How to Make Sure Your Multifamily is Profitable

One of the easiest ways to get started in real estate investing is with a multifamily home.  It is just as easy to qualify for financing on a duplex or triplex as it is a single family home.  Yes you will have bigger payments but the rental income can offset your expenses and make living in your home very inexpensive.  Your tenants can take care of the mortgage while you use your money for other real estate investments.  But before you make an offer to purchase you need to know how to make sure your multifamily is profitable, here is what you need to look for.

Is it Ready to be Rented

Are all of the units in good enough condition to be rented out as soon as you take possession of the house or do they need work?  Is the neighborhood a desirable one where you won’t have a problem finding good tenants?  You also need to be comfortable with the idea of sharing your house with tenants.  If you want a house for privacy then a multifamily may not be for you.  You also need to crunch the numbers for cash flow and figure out how long you can carry the mortgage without a tenant.

Expect Vacancies

Set aside some emergency money for times when you are between tenants.  Even in the best of neighborhoods there may be gaps in between occupants, you may need the time to get the unit ready for the next tenants.  Plan on your units being 75-80% occupied for the year, if it is more than that then great.  You need to underestimate your rental income.

Calculate the Total Costs

There are additional expenses aside from your mortgage you will also have to pay property taxes, the utilities, and there will be maintenance costs.  You need to set aside a reserve fun for big expenses like plumbing, hvac or roofing problems.  Get an inspection before you make an offer and that will tell you exactly what needs to be done to the property.  If there are too many issues you may want to pass on the deal.  This will also help you understand what maintenance costs to expect in the future.

A multifamily property is a great way to dip your toe in the water when it comes to real estate investing.  It will give you some experience in what it takes to become a landlord and how to manage property on a small scale.

Putting in an Offer on an Investment Property

Most real estate investors present offers directly to the seller or seller’s agent rather than going through an agent.  If you are new to the world of real estate investing you may not be quite sure how to put in an offer.  Putting in an offer on an investment property requires confidence and more importantly you need to understand the maximum price you are willing to pay for a property.

Here are some things you will need to consider:

  • The value of the property once it is repaired
  • Your cost to repair the property
  • The carrying costs while you upgrade the property

All of these will factor into your decision on what to offer and what you are willing to pay for any particular property.

Negotiating

Once you have established your maximum price for the property, never go above that.  When you enter into a negotiation process there are a couple of things you need to keep in mind.  This is a business and you need to keep the emotion out of it.  That means the seller’s situation is none of your business.

That being said listening to the seller is important, ultimately you’re working together to try and put together a deal that works for both of you.  However, their situation should never impact your offer.  Your offer should only be based on the numbers you have already worked out and the most you are willing to pay for the property.

The Seller’s Position

As an investor there are going to be times where your offer won’t be enough to cover the debts that the seller owes on the property.  Don’t be surprised when they accept your offer anyway.  Many can’t afford the burden of homeownership or the costs needed to cover the repairs that are necessary.  They simply want out of the current situation and to move on.

New investors are often hesitant to make an offer because of the seller’s position.  Don’t make assumptions on what they need or what they would be willing to sell for.  Your offers need to be based on financial decisions that work for you.  Flipping houses is a business and while you may want to help the seller as much as you can you need to keep your emotions out of the situation.  If you or the seller aren’t happy with the deal you both have the option of walking away from the transaction.