Multifamily Investing – 50 Expert Tips, Tricks and Hacks
July 28, 2020
Multifamily investing is one of the most lucrative areas of real estate investing. But to make money, you must know what you are doing. First, read the many multifamily investing articles Assets America® has published. These will give you a good idea of what you need to know to start multifamily real estate investing. Even with all this information, we cannot stress enough how vital it is to work with a seasoned, expert lender. Every project is unique, and sometimes you have to think outside of the box. Assets America® has seen most everything — we can help you navigate most any project so that you maximize profit and minimize waste.
Video: Investing in Multifamily Properties: A Step by Step Guide
How Assets America® Can Help
Assets America® can arrange financing with a minimum transaction size starting at $10 million ($10M). Our network of private money lenders and institutional funding sources can fund your multifamily assets, other real estate properties and equipment with efficiency, accuracy, speed, and highly competitive terms. Call us today at 206-622-3000 for a free consultation, or simply fill out the below form for a prompt response!
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Multifamily Investing Tips
What follows is a list of multifamily real estate investing tips that you can refer to at a glance. Keeping these in mind may help you avoid costly mistakes, hurt feelings, and painful lawsuits.
1. You don’t have to start big for multifamily investing. But you must start. It makes sense to start small because smaller projects usually have less-costly mistakes. Small projects require less time, less financing, and less equity. Consider such properties your on-the-job training, where you’ll build the skills and confidence to tackle bigger projects later.
2. Decide where you want to start. Many folks look for “hot markets,” which may turn out to be more hype than heat. Other investors stick close to home, with the neighborhoods they know and understand. Wherever you start, analyze the target property or if you are building, the construction site. You want to ensure that the property is the right size, with the right risk profile and right cash flow. Ideally, it will be a springboard to larger and larger deals down the line.
3. “When you’re looking for high-quality leads, consider sourcing for sale by owner (FSBO) listings,” advises Nicholas Thomas, Performance Marketing Relationship Manager at Fit Small Business. “While you can do this yourself, it takes time—time better spent making a sale. Instead, try using a lead generation tool like REDX, which will deliver valuable FSBO leads up to 24 hours before any other service. It even finds missing contact information and verifies it against the Do Not Contact (DNC) list.”
4. Understand the ratios. When you consider purchasing an existing multifamily property, understand the ratios and what they mean. The big three are cap rate, debt coverage ratio, and cash on cash return. These reveal the property’s return to you and your private investors. They also tell creditors how easily you can repay financing.
5. “Invest or consider investing in next-wave cities (cities with high projected growth),” says Karla Stefan Singson, Events & PR Lead, PREP – PR, Events & Promotions. “There are about 10 to 20 cities in every country that qualify as next-wave based on economic growth. You can easily access this information through records in your relevant government office. I’d advise buying properties there.”
6. When flipping multifamily properties, avoid capital gains tax. You can accomplish this under IRS Code Section 121 by living in the property for at least two out of the last five years before the sale. This allows you to exclude $250,000 ($500,000 for married couples) of the gain on the property. You can increase your after-tax profits and live in your own property. That comes in handy when you act as the landlord.
7. Buy multifamily investment property at value. When you are looking for a good investment opportunity, check out distressed properties. Don’t pay more than the value of the property before repairs and try to pay even less. Some sellers suck in buyers with prices that reflect the post-repair value, a trick you must avoid. Only offer a price that fits into your ROI requirements for apartment buildings, etc.
8. “Take transaction costs into account when you’re buying and when you eventually sell,” says James McGrath, Co-founder, Yoreevo LLC. “Given sellers typically pay the largest transaction cost (broker commissions), that can have a material impact on your real return.”
9. Consider investing in non-performing notes on multifamily properties. These are delinquent and defaulted mortgage notes. Many lenders prefer to sell the notes at deep discount rather than foreclose on the properties. This can be lucrative but risky, so exercise caution. You want to avoid protracted, expensive legal proceedings to foreclose and receive clear title.
10. If you work with a realtor or real estate agent, use only the best. The commission is the same whether the agent is tops or a disaster, so stick to best. Many associations recognize their top agents. For example, if you work with Zillow, insist on a Premier Agent. They can generate valuable leads through the traffic to Zillow website.
