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A Brief Guide to Investing in Multifamily Properties

Real estate investing is a great way to make serious capitol. Most investors tend to gravitate toward purchasing single-family homes for rental income or a quick flip, yet establishing rental property income on a monthly basis is a great way to begin your real estate career.

Are you looking to seriously add to your cash flow? Multiunit investing is a great way to boost your portfolio and create recurring cash flow all at the same time. Simply put, by owning multiunit properties, you’ll be able to reduce your vacancy rates and increase your income together, which is a great way to conquer the real estate game.

How to Find Potential Multi Family Units to Invest in

From a completely mathematical standpoint, it’s best to crunch the numbers to determine approximately how much you’ll be able to make from a specific multifamily property once you own it. Basically, you need to calculate all of your potential avenues for generating income – i.e. collecting rent, parking fees, and storage fees – and subtract your expenses – i.e. maintenance, repairs, etc. – and figure out how much money is left.

To determine if an investment is solid, figure out your expected income and then cut it in half. The reason you cut it in half is because that’s what you’re going to estimate your expenses to be. And then once you know the difference between the two numbers, you’ll understand your net operating income and you’ll be able to determine if this is a good investment or not.

Determining Your Cash Flow

During this step, you have to add your estimated monthly mortgage payment to the mix. Simply subtract your monthly mortgage payment from your net operating income, and this will help you determine how much your multifamily property will create as a monthly cash flow.

In some instances, your cash flow is going to be better than others. So you need to have all of these facts and figures in front of you to figure out if you’re looking at a worthwhile investment or an investment that’s going to end up becoming a money pit.

What Is Your Capitalization Rate?

Lastly, it’s important to memorize your capitalization rate, because you want to know how fast you’ll be able to make a return on your investment.

So, to come up with your cap rate, take your monthly net operating income number and multiply it by 12 to get your yearly operating income. Now, divide this figure from your total mortgage.

If your cap rate is generally higher, this means you’ll have a higher return and the property as a higher risk. A lower cap rate means a lower return but it’s also a much less risky property. Strictly speaking, your cap rate should fall somewhere between the 5% to 10% range. If it’s any lower the investment might not make enough money, and if it’s any higher you may be taking too big a risk.

Final Thoughts

Investing in multifamily units is certainly a great way to earn a tremendous income. Please use the formula shared above to determine if a multifamily property is a worthy investment or not.

Join us at one of our upcoming events to learn more.