There are many ways to get started in real estate investing. For the beginner, a good strategy might be to purchase a multi family unit to rent out. Four families or less per building is the ideal size to look for. This will allow you to still acquire a building with a residential mortgage, taking advantage of the lower interest rates. Here are some great reasons why investing in a multi family building can be less risky than other types of housing.

First is competition. There are going to be more investors going after those single family houses. This can drive the price of those houses up to a point where they will not cash flow for you. Do not depend on appreciation to create cash flow. You need your properties to be cash flow positive right out of the gate. If you are considering being a landlord, you might as well purchase a unit that has more than one tenant option.

Then there is the fact that you have more than one unit to rent out. If you purchase a single family house and the tenant skips town, you have to cover the entire mortgage payment until you get it re-rented. With a multi family, it would be highly unlikely that all of your units would be unoccupied all at once, giving you a bit of a cushion. If you have a four unit building, having one tenant gone may not even put you in negative cash flow! This could make all the difference in the world for your yearly profit.

Multi family units bring you more money per month. Depending on your market, duplex or triplex properties can be around the same price as a single family house. However, you can get more rent from 2 units than a single unit. So, you will be getting more money per month for approximately the same mortgage payment. Which means more positive cash flow - the most important aspect of real estate investing!

Repair costs per unit average out to be less. If you have 3 single family homes and need to replace the roof on each one, that is a lot of money per unit. However, if you have a triplex that needs a new roof, you are in effect replacing 3 roofs in one, making the cost per unit decrease. Same thing goes for maintenance, it's less travel time to go from unit to unit, maximizing labor costs.

As you grow your real estate portfolio, the increased cash flow given to you from your multi family units will allow you to be able to afford a property management company if you want. This will free up your time to find other deals, or do whatever you want!

So, don't get stuck in the mindset that real estate investing only involves single family homes. Smart investors will have a portfolio that includes a mix of single and multi family properties. Just work the numbers and you may find multi family investing to be profitable for you!

Okay, let's look at three elements crucial to buying multifamily property and then consider the pros and cons of multifamily property ownership.

1) Obtain Sound Financing

Establishing a sound financing package on the property is paramount to buying any rental property--you want to obtain a loan that doesn't place excessive burdens on the property or yourself.

Because lenders evaluate rental property based on income stream, and generally structure a loan based on the property's financial strength as well as the investor's, always bear in mind the role that "using other people's money" plays in financing the investment. Therefore, when applying for a loan on multifamily property be sure to present lenders with clear and concise cash flow reports. When the property is represented fairly to the lender and the income and expenses are shown to be accurate, the investor is more apt to obtain a favorable financing package.

2) Conduct a Rent Survey

The cornerstone of any multifamily property is the tenants and the rents they will pay to occupy a unit in the apartment complex. It is incumbent upon real estate investors, therefore, to understand local rental market trends for vacancies and rental rates when buying multifamily property.

Luckily, rental market trends are easy for multifamily property investors to recognize. Just watch the newspaper or drive around the community noting all rental properties that have vacancies. If you see few "for rent" ads or signs, or surmise that rents are increasing, it probably signals a shortage of rental units, and a favorable opportunity for you; and vice versa.

When vacancy rates decrease, for instance, property owners can be more selective about the type of tenant they rent to and establish a positive direction for the complex; perhaps even increase rents. On the other hand, when tenants become scarce, owners might have to become less selective about tenants and perhaps lower the rents just to fill the units.

3) Consider Economic Conversion

In cases where the former property owners have let the property run down and rents had to be decreased to keep the units filled, an opportunity to upgrade the building and raise rents might be in order. If these rental properties are in a good area of town or in an area that is returning to a former higher quality, then the remodeling of a rundown apartment complex can be a profitable venture.

Just be careful to ascertain the cost for remodeling and what impact it will have on rental income. 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. Moreover, get a qualified contractor to give you a bid on remodeling. Otherwise, what you surmised as surface issues when you were buying the multifamily property could in fact be a costly can of worms.

The Pros and Cons of Buying Multifamily Property

The advantage of buying multifamily property (like any income property ownership) is real estate investors can grow wealthy in the long run. Simply by holding onto the property and letting "other peoples money" payoff the debt, even if there is no immediate cash flow, is what drives people into real estate investing. Moreover, multifamily properties serve a basic need, which limits the downside risk in that they provide shelters to those who cannot afford or who do not choose to buy real estate.

