Things to focus when buying multi family property?

Question

Hi,

I'm new to investing in multi family property. What are the top things I need to be careful when buying or analyzing the property in terms of contract, locations, tenants etc?

Thanks in advance!

Marlen Weber · Answer

@Taylor L. You touched on great points. Thank you for taking the time to share those with us.

Joseph Cacciapaglia · Answer

We're getting a ton of first time multifamily buyers coming here to San Antonio from California. I see a lot of them struggling with a few different things, depending on what size they are looking at:

If you are looking at 2-4 unit properties, one of the biggest issues is getting a good handle on the finances. A lot of these properties are owner occupied and self managed. Getting real data on lease rates and other market terms is extremely important with these properties, because you won't get real financials most of the time. You will get a copy of the leases during your option period, and that's about it.

If you are buying 5+ unit properties, then you have to be good at analyzing their financials, or work with an agent and lender that will take the time to work through those with you. Don't ever take projections in an OM at face value. You see a lot of T3 or annualized RR income with T12 expenses. This may or may not be a fair way to look at a given property. If the units aren't separately metered and there isn't a RUBS in place, then you definitely need multiple years of expenses to make an informed decision.

There is really a lot to learn about multifamily, and I would say it's more important to build a strong team than it is to learn every detail. This includes getting your property manager and lender involved early in the process. It also means working with an agent that is knowledgeable in multifamily (I'm assuming you're talking about small enough properties that there is a buyer's agent involved in the process. Once deals get bigger, those go typically go away in my market). I would start with something smaller than you can safely afford. You will learn so much going through the process.

Greg Dickerson · Answer

There's a lot to know when investing in Multifamily and a lot depends on the size of property you're considering. The Southeast, Arizona, Texas are all hot right now in terms of job and population growth. There's lots of info out there regarding multifamily in these markets.

San Patel · Answer

@Chris Collins I own a primary home in Bay Area and I feel like I can achieve MFR in other parts of the country to generate consistent positive cash flow. Market is already peaked, so I won’t invest for much appreciation. I see 2% rule can be achieved in mid west and south west.

I’m currently doing Fundraise, I like that but I want something physical.

Looking for advise around upcoming markets. I wonder how the snow zone can give positive cash flow with lot of headaches around maintenance.

Thanks for reply!

San Patel · Answer

@Taylor L. Great, thanks much!

Chris Collins · Answer

@San Patel before going into a long list, what is your background in real estate?  You mention being new to mutlifamily, have you been active in other asset classes?

Guess the reason I'm saying that is, the response could be 'all of those.'  But maybe before that, I might recommend 2 books for you to give you some education, then you may have some more specific questions on the subject.

Crushing It In Apartments and Commercial Real Estate

and

Millionaire Real Estate Investor

Go get em!

Taylor L. · Answer

The list includes:

• Demand in the market & factors that influence said demand
• Location of the property
• Physical condition of the property
• Its proximity to you

Each of those has many sub-factors. Demand in the market can be influenced by job growth & net migration, industry breakdown of the market, new product coming online, landlord/tenant laws, and many other factors.

Location - is it in a good or bad part of town? Growing? Good schools?

Physical condition - this is enormous. Older properties can need a considerable amount of work. If you're new to this, see if you can hire someone to walk properties for you and tell you what they need.

Its proximity to you - are you going to self manage or hire a property manager? I highly recommend you hire a property manager. If it's far away, will it generate enough cash flow to pay for one or two checkup trips per year? Will you be able to effectively manage your property manager from a distance?

Brian Hennessey wrote a few books on real estate due diligence, which you can find on Amazon. They'd be well worth picking up a copy.