and flip or single-family rentals? Many investors opt to seek out multifamily property loans as their first foray into commercial real estate. Two- to four-family rentals offer many of the benefits of multifamily investing without the high price tag and property management responsibilities of high-rise multi-dwelling units (MDUs).
In fact, managing duplexes up to four-family homes are not all that different from managing single-family rentals. The characteristics you should look for in a good rental property are similar, too.
Location Counts More Than Ever
As with any real estate investment, the neighborhood you choose for your multifamily rental is going to have a major impact on how easy it is to rent the property and your overall profit potential. But multifamily rentals may face some specific roadblocks to profitability.
Many suburban neighborhoods are not zoned for multifamily, which means you may be limited to pricier urban areas. The stigma still exists in many parts of the country that renters don’t take care of the property the way homeowners do; a neighborhood full of rentals may drive property values down, and it’s assumed that multifamily dwellings will have at least one rental unit.
To choose a desirable multifamily neighborhood, pick one that is centrally located near transportation hubs such as main highways, close to amenities like parks and shopping, and is an area that is well-maintained and/or undergoing revitalization.
Choose a Property That Won’t Cost More in the Long Run
Many investors expect some rehab before they can rent a property. But elements like a deteriorating roof, aging HVAC systems, or the presence of lead paint or asbestos tiles can severely cut into your profitability.
It also makes sense to choose a property that doesn’t need major structural changes; renters today look for an open, flexible floorplan and many are not willing to compromise.
Amenities Can Accelerate the Rental Process
While you may not want to spend a bundle on repairs in a 100-year-old duplex, it can make sense to invest in certain upgrades. For instance, today’s generations of renters are eco-conscious. Upgrading windows, doors, and appliances to energy-efficient models could be an easy, worthwhile investment. And, opting to include utilities in the total rental price can save you money in the long run.
It’s a good idea to look for properties with desirable features like a rooftop gathering space, community laundry room, and security systems.
Consider the Cap Rate to Choose a Profitable Property
The cap rate, or capitalization ratio, of a property offers some insight as to whether the investment is a good risk, or not. To calculate the cap rate, divide the net operating income by your purchase price. Net operating income refers to your profits after repairs, maintenance, mortgage and taxes, and operating expenses, as well as marketing costs to rent the property.
Multifamily units tend to have lower cap rates than single family rentals, because the property’s income is derived from more than one tenant. If you lose one tenant, your NOI won’t fall to zero. The higher the cap rate, the greater the profitability. But risk also increases as the cap rate rises. If you want to play it safe, look at multifamily properties with a cap rate of 5% or lower.
Embrace Multifamily Properties as You Scale Your Investment Business
Considering location, repairs, amenities, and cap rate can help make your foray into multifamily investing and maximing your multifamily property loan profitable and painless. Partnering with the experts at 5arch can make the path to MDU investment even easier.
Consider a Low-Rate 5arch Multifamily Loan: Borrow Better today!