9 Tips for Purchasing Multi-Family Properties

Sean Perkin in Thailand

Sean Perkin travels the world to gain interior design inspiration. The above photo was taken during a trip to Thailand.

As owner of Sean Perkin & Associates, Sean Perkin has brokered and sold in excess of 150 single- and multi-family properties in California. Last week he shared some tips for purchasing single-family investment properties in this blog post, and this week he has nine tips for purchasing multi-family properties:

  1. Historically, apartment buildings have been stable investments that return reasonable returns of between 5-20%, to infinite, upon stabilization. This dramatic difference is based on an investors refinancing of the property and their eventual cash left in the deal.
  2. Buyers of apartment buildings tend to be for the most part “mom and pop” owners who are very conservative, like to run the properties themselves and keep an eye on things. Of course there are  major institutional players as well, however, they tend to purchase Class A assets that are larger.
  3. Multi-family units are an incredible way to go for investors who are patient. As we say in the business “making money in apartments is like taking a slow boat to china.” There is no get rich quick or fast money. Like everything else, these type of investments require intensive management, watching every dollar and being well capitalized.
  4. While historically apartments have been great investments they are not for everyone. The management of rental property is very difficult and expensive. Tenants lie, don’t pay rent, abuse the property and in general mistreat the asset. Of course there are always maintenance issues including plumbing, roofs, electrical and termite. And, while hiring a management company is great and alleviates a lot of the day to day management by owners there is a cost of 4-6% of the gross rents collected for the service. While that is not a large amount, most owners believe they can do a better job (they are vested) than a third party.
  5. Financing for multi-family units (5+ units) is very different than that of single family. The overall process including rate and loan amount is based more on the asset than they owner. As such, vacancy rate, location, deferred maintenance, experience of the owner are all factors.
  6. Buyers of apartments typically need to come in with 25-35% down. The more a buyer puts down the greater the monthly cash flow but the lower the yield. Real estate investing is all about leverage. If you’re able to buy a $1,000,000 building for $200,000 down or $300,000 down, what would you do? What would be the better deal? The truth is – it depends on your situation. The lower amount will mean a higher return on your cash invested but your annual cash flow will be lower than if you invested a larger amount.
  7. Buyers should also be aware that when a property requires a down payment larger than 35%, unless there is a compelling reason to purchase it (major vacancy) it is most likely over priced.
  8. Once an investor has purchased a property and stabilized it (fixed it up and gotten all tenant to pay on time on a regular basis) the rewards are great. Aside from the leverage most properties experience rental income increases annually, asset appreciation, depreciation and write off’s. All of which lead to an owner eventually refinancing and pulling out their initial investment – which leads to an infinite return on the investment.
  9. Those interested in apartments should set a realistic timeline for returns (minimum of one year) and have ample reserves in the event of vacancy and maintenance.

 

If you have questions about the intricate process of real estate investment, reach out to Sean Perkin today to obtain more information.

You can learn more about Sean Perkin by adding him to your LinkedIn network or reading his bio on Weebly: seanperkin.weebly.com

Speak Your Mind

*