According to Forbes, around 25 percent of all housing units constructed are buildings with five or more units according to historical averages — yet in 2014, the average was 35 percent. This number is expected to continue growing through 2020. Forbes points to the young 20 to 34 year old demographic who are currently more interested in renting than owning as the cause for this growth.
In light of these statistics, many savvy investors are choosing to invest in the real estate market by purchasing and renting multi-family properties. This can be a solid investment strategy, because the interested renters are definitely out there. Before you buy, though, you need to make sure that this is the type of investment that makes sense for you.
Do the Math
First and foremost, it’s essential to ensure the investment is going to bring a potential return. This requires careful math.
First, add up how much gross income you will receive from all of the units, based on the number of bedrooms and local area rent averages. Then, deduct 50 percent of that to cover the expenses for upkeep, marketing and other aspects of managing a multi-family property. Then, deduct the expected monthly mortgage amount from what you have left.
Does this provide you with any income at all? If the income is not sufficient, then the property is not worth investing in. Look for a property with a more reasonable price or in an area where you can charge a higher rent.
Sometimes the Risks Equal the Benefits
Owning a multi-family property carries a significant number of benefits, but Money Under 30 warns that those benefits are often overshadowed by equal and opposite risks. In fact, the website calls this “Newton’s third law of multi-family real estate.”
For instance, when you purchase an apartment complex you are almost guaranteed to have rental income every month, but on the flip side you gain a lengthy list of complex tax rules. You will need to weigh the pros and cons to make a decision that is right for your specific needs.
You Must Have a Good Location
Next, you will need to be certain that you have a good location. It’s crucial to choose a location that has a high demand for rentals, because that almost guarantees you will have prospective tenants who are willing to rent from you. However, you may not want to purchase a multi-family unit in a particularly rough area of town, because this could put your investment at risk or keep you from finding quality tenants, as quality renters do not want to live in dangerous areas.
For renters, consider close proximity to main necessities. Renters want to live close to work, grocery stores and good schools. Unlike buyers, they may not be willing to drive a significant distance to get to these amenities. When buying, make sure the property is located near main roads and amenities.
Living On Site Has Benefits and Drawbacks
One way to make investing in multi-family properties more affordable is to buy a property with the intention of living in one of the units. You will be able to bring in money from your tenants to offset your mortgage, and will be on hand to help with maintenance concerns as they arise.
That said, this is not always the best idea. When you live on site, your tenants may decide they can come to you at any time. Also, because you need to own property in areas where tenants want to rent, you may not be able to live in your ideal neighborhood.
Tenants May Not Pay
Your investments are only profitable when your tenants pay, but sometimes they won’t. Do you have what it takes to put pressure on a non-paying tenant? Do you have enough money in savings to get through a period when you don’t have a tenant willing to pay the rent, and therefore part of the mortgage on the property? Dealing with tenants is one of the biggest drawbacks of this type of investment, but it’s also reality.
If you are considering investing in multi-family housing, you could be making a wise financial decision. The market is there, and the potential for a good income is high. Do your homework first, though, to ensure that you are well prepared for all of the intricacies of this process. If you do, your investments will be a valuable asset to your portfolio, instead of an ongoing source of stress.
Jeff Cronrod has more than 40 years of experience as a landlord and is a board member of the American Apartment Owners Association. Mr. Cronrod has owned, rehabbed, developed and managed more than 4,000 rental units throughout the United States.