Multifamily Investing: The Basics and Benefits
If you are new to multifamily real estate investing, you may be feeling overwhelmed with all the necessary information. This article will walk you through the basics and benefits of multifamily investing.
What is Multifamily Investing?
Multifamily investing can be residential or commercial real estate. Residential can be any multifamily dwelling such as duplexes, triplexes, all the way up to five units. These investments will have a residential mortgage or loan put on the property. And when it comes to borrowing power, the lender is looking at you, the borrower first, and then the property. This means you must qualify for the loan. And it is you alone who is responsible for the investment.
Commercial multifamily is anything over a five-unit property. Within commercial, there is non-institutional and institutional investing. Institutional grade investments are over 100 units, while non-institutional investments are under 100 units. At Multivest Capital, we work with multifamily investments of over 60-unit apartment communities. Apartment communities have been historically proven as the best asset for building wealth while limiting exposure to erratic market conditions. When securing financing for commercial multifamily, the lender looks at the property first and then the borrower. The lender wants to make sure the property is producing cash flow, that there is a business plan, and is it in a good market. There are many advantages of acquiring and investing in multifamily real estate. Through multifamily investments, you have financial freedom through passive income. It is real estate ownership without the headache and stress of fixing broken air conditioners and playing mediator between quarreling neighbors.
1. Cash Flow
Multifamily investing is extremely strong with cash flow. In real estate, you must have a cash flow, or you will not support the leverage and will not make your investment profitable. Unlike a single-family residential property where you have one tenant, and they are paying the bills – in a multifamily property with several units, the economy of scale works in your favor – your expense ratio takes up less of the property’s gross income. So, your NOI (net operating income) goes up.
This occurs by reducing income or reducing expenses incurred in the operation of the property which increases NOI. Examples of areas of manipulation include maintenance and repairs, management fees, insurance, utilities, and marketing.
Over the last two recessions, multifamily real estate has proven the most stable investment. When investing, you never want to lose your capital, and multifamily is one of the safest investments you can make. Imagine purchasing a duplex where you have two tenants. If one tenant moves out, your revenue goes down 50%. With multifamily real estate, you have a larger scale. For example, if you have 80 units and three tenants move out, that is already worked into your business plan.
In spite of vacancies, property owners of multifamily homes will always have continued cash flow. A recent study by statista.com revealed the average vacancy rate in multifamily homes in the United States is a mere 5.7 to 6.4%. Alternatively, single-family home vacancies mean no rental income and no cash flow.
Appreciation of a property can be forced, or it can be left alone to market appreciation. Forced appreciation is when there is a business plan to improve the property, making its value rise, such as interior and exterior renovations, increasing the rent if it is under market value, and optimizing the expenses. The investor does all these things to force the appreciation creating a more significant profit. Market appreciation happens when the market value for the property goes up regardless of any improvements made. When the market goes up, the value of the property follows suit. As investing goes, market appreciation is a big win because you make a profit without putting in extra work.
Leverage is a fancy way of saying you are using someone else’s money, mainly a lender. For example, if you acquire a 20-million-dollar property using your 20-million-dollars, that is not a good utilization of your capital. The wiser decision would be putting 25% down of your own money in equity and then mortgaging the remainder. This way, your return goes up, and you can use that excess capital to spend on acquiring other pieces of real estate. Leverage in multifamily investing is significant because lenders want to lend for these investments mainly because of the cash flow, the stability, and the appreciation factors. Lenders feel safe lending for multifamily investments. Because of this, investors can take advantage of low-interest rates. Lenders compete to get a multifamily property loan going with an investor. Low-interest rates allow you to have more cash flow, enabling you to put more cash back into the investment, increasing the appreciation of the property.
How Do Multifamily Deals Happen?
Multifamily deals happen through the real estate matrix, which comprises four components: the deal, financing, capital, and management of the property. No deal can happen without all these components working together. Working with us means you do not have to have all four components; all you need is the desire to invest in passive income. This is called syndication.
Syndication is when you do not have to have all four components on your own. Syndication allows investors to invest in multifamily with only their capital. Investors do not have to worry about financing, finding the deal, or managing the property.
At Multivest Capital we help busy professionals reach financial freedom through simple, stress-free real estate investing through strategy, location, and community.
Our strategy focuses on stabilized assets with enriched opportunities that gain large returns. We target areas with robust growth while improving all neighborhoods and communities where we invest.
If you are interested in learning more about multifamily investing and passive income, please contact us.