We recently purchased our first investment property in the city we live in and we learned a number of lessons from buying a multifamily property.
Although extremely rewarding the process had its ups and down and we dealt with bouts of frustration along the way. In the end we looked at over 50 properties until we found the right one for us. And although time consuming, the process was worth it and we learned a lot along the way.
I thoroughly believe in not only paying debt and saving but creating avenues to build wealth and increase income. Here is a list of things we learned along our journey to becoming landlords and buying a multifamily property.
It’s a significant investment
My husband and I stumbled on this journey when we saw a significantly cheap property for sale. On a whim we contacted the realtor who helped us purchase our first home to help us view the property.
Needless to say, it was a complete dump. This whim resulted in us seriously considering our first investment purchase. We quickly found out what that truly meant. Because we were interested in financing and already occupied a home, we were required to pay 25% down on a property.
Additionally, to putting paying a deposit, we ended up paying for inspection (which costed more with when purchasing a multifamily), appraisal and closing costs. Closing cost isn’t a requirement, but it was part of our strategy to get the offer accepted on the property we wanted.
If you aren’t first, you’re last
The strategy that helped us get our offer accepted was being the first to offer one. The investment property market is aggressive and competitive especially when it comes to finding a good deal with a good return on investment.
We were the first to see the property and the first to put an offer leaving little room for the sellers to accept a cash or more significant offer.
Work with an experienced realtor
Multifamily properties are not as well kept as single-family homes. Because of this it was important that our realtor not only understood the market but had a keen eye for details and major foundational and cosmetic issues.
There were many properties that we liked, but our realtor quickly pointed out concerns regarding costly issues such as termite damage, roofing damage, water damage, HVAC issues, etc. She was even able to estimate repair costs which helped paint a picture for overall costs and return on investment.
Patience is key
I’m not going to lie, there were a few times that I got emotionally invested in a property due to the pressure of the market and the desire to get an offer accepted. It wasn’t that we didn’t like any of the 50 plus properties we saw, sometimes we were too late, or the seller received a better offer.
I have found that it’s better to wait until the right property reveals itself rather than settling on a property that can make you regretful down the line. The right property for us eventually became available and we were so grateful we didn’t purchase any of the others we saw prior.
Know your numbers
The single and simplest way to rule out investment properties is to have your numbers in mind. It’s important to understand all the costs associated with the property and what they mean to you. Determine how much you can put down, consider expenses associated with the property such as utility payments and repairs and examine profits.
Some questions you can ask yourself is how much profit do I want to make a month? How long do I want to make payments? Then consider if the property is going to help you reach those goals.
A good way to calculate your return on investment is using a rate of return on investment, cap rate and cash on cash return calculator.
- Return on investment measures how much money or profit is made on an investment as a percentage of the cost of the investment.
- The cap rate measures how risky a real estate investment is, the higher the riskier.
- Cash on cash return measures the cash income earned on the cash invested in a property.
To calculate the ROI, cap rate and COC yourself use the formulas below:
ROI = (Annual Rental Income – Expenses and Costs) / The Property Price
Cap Rate = Net Operating Income/Current Market Value
- Experts consider 6% a decent cap rate
Cash on Cash Return= Net Operating Income/ Total Cash Investment
- Experts consider 8-12% a decent Cash on Cash Return
Consider using a Broker for financing
Brokers typically have better rates because they act as a middleman between you and lenders. Their job is to work on your behalf to find you the best competitive rates. A better rate means a cheaper mortgage payment. Additionally, brokers can find financing for those with less than perfect credit ratings. Shop around between banks and lenders and don’t be afraid to negotiate your deals.
Having an investment property can not only create positive cash flow, it can provide appreciation over the long term. It is the best decision we have made as a couple and we look forward to seeing where it takes us.
What are your tips for buying a multifamily property?
Please comment any questions you have!
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