11. Work with a mentor, someone who has been in the multifamily investing game for many years. Even if they charge a fee, good mentors are worth much more than they cost. Look for someone with a proven record of profitable real estate transactions. Some mentors are also book authors, have their own websites, and even appear as expert talking heads on media.
12. Consider hard money deals. These are great if you have no access to bank capital. In a hard money loan, private investors, like those used by Assets America®, require the property as collateral. Typically, these deals predominate when you buy the multifamily property, fix it up and flip it. You use the proceeds to repay the lenders and you keep the rest. Hard money loans usually require at least 35% down, and sometimes much more. But if you can swing the down payment, this is a viable alternative.
13. Contact landlords to see if they want to sell their multifamily properties. This alone separates you from the average multifamily investor. For every 10 or 20 negative answers, you might find someone who shows interest. Some landlords want to be sellers but don’t know it yet, so remind them.
14. Be mindful of security when purchasing foreclosed properties. We mean physical security, not financial. For example, you might find out that the multifamily property has a bunch of squatters illegally occupying the units. Or, you might discover that the property has serious damage than can endanger tenants. Perhaps the property sits next to a toxic waste dump or in a flood plain. Know all about a property before you buy it.
Video: Financially Free in Less Than 5 Years Through Apartment Investing
15. Become an inspector. That’s a great way to gain expertise when appraising a property without having to rely exclusively on a third person. We’ve heard stories of sellers paying off inspectors to turn a blind eye to serious problems. When you have an inspector’s expertise, nobody is going to pull a fast one on you. And for small operators, you can earn some money as an inspector between you real estate projects.
16. Work with contract flippers. These are investment professionals who locate undervalued properties and put them under contract. The contract has a contingency allowing the flipper to assign the contract to a separate buyer within a short period of time. A good contract flipper has done all the preliminary work for you. That makes it worth the small premium that you can tack onto the price at assignment. Only work with a contract flipper that has an excellent reputation, as bad ones can kill you.
17. Consider leasing your multifamily property to an operator who will be the responsible landlord. In this way, you free yourself of daily entanglement with the property while collecting monthly lease payments. The lessee is responsible for subleasing the units to tenants. Make sure the lease requires full payment even if one or more of the units is vacant. You can sell the property at any time to someone willing to honor the lease contract. Or, you can let the lease expire and resume direct control of the property. This is a very flexible arrangement.
18. Looking for multifamily seller leads? “Zurple is a unique lead generation software that targets seller leads,” touts Emile L’Eplattenier, Managing Editor, The Close. “Once the seller responds to an online ad placed through Zurple, the software’s CRM tracks the lead and automatically responds with emails to every seller action on your website. Instead of wasting time tracking down sellers, you can let sellers come to you.”
19. Use a property manager if you don’t want to be the landlord. A good property manager will run a multifamily property efficiently. Look for a manager that is known to proactively fix small problems before they mushroom into large ones. Better yet, find a property manager that prevents the small problems from occurring. Using a property manager gives you the time to expand your real estate empire.
20. Crowdfunding is another way to identify and purchase available multifamily properties. In fact, there’s never been a better time to use crowdfunding to invest in real estate. In particular, renovating multifamily properties for quick resale can often be a lucrative opportunity. Perhaps that explains the increasing levels of home-flip activity year after year. You can invest in crowdfunded properties along with other investors. Alternatively, you can speak to the sponsor about buying the property outright. That’s perhaps the best way to use the real estate crowdfunding platforms for multifamily investing.
21. Consider a 1031 exchange. “Section 1031 of the IRS code allows real estate investors to sell investment properties in exchange for a like-kind property of equal or greater value,” chortles David Wieland, CEO, Realized1031.com. “For example, you could sell your multifamily rental and co-invest in say, a shopping center or office building. Sure, this doesn’t sound that exciting until you learn that under a 1031 exchange, you won’t pay a dime in capital gains tax.”
