What is a Multi-Family Home all about?
Buying multi-family homes for investment in Orange County, California or Georgia? That's great, but do you know what a multi-family home is? The answer to this question seems obvious - a multi-family home is one that contains more than one family. That doesn't necessarily mean more than one family living under the same roof - parents, grandparents, kids, in-laws, etc. What we mean by a multi-family home is a dwelling that contains separate units for individual families, and is usually an income-producing property.
Investors who are keen on buying multi-family homes for investment need to consider the pros and cons before going ahead. Multi-family homes are good for housing tenants, so consider the existing tenants - how long they've lived in the building, and whether or not their rent payment history is satisfactory. If the building is not fully occupied, then prospective tenants have to be properly screened. If they're not, then they may be delinquent paying the rent, cause damage to the property, or worse, move out without notice, leaving the home unoccupied. Failure to properly screen tenants can cause the property owner to lose money.
Buying multi-family homes for investment purposes need to be evaluated using two models:
The Cap Rate: This is the annual net operating income, before taxes, and it is divided by the present market value or the purchase price. For example, if you are buying a multi-family home for investment purposes at $500,000, and you made $50,000 in net income, your return on investment would be 10%, and your cap rate would be 10.
The Gross Rent Multiplier: This is the present market value or the purchase price divided by the total rents or the gross operating income.
CONSIDERING A MULTI-FAMILY HOME AS AN INVESTMENT PROPERTY?
Multi-family homes are typically sold by real estate brokers, who may have expertise in both commercial and residential property, but who may specialize in one area over the other. Ideally, if you're considering buying multi-family home for investment, you should find a broker or an agent who specializes in multi-family homes.
Consider the Competition
When you're looking to rent units in a multi-family home, you have to know that you're going to have competition. You'll want to consider how much new construction is going on in the neighborhood, how quickly it's happening, what the rent control restriction and vacancy rates are, the level of employment in the neighborhood, and myriad other marketplace factors. When there's a lot of new construction and a high vacancy rate, you won't be able to charge much rent. Similarly, if the vacancy rate is low and not a lot of new buildings are going up, you can likely expect a rise in the rent.
MORTGAGES ON A MULTI-FAMILY HOMES
A multi-family home mortgage is very different from a single family mortgage. When you're taking out a mortgage to buy a home for yourself, your personal credit rating is very important. When you're buying a multi-family home for investment, the lender is going to be more concerned with whether or not the property is likely to generate income. If the property isn't likely to generate enough income to satisfy the mortgage, you're not likely to get financed no matter how good your personal credit happens to be.
If you can find good multi-family homes in decent areas where the vacancy rate is low, you may very well be able to get a mortgage and supplement your existing income, or even make a new career. It will, however, all depend on how likely the property is to remain occupied by tenants who will continue to generate income for you so that you can not only earn profit, but also fulfill your responsibilities towards your lender.