If you’re interested in diversifying your portfolio through real estate investing, there are a number of different strategies you can use. One of the best methods is to invest in income producing property. Not only do rental properties provide steady monthly income, but you also benefit from having tenants pay the mortgage. Then there’s the historical appreciation of real estate, which can lead to some pretty nice returns when you invest in growing markets.
But even under the heading of “income producing property,” there are a number of subheadings. There’s commercial, residential, single-family, and multifamily – to name a few. While not as popular as the former methods, multifamily real estate investing often proves to be the most lucrative opportunity available. In addition to high cash flow and stable/steady demand, multifamily properties also offer high future growth potential.
“Single-family homes are often priced based on what families find appealing, which can be subjective and fluctuate significantly based on changes within the neighborhood,” Houston-based Green Residential explains. “Multifamily properties, on the other hand, are priced almost exclusively based on how much income-generating potential they have. They’re bought and sold primarily as forms of investment, and therefore have more stable long-term growth (in many cases).”
4 Tips to Help You be Successful
If you’re thinking about multifamily property investing as way of generating income and diversifying your portfolio, here are some tips you’ll definitely need to consider:
1. Start With a Single-Family Deal
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As a rule of thumb, multifamily isn’t a good starting point for real estate investors. Before you get involved with multifamily deals, it’s probably helpful to get your feet wet with a single-family deal or two. This gives you the chance to learn more about the investing process and what it’s like research properties, obtain financing, negotiate contracts, fix up properties, and deal with tenants.
Once you feel like you’re comfortable with single-family, you can switch your focus to multifamily deals, which are generally based on the same principles (only magnified to a higher degree).
2. Know What You’re Looking For
It’s imperative that you know exactly what you’re looking for in a multifamily property before you start your search. Otherwise, you’ll end up settling for whatever catches your eye.
According to experienced investor Brandon Turner, you should have a clear idea of the location, number of units you’re looking for, the target monthly rent, an accurate understanding of expenses, cash flow calculations, and who the seller is (bank, individual, investment group, etc.).
3. Hire a Property Manager
While you may be able to manage one single-family property in your spare time, you aren’t going to find multifamily property management quite as simple. You have more units, which means more tenants, which means more problems. Unless you have a ton of free time to willingly devote to the day-to-day operations of managing your rentals, you’re probably going to want to hire a property manager.
4. Keep Cash Reserves
The final tip is to always keep a healthy pile of cash in reserve. While there’s nothing wrong with pulling out some of the profit you generate each month, a certain portion should stay in the bank so it’s there for a rainy day – i.e. broken appliances, new AC units, unforeseen legal expenses, etc. This will help you stay out of trouble, regardless of the scenario.
Don’t Get Ahead of Yourself
It’s easy to get really excited about the potential of multifamily real estate and forget how much due diligence, discipline, and risk goes into the process. Take your time, surround yourself with experts who know what they’re doing, and don’t let your emotions tell your money what to do. Remember these principles and you’ll find success.