The downside to owning multifamily property mostly concerns the management problems associated in dealing with tenants--apartments can be management intensive, though there is a way to minimize this disadvantage. When you purchase multifamily property you can hire the services of a professional property management company to deal with the day-to-day issues of running the property. So you do have options.

 

Many first time home buyers wonder if they should consider purchasing a multi-family property to help defray the cost of home ownership. Rental income tempts many buyers to start out with a multi-family home that can be retained as an investment property in future years.

A multi-family property is defined as a two, three or four unit property. Properties with five or more units are considered commercial properties, and as such require commercial mortgages. Single family homes with in-law apartments usually are not considered two family properties, but may be depending on the size of the unit in relation to the entire home.

Before jumping into a multi-family property, a home buyer must consider both the financial and lifestyle ramifications. Many inexperienced home buyers think that being a landlord means depositing a rent check. When a buyer becomes a landlord, he or she essentially takes over a small business. The asset of the business is the property, and the tenants are the customers. The landlord must maintain the physical asset, provide customer service to tenants and hopefully earn a profit on the operations.

Most multi-family home buyers make two financial mistakes when planning for a purchase. The first is to assign the maximum possible market rent as the rent that they will receive from their tenants. There is a direct correlation between rent prices in relation to competing apartments and the amount of turnover among tenants. In other words, the higher the rent, the more likely that a tenant will move within a short period of time. This is due to the basic laws of supply and demand: tenant consumers will constantly seek out the best value for the lowest price. In addition, the higher the rent, the more incentive a tenant has to attempt to purchase their own home. Landlords should consider pricing their rentals competitively to reduce turnover, marketing expense and time taken to rent units.

Potential landlords also fail to make adequate provisions for rent losses due to vacancies and repair expenses on the rental units. If an apartment normally rents for $1,000 per month, most buyers will simply figure their monthly payment and subtract the $1,000. No apartment anywhere has ever stayed 100% rented forever. Even the normal process of tenant turnover will often cause the loss of one month's rent. Prudent landlords should budget at least one month of vacancy per year in good rental markets, and two to three months of vacancy per year in softer markets. This means that in a good market, the property in the example above would generate $917 per month on average instead of the ideal $1,000.

Repair expenses are also vastly underestimated. If a new landlord is able to make most simple repairs, then costs should be limited to materials only. A landlord who must hire out all repair work however, will quickly find bills mounting. Holiday weekend midnight calls to plumbers for broken pipes can inflict major casualties on a property's cash flow. Landlords must set aside a portion of rent revenues each month to prepare for these expenses.

Tenant relations is another vital function of property management, especially when the tenant is directly above or below the landlord. Issues such as noise, parking and garbage are hard enough for one family to manage, but the landlord must help between two and four families manage these issues without driving each other crazy. Landlords can issue rules to tenants, but there is little recourse against non-compliant tenants except eviction.

Owners of multi-families must also understand that their property will take longer to sell and will probably not appreciate in value as fast as a single family property. Multi-families suffer faster physical deterioration due to tenant wear and tear that is much heavier than owner-occupied dwellings. Moreover, less than five percent of the general home buying public actually purchase multi-family properties as their primary residence.

Multi-family homes have often had additional apartment units created without proper zoning approvals. For example, many landlords convert the large attic of a two-family into a small studio or one-bedroom apartment. Owners avoid obtaining approvals either because zoning would not allow the change or because they fear higher tax assessments with an additional income unit.

No buyer should attempt to purchase a property that does not have proper zoning approvals, building code compliance and certificate of occupancies. Lenders will not permit a buyer to obtain a mortgage that is missing any of these vital elements. More importantly, insurance companies will deny any claim by a property owner for a loss on a property that did not have all approvals in place. The last problem a new owner wants is to have town officials knocking on your door the day after you move telling you that you are going to be fined for a zoning or building code violation.

Finally, multi-families are treated differently by the IRS for federal income tax purposes than a single family home. Specifically, the home mortgage deduction is only available for the portion of your home that is used as your residence. A home owner who lives on the first floor of a three family home may only deduct one third of the mortgage interest for the property.

While many parts of being a landlord can be overwhelming, owning an income producing property can be an excellent long-term project if managed properly.