Multifamily Property for Investors
What is Multifamily (MF) property? This is a real estate classification to indicate multiple families living in the same building or complex. This could be as small as a duplex (2 units) or as in the case of apartment complexes, hundreds of units.
Investors purchase this type of property and then rent them out to individual families. They may or may not be the management or landlord of these units. Many owners will hire a management company to oversee the day to day operations of the property as they don’t want to be bothered with the details, or may live abroad.
Rate of Return
So what kind of return does this make for the investor? Currently the average CD rate is near 1% and the best Savings accounts are around .4%. The average return for an investor can be a direct 5% to 15% although it could be higher or lower, depending upon the property, renters and such. Indirect returns such as property appreciation or tax breaks are not included in this.
Cap Rate vs the Gross Income Muliplier
Usually what is called a Capitalization Rate (Cap Rate) is used to provide a rough return for judging properties. The definition of this is correctly defined as the Annual Net Operating Income divided by the property Cost (CR = NOI/C). Sometimes this is confused with the Gross Income Multiplier (GIM) which is the Gross Income divided by the property Cost (GIM = GI/C). Don’t mix apples and oranges here or your comparisons are not valid.
The Cap Rate is not a perfect way to evaluate property as it does not take into account factors such as Financing (it is based on a Cash model). It is also based upon some factors that are not a matter of public record, such as vacancy factor, maintenance expenses, landscaping costs, etc. which make the calculations based upon estimates or upon someone’s quoted (and may not be verified) numbers.
Net Operating Income
To calculate the Net Operating Income (Cash) use a sheet like shown below. If you do not do the management of the unit yourself but instead hire a management company, then be sure to enter that in as an expense also. Note that the below is an actual property listed in Phoenix in August 2011. Although the MLS had the Cap Rate listed at 11.12%, they (whoever provided the data), did not include some expenses.
So always verify the information to your satisfaction.
Financing
A couple of things to note on MF properties. Unlike Single Family Homes/Residential, prospective owners do not usually get to see the inside of the units until they have either made an offer, have provided Proof of Funds, or are actually in Escrow. A property from 2 to 4 units can be purchased using a Residential loan, but properties larger than that will require a Commercial loan.
Don’t forget about…
Looks great right? Ready to buy a couple and then kick back and enjoy the money rolling in? Well, not to throw a monkey wrench into the washer, but there are a couple of other things that do sometimes happen. As with any rental, you must anticipate out of the ordinary costs such as the time between renters (vacancy factor), the repairs needed between renters (maintenance costs) and what happens if you must evict someone or they skip out without paying the last month’s rent? Other costs are just general costs you will find on any home; the roof needs repair work, the A/C unit needs fixed or replaced, the stove/refrigerator doesn’t work today…
Last thing, if you purchase or own rental property, even if you are renting it
to a family member, you must
register with the county. Failure could cause a number of fines.
MF property is a specialized area, so don’t rely on just any agent to help you with this. If they don’t have substantial experience in MF properties, then please Contact Us for assistance.
Cap Rate Calculations
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