Investing in a multi-family real estate property can be a great way to build long-term wealth. As a beginner, you will be able to live in one of the units while renting the rest out, a strategy referred to as “house hacking.”
In this guide, we will go over the main benefits of investing in multi-family properties, what to look for in an inspection, and the best financing options available to give you the knowledge to make your first investment easier.
Let’s get started on your multi-family real estate journey.
Key Advantages of Purchasing a Multi-Family Property
Purchasing a multi-family property can be a smart investment strategy for building long-term wealth. It offers several unique advantages that are not available when investing in single-family homes.
Income Generation
The most significant selling point is cash flow. With multi-family properties having several tenants, you receive several rent checks each month. You also have parents moving in to start a new life, and they hope to stay long-term.
This combined and long-term rent payment will typically be sufficient to cover your mortgage and operating expenses, while providing a strong positive cash flow each month, which can be challenging to achieve with single-family rental units.
House Hacking
You could also use house hacking to offset your living expenses considerably. If you live in one unit while renting out the remaining units, you can use the rental income to pay either most or all of your primary mortgage. Effectively, you are living for free while your tenants are paying your mortgage and building equity for you.
Economies of Scale
Another important advantage is economies of scale. It is easier and less expensive to manage multiple units under one roof than a single-family or detached rental. Whether you are looking at maintenance, landscaping, or property management fees, multi-units give you better, if not much lower, per-unit cost versus single-family homes. Being able to fix multiple issues at one location saves you time and money.
Financial Benefits
Financing is usually much easier. For instance, lenders are often more willing to lend against multi-family properties (2-4 units) since they are still residential properties. This allows you to obtain residential financing, which has better terms than commercial. On top of that, a lender may also factor the rental income from the other units to value a bigger loan.
Natural Diversification
Your risk is shared by a number of tenants. If one unit is vacant, you have the income from the other units to help pay the mortgage. This buffer protects you from the total loss of income when a single-family rental is vacant.
What to Look for During Property Inspection and Due Diligence
If you thoroughly inspect and follow through on the due diligence process, you have the best protection against making a bad investment. This process involves looking at the physical building and the financial documents.
Property Inspection
Hire a professional inspector to assess the property’s underlying mechanics for issues. They will inspect the roof for leaks or age-related issues, check the foundation for cracks, and inspect major systems such as plumbing, electrical, and HVAC, to ensure the property is functioning properly and in compliance with local codes.
This provides both immediate and future repair costs, ultimately protecting you from any unexpected repair expenses down the road, once you make your purchase.
Financial Diligence
You must also verify the property’s financial status. Review the current rent roll, operating expenses, and tax history closely. Ensure that you analyze this information to identify the respective actual and expense lines, thereby confirming the seller’s information. This is the only way to accurately determine our true cash flow and return on investment projections.
Review Leases
Obtain and read all tenants’ current leases clearly. You want to know and identify important terms such as rental amounts, lease start & expiration dates, and security deposit amounts. Also, look for any unique terms that will attach you as the new owner. It is vital for you to understand the lease agreements and income basics for dealing with your tenants by having these additional arrangements clearly outlined.
Local Violations
This is important in a rental market such as Atlanta. Confirm current rental codes for your city. You will most likely encounter strict policies regarding smoke detectors, carbon monoxide detectors, and lead paint certification for older buildings.
Failing to adhere to the market ordinance may result in serious fines. Knowing the right property managers in Atlanta is crucial for many investors, as it allows them to navigate the local regulations and avoid unexpected issues later on.
Financing Options and Tips for First-Time Multi-Family Buyers
Getting financing is a key step in your investment journey. Fortunately, you will have several loan options available to you, each with particular advantages tailored towards specific goals, especially for owner-occupants.
Conventional Loans
A conventional loan is one of the most common ways to finance an investment property. For multi-family homes with 2 to 4 units, the down payment requirement typically ranges from 15% to 25%.
Your interest rate will be based on your credit score and debt-to-income ratio. Conventional loans are considered to be slightly stricter than owner-occupied loans. However, they are still an easy option for financing a non-owner-occupied investment property.
FHA Loans
If you plan to “house hack,” an FHA loan is a great choice for you. FHA loans are backed by the government, and they allow you to purchase property with 2-4 units with a minimum down payment of 3.5%.
The one caveat is that you must actually live in one of the units as your primary residence for a full year. Other than that, the FHA loan is the lowest barrier to entry for most first-time investors.
Commercial Loans
If you are considering a larger property with 5 or more units, you will need to acquire a commercial loan. Commercial loans are underwritten based on the future income of the property itself, versus your personal income.
You can expect the largest down payment needed for commercial loans (25%-30%) as well as terms that are shorter than usual (5-20 years), and over time, you’ll have to pay a balloon payment.
Bonus Tips for Real Estate Investors
Taking a little time and attention to detail on just a few elements of your financing will help your application. The first will be to achieve a strong credit score (above 720) to qualify for the lowest rate.
The second element that your lenders are going to need to see is cash reserves, usually sufficient to cover six months of mortgage payments after the down payment. Lastly, each lender may have different terms for investment properties, so don’t be afraid to shop around with multiple lenders.
Conclusion
Choosing to start your investment journey with a multi-family property is a sure-fire way to build wealth and secure your financial future. To be successful, you’ll need to understand the advantages, thoroughly assess the property, secure the right financing, and understand local laws.
All these can be time-consuming, especially if you have other pressing activities. In this case, most investors partner with expert property managers. Choosing the right property managers in Atlanta can significantly improve your return on investment, since they handle everything from legal compliance to property maintenance.
