Finding the Right Multi-Family Property Investment

In many ways, the current economic climate makes for a great time to purchase a multi-family investment property. The prominence of short sales and foreclosures has given way to good purchase prices in many areas of the country. Add to this the fact that there are some incredible interest rates out there right now (even for investors) and the fact that many former homeowners have now found themselves back in the rental market, and there’s a very valid argument that this is a good time to get into the multi-family market. If you are considering making a multi-family property investment of your own, following are a few things to consider before taking the leap.

Know what you’re looking for
Before you even begin to look at properties, have a clear idea of what you’re looking for and what you’re willing to put into a property, both financially and in terms of your time. Of course, this is always subject to change if you find just the right place, but that doesn’t mean that you shouldn’t go into the house-hunting process without a fairly narrow baseline in mind. Aside from basics like location and size, you also want to have know whether you’re looking for a “fixer-upper” or a “as-is” property.

Look at the whole package
Looking for a multi-family investment property is different from looking for a single-family home and requires a bit more of a discerning eye. Remember that you will be renting multiple units out to different tenants. To protect your financial investment, you need to be sure that each and every unit will appeal to (or can be transformed into a unit that will appeal to) renters. If, for example, you’re looking at a four-plex with three units that are in stellar “as-is” condition, but a fourth unit has problems which are extremely difficult and expensive to fix (lack of windows, rotted flooring, etc.), you may be best to keep looking. Even if you are able to easily rent out the first three units, covering the mortgage may be difficult should that fourth unit go unoccupied for an extended period of time. With each unit—and the property’s common areas—ask yourself one basic question: Is this somewhere I would want to live?

Determining your desired profit margin
In any property buying scenario, there’s always financial work to be done beforehand: figuring out what you can spend up front, how much you can afford per month, and going through the logistics of the pre-approval process. But when it comes to purchasing a multi-family investment property, you are in some ways taking other parties’ finances into account as well. Begin by determining how much rental income you will need to generate on a monthly basis to cover the cost of not only the property mortgage, but also regular expenses like water, sewer, garbage, and property taxes.

After you’ve done this, perform a very careful analysis of comparable rental properties in your area to ensure that you can command the rental income necessary to cover these expenses—remember, this is most frequently not an even split. The one-bedroom upstairs with great views will likely command significantly more rental income than the studio downstairs. In addition to figuring out average rental prices, you will also want to figure out local vacancy rates. Not only do you want to know that you can ask for your desired rent amount, but you also want to know that you will be able to fill vacancies fairly easily. Even a single lingering vacant unit can have an extremely adverse affect on your property’s financial situation.

For even more tips on finding just the right property for your portfolio, be sure to check out our previous blog posts on building a property investment checklist and selecting just the right location for your new investment property.

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