How to Invest in a Multifamily Home

Posted by Barbara Bellesi on June 21, 2016

As an experienced real estate investor, you’ve gotten into the groove of fixing and flipping single-family homes. It would seem a multifamily dwelling would be the next logical step – or is it? On the one hand, it could make for excellent cash flow, but on the other, you’ll need to increase your renovation budget accordingly, not to mention the estimated timeline of the reno. Real estate is risky, and you’ve definitely upped the ante with this bet. Here’s how to make it pay off:

Assess the Risk

Bigger Pockets investment expert Brandon Turner advocates the 50% rule as a quick, yet conservative, way to determine whether a property will be worth the investment over time. Take the income from your investment property and divide it in half. One half will be spent on the property’s expenses, which do not include the mortgage. If you are happy with the cash flow offered by the other half of that income figure – which is used to pay the mortgage – then it’s a viable investment opportunity.

Stick to a Budget

You already know how hard it can be to stay within your budget for a fix-and-flip renovation, and it’s even harder when you’re dealing with a multifamily property. If you’re flipping a duplex or a triplex, it might feel like you’re renovating one house for the price of three. If you’re renovating an apartment building unit by unit, then you need to prepare yourself for an expensive process that could take several years to complete.

While you certainly don’t want to cut corners with a renovation of that magnitude, you might not have the budget to do a high-end kitchen for every unit. However, depending on the current condition of the building, smaller upgrades might be enough to see a return on your investment.

Be Ready for Vacancy and Turnover

Preparation is key to ensuring that your property stays at or above the city or region’s average vacancy rate. “While vacancy is a four-letter word to most landlords, it isn’t always a negative thing,” says Chris Washington, managing partner of Pinnacle Multifamily Group, LLC. “Personally, I’m more scared of sustained periods of 100% occupancy. Some vacancy helps reinforce that you are maximizing your rents and receiving the most money from your units,” he explains.

Washington says it’s normal to experience a turnover of about one-third of the units each year. “The most important step is having your maintenance crew on standby, ready to turn the newly vacated unit as soon as the previous tenant moves out,” Washington says. Aside from a major rehab, he aims for having empty apartments ready to show to prospective renters in about a week. “If it takes any longer than this, it’s probably time to find a new crew,” Washington says.

If you’re ready to boost your real estate portfolio and are committed to a long-term timeline, multifamily homes could be the next step for you to take as an investor.

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