Key Factors To Consider
Good afternoon Everyone,
I've been interested in RE investing for awhile now, specifically multifamily. What are some factors to really consider when analyzing mulitfamily properties. I am really just looking at duplexes but considering properties with more units. TIA
Most Popular Reply
Buy in your local area and learn hands-on how to operate multifamily properties. Then you'll know how to manage a team to run your properties for you later on.
When analyzing the deal don't just consider rental income - debt service. I see a lot of newer investors significantly underestimate the expense side of the ledger.
Underwrite allowances for
- Vacancy, Prop Taxes, Insurance, Utilities, Repairs & Maintenance, a Reserve Account, and Property Management.
You will build skills and experience in acquiring and managing the duplexes that will help you with real estate projects large and small.
Don't get sucked in by the cheap huckster talk of owning a small slice of some multifamily project where you're not on the title and have no control. Those investments are super risky and if you have $200k to invest you don't get any additional mileage out of your money by having a $200k slice of a $50 million project. You still only have $200k working for you there.
Buy in your local area and learn hands-on how to operate multifamily properties. Then you'll know how to manage a team to run your properties for you later on.
When analyzing the deal don't just consider rental income - debt service. I see a lot of newer investors significantly underestimate the expense side of the ledger.
Underwrite allowances for
- Vacancy, Prop Taxes, Insurance, Utilities, Repairs & Maintenance, a Reserve Account, and Property Management.
David has really good points here.
The biggerpockets rental calculator is great, but sometimes the rent estimates are way off. Call local property manager and ask if what the range they would think this is, underwrite for the lowest number they give you. Also don't bank on appreciation "saving you" and you will definitely be spending a lot more than you would think on maintenance. This may be mitigated by a good home warranty which your agent may be able to negotiate for via a concession.
I guess general rule: Underwrite like the world is going to end, lol!
You should consider yourself first, how much capital you have, what you are trying to accomplish with real estate, are you aiming to do it full time, or do you want to be a passive investor?
Duplexes are not considered commercial, and to analyze a duplex it's more of a comp analysis. Cap rates are pretty useless. Are you buying to house hack or rent out both sides.
There are so many personal questions to answer, before you begin analyzing deals.Factors such as jobs, population, tenant laws, median income, affodability, crime, schools are all metrics to consider
Good Luck! Exciting time to be investing
Gino
#5 Multi-Family and Apartment Investing Contributor
- Cincinnati, OH
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#5 Multi-Family and Apartment Investing Contributor
- Cincinnati, OH
@Roberto Rodas, I would argue your biggest expenses are going to stem from capex items and tenant damage.
Capex can often be handled from the front end with inspections and contractor bids, but remember even a brand new house will wear out over time and need replaced. A roof on a typical duplex may cost $8k to tear off and replace. An asphalt shingle roof often lasts 25 yrs, so you need to reserve $27/mo EVERY MONTH for 25 years to have $8k available in 25 yrs. If the roof is already 15 yrs old, then you have 10 yrs until that $8k is needed.
Second is tenants. Typically, lower quality tenants are harder on units. So if you are buying in class C/D area, you will have higher turnover costs than in Class A areas with Class A tenants. This isn't hard and fast rule, but overall my (and many other's) experience. So, if you are buying in lower end areas or an area that is harder to attract high quality tenants, you will likely have more vacancy due to fewer qualified applicants and often time wear and tear that can be fairly expensive with each new tenant.
Roberto - There are many underwriting books and educational content that you can review to provide great information. As Gino has stated, duplexes are not underwritten as "true multifamily" because of how they are valued. For your particular situation, I would recommend reading the "Multifamily Millionaire, Vol 1" by Bigger Pockets followed by Vol 2 if you want to scale up to larger deals. Multifamily Millionaire Book Bundle – BiggerPockets Bookstore
I think by reading those you'll get a better sense of where you want to focus on multifamily and from there you can continue your focus on what type of analytics/underwriting makes sense. Good Luck!
Hey @Roberto Rodas, one important thing to consider is what your investment strategy is. This will help inform what other factors you should be considering when evaluating the investment.
But in general, the physical asset, the finances associated with the asset, and the location of the asset are a great place to start when evaluating a property.
Good luck!
@Dimitrius Kiritsis @Greg Kasmer @Gino Barbaro @Max Ferguson @Account Closed
I want to give you all thanks for the feedback you provided. You guys have giving me a lot to think about, especially with underwriting. Again, thank you all!