As more people look to real estate for passive income streams, smaller multifamily properties show promise as investments.
New statistics show that homeownership is in decline. Forbes’ data showed that 78% of families could afford to buy a home with their incomes and interest rates in 2012. By the latter half of 2018, that number dwindled to 56%. While renting in some parts of the country can be more expensive in the long term, homeownership has a massive entry barrier in terms of down payments, closing costs, and so on. Because of this, more and more households turn to rent. This means there is a greater demand for landlords.
A beginner or small-time investor can secure a decent source of income by purchasing small properties to rent out to tenants. Here’s why you should consider multifamily property investing.
Why Invest in Small Multifamily Properties?
Multifamily properties allow you to pull from multiple income streams from one building. There are a few advantages of investing in multifamily properties over single-family homes.
Mortgage lenders tend to follow Fannie Mae and Freddie Mac’s guidelines and limit investors to ten mortgages at a time. This will limit your ability to buy investment properties unless you’re already sitting on a mountain of cash. Multifamily property investing lets you maximize your mortgage limit. A portfolio of ten quadplexes looks more attractive from a cash flow standpoint than ten homes designed for one family each.
There are cost advantages associated with multifamily homes compared to single-family ones. Multifamily properties tend to have a lower price per unit. So even if they come with a larger upfront price tag, a quadplex building for four families will fetch a lower cost than four single-family homes.
You’ll also have the rent of four households to cover expenses and the mortgage of your property instead of one household per mortgage. Turnover will be less painful in a multifamily property, as the other households give you a safety net you won’t find in single-family properties.
The economy of scale also comes into play when you factor in the costs of maintenance and repairs. In the event of a natural disaster, for instance, you’ll be able to fix the roof of that quadplex for a lower price than you would if fixing the roofs of four separate houses.
This style of property is often less competitive than the single-family homes that prospective homeowners and investors alike are quick to scoop up. However, the nature of multifamily properties means they’re almost always bought as an investment.
Multifamily property investing gives you a chance to grow your portfolio quickly. Buying one quadplex and filling it with four tenants means you added four revenue streams to your portfolio. You’d have to buy four houses to match that in a single-family home.
Finding Properties for Investment
People are moving away from “24-hour cities” like New York and Los Angeles in favor of suburbs and quieter cities. This is even more true now in our post-pandemic world as more workers adjust to a work-from-home lifestyle. So-called 18-hour cities give people the best of both worlds as they can experience the hustle and bustle of city life with a more affordable cost of living. Cities like the following are seeing a lot more growth as a result:
- Columbia, South Carolina
- Kansas City, Missouri
- Tucson, Arizona
- Chattanooga, Tennessee
18-hour cities like the above are an excellent opportunity for new investment properties. As more people look to move into these areas, you’ll be in a prime position to rent them living space. Use ProspectNow’s likely seller algorithm for a chance to strike on properties before they hit the market. Keep reading for more information on ProspectNow’s likely seller feature.
Going off due diligence regarding the property location, you’ll also want to look at the surrounding neighborhood. Much like when you place a value on a commercial property for sale, you’ll want to check some statistics in the immediate area to assess key factors. Make sure to look at the following:
- Median property price
- Price per square foot
- Price to rent ratio – used to determine whether it’s more expensive to rent or buy in a given area. You calculate this number by dividing the median home price by the median annual rent.
- Traditional rental income
- Traditional cap rate
Consider looking in neighborhoods that show promising growth but have room for more residence space. This will give you opportunities to make improvements to the property after purchase and add to its value.
Type of Building
For those just getting started in the multifamily investment niche, experts recommend going for smaller buildings. This means duplexes (two units), triplexes (three units), and quadplexes or four-plexes (four units). These help you grow accustomed to the needs of handling multifamily properties while mitigating the risks and expenses that come with it. They’re also more affordable, making the barrier to entry that much lower.
Here are a few figures you’ll want to calculate when looking at properties:
- Net operating income (NOI): Your estimated monthly income with estimated monthly expenses subtracted. If you don’t have access to the expenses data, you’ll want to make a sound projection. A good rule of thumb is to cut your estimated income in half.
- Cash flow: Your NOI less the mortgage payment.
- Cap rate: A more complicated figure, calculated by multiplying the NOI by 12 and dividing that number by the market value. Note that a higher cap rate isn’t necessarily better – it signifies high potential returns but also higher risk. A lower cap rate means lower returns but lower risk. A good cap rate is around 5-10%, but you decide your level of risk.
Finding Multifamily Properties With ProspectNow
Operating since 2008, ProspectNow combines an extensive yet affordable property database with a full-featured CRM. Start your investment journey by looking up potential investment properties in any part of the country.
You can look at all the properties currently on the market, or you can use ProspectNow’s likely seller algorithm. This lets you view properties that are likely to sell in the next 12 months but haven’t yet hit the market. Why is this useful? With the likely seller algorithm, you have the chance to make a favorable first impression on prospective sellers. You could also get a lucrative multifamily investment property ahead of your competition, perhaps closing a deal before the property hits the MLS.
Once you’ve identified a potential investment, use ProspectNow to contact prospective sellers directly. All the contact information you could ask for is available directly on the platform. You can even lookup the name behind an LLC. Make your phone calls, emails, and even send physical mail through the platform. If you’re not sure what to say, use one or more of the templates available to you.
Ready to close more deals and make more money with multifamily property investing? ProspectNow is an essential tool for real estate investing and marketing. Try our platform risk-free for three days and see how much you could make with our system.