If you have ever rented an apartment, you can realize the tremendous benefit of owning a multifamily property. While the renters are paying down the mortgage debt of the property, you collect the gains from the appreciation, also known in real estate investing circles as "using other people's money". The profitability of a multifamily property is highly dependent on the ability to generate income to meet debt service and other obligations to keep and maintain the property. This article explains how to find good opportunities and turn them into profitable investments.
Conduct a rental market survey
What tenants are willing to pay to occupy a unit is the cornerstone of the investment. Therefore, it is incumbent upon investors to understand local rental market trends for vacancies and rental rates when buying multifamily real estate. Rental market trends are easy for investors to recognize: Just watch the newspaper or drive around the community noting all rental properties that have vacancies. If you only see a few rent ads or signs, or surmise that rents are increasing, it probably signals a shortage of rental units and a favorable opportunity for you. On the other hand, when lots of rental signs start appearing and rents drop, it could spell trouble for multifamily real estate.
The ideal situation to own multifamily property, of course, is when vacancy rates decrease. Apartment property owners can be more selective about the type of tenant they rent to and establish a positive direction for the complex, perhaps even increasing rents. On the other hand, when tenants become scarce, owners might need to become less selective about tenants and perhaps lower the rents just to fill the units.
Obtain sound financing
Like any investment property, it is critical that you establish a sound financing package. You'll want to obtain a loan that doesn't place excessive burdens on the property, or yourself. Lenders evaluate multifamily real estate based on the income stream and the financial strength of both the property and the investor.
When applying for a loan on a multifamily apartment, present lenders with clear and concise cash flow reports. Providing accurate income and operating expenses will make it easier to obtain a favorable financing package.
Consider economic conversion
Look for opportunities in which the former property owners have let the property run down and lowered rents to keep the units filled. If these rental properties are in a good area of town or in an area that is improving, then the remodeling of a rundown apartment complex can be a profitable venture. Just make sure that you ascertain the cost for remodeling and understand what impact it will have on your income stream. Pure window dressing for the sake of appearances only—unless it has a positive influence on occupancy levels or rents—is typically avoided by prudent real estate investors. Get a qualified contractor to give you a bid on remodeling. Otherwise, what you perceive to be surface issues could in fact be a costly can of worms that can eat away the profits.