With the real estate market today being a typical “down market,” some buyers are ruling in the real estate game. It can be a great time to invest some of your money into a multi family investment.
First off, as with any home purchase, you’ll want to get pre-approved before you go out house hunting. Generally, buying a non-owner occupied residence will require more of a down payment, typically 20%, but loans can be found for less. The pre-approval will also play an important part later when you’re figuring your income versus expenses into the equation. You’ll want a general idea on what your monthly mortgage payment will be before you set out to find the perfect investment.
Once you’re pre-approved, you can start on your money making adventure. A two, three or four family is a great way to go for the first time landlord. Three or four families would be ideal, because it gives you more opportunity to advance your income. Once you hit a five-family house, it becomes commercial, which I wouldn’t recommend if you were a first time investor, unless you have substantial money sitting on the sidelines. The loan percentages are higher, and so is the insurance!
Be careful when you’re looking and compare your cost of upkeep versus the rent amounts coming in. It will vary across the country; some areas have a hard time keeping up with the need for space for would-be renters, while other areas struggle with vacant apartments on a consistent basis. You want to have ideally six months worth of rent set aside to accommodate any vacancies that happen.
A real estate agent that prices multi-families, there is a general rule of thumb that shows where you would start to break even on income versus expenses. Rent is generally 1% of the list price, so for instance, if your rental income is $2,000 per month, your list price would be $200,000. Anything below the 1% rule would be a great place to start looking, meaning the rental income would be more than 1% of the actual list price.
What you want to find out, in addition to the rental income, is the cost of upkeep on the building. It is required that landlords pay for any “common area” lights, so you will most likely have an electric bill. If heat and hot water are included, you’ll want to find out the cost of the oil, gas or electric, however it is heated. Look for loose or broken windows where your heat might be sneaking out, making all your expenses rise. Keep in mind that homeowner’s insurance is higher on a multi-family, as there is more liability.
You’ll want to look at taxes, water and sewer bills as well. Look for any non-paying tenants, and ask that they be removed. With laws the way they are, a “bad” tenant will cost you thousands if you have to go through an eviction process. If they are not paying, find out the reason why. Is there something wrong with their apartment? If so, be prepared to make the necessary improvements to make their life comfortable. You will be held responsible for the tenants’ quality of life in their material home. Normally, if the tenant has a lease when you purchase the property, you cannot have them removed. Special circumstances might allow you to, but it will be something you have to investigate. Leases can be a good thing with the right tenant, you will be guaranteed to have someone occupying that unit for some time without having to worry about leaving the apartment vacant as you search for new tenants.
Owning a multi-family is an excellent opportunity to add to your annual income, just make sure you do your homework first. They can be a lot of headache, for little money if you don’t! It’s a great way to add real estate to your investment portfolio!