22. Attract tenants with an effective website. If you manage your own multifamily property, then it’s your job prevent unit vacancies. “In commercial real estate, 80% of potential tenants start their search online, which means that you need an IDX-enabled website that can capture traffic and convert visitors into potential prospects,” according to Allie Potts, Sales Editor, Fit Small Business. “One of the most effective—and easiest to use—IDX website builders on the market is Placester. You can design each page the way you want with MLS listings, lead capture forms, and more.”
23. Purchase a short sale multifamily property. For those just starting out, a short sale occurs when a lender agrees to sell a property at discount. In other words, the lender agrees to eat some of the mortgage to move the property off its books. Usually, the motivation for this behavior is a property in default. The lender would rather sell the property at a loss than pay for an expensive foreclosure. Their pain is your gain.
24. Devote some multifamily units to short-term rentals, including corporate housing. If your property resides in an area with high demand for short-term rentals, set some units aside. These alternate accommodations can bring in high revenue if their vacancy rates are low. You can easily reap double-digit capitalization rates in high-demand markets. Remember to keep at least five units for normal lease rental to accommodate commercial multifamily loan requirements.
25. Convert more website leads into tenants. If you have many units for lease, you need to use the internet and social media to generate leads. But the job isn’t complete until you convert those leads into tenants. Therefore, you need to spend some money on creating an effective website, starting with excellent content. Hire a professional writer who can deliver reliably awesome results that instills leads with confidence. Utilize SEO and social media marketing techniques to expand the reach of your website. Remember, a great website pays for itself in no time with higher rents and lower vacancies.
26. Consider investing in multifamily property tax liens. You can do this at county auctions on properties that have defaulted on their taxes. Normally, the owner of a multifamily property has a grace period to make good on past-due taxes. During this period, you’ll earn interest on the lien, as bid at the auction. This can diversify your multifamily investment portfolio without wandering into other property types.
27. Consider lis pendens properties, which are properties facing foreclosure due to delinquent mortgage payments. Unlike the short sale strategy, these properties do not necessarily qualify as short sales. However, they do provide the opportunity to scarf up multifamily properties below market value. Work with your lender to analyze these properties and identify the best candidates.
28. Offer lease-to-own units. This will widen the pool of potential renters who are not quite ready to take on a mortgage. You can charge an above-market rent and collect a deposit as well. Your lawyer can structure the lease to give incentives that attract tenants. This can be your exit strategy for unloading the multifamily property over time while collecting high rents for now.
29. Convert a single-family house into a multifamily property. You can do this legally by adding accessory dwelling units, as California calls them. You can then rent these units out by taking advantage of the special zoning arrangements of the law. Municipalities often approve these “granny flat” laws in the face of housing shortages.
30. Acquire real estate owned (“REO”) multifamily properties. These are bank-owned foreclosed properties that didn’t sell at auction. Typically, banks are willing to offer good deals on these properties to get them off their books. The nice thing about REO properties is that the bank has resolved certain problems. These include getting a clear title to the property and evicting tenants if necessary. The bank might even repair the REO property to help sell it.
How Assets America® Can Help
Assets America® can help you with your multifamily investing in several ways. We can also act as your Buyer Representative in a sales transaction. And of course, we can arrange financing for the purchase, construction, or rehab of multifamily properties. But it doesn’t stop there. With our decades of accumulated wisdom, we can help you decide on whether a multifamily project is worthwhile. We’ll help you understand the economics of the project, including possibly, the right purchase price to offer. Also, we have an extensive network of real estate and legal professionals who can help support you throughout the process. Consider Assets America® your one destination for all your multifamily investing needs.
What does loss-to-lease mean in multifamily investing?
Loss-to-lease is a charge against gross potential rent (GPR) due to reduced rents. Typically, this occurs on unleased units after the expiration of the initial lease-up term. The rents on these units are less than the anticipated GPR.
What are the small markets outside of bigger markets called in multifamily investing?
These markets go by several names. These include secondary and tertiary markets, suburban/exurban markets, rural markets, and farmland. These may be good, affordable markets for budding multifamily investors to begin learning about multifamily investing.
How do you get started in multifamily investing? Our best advice is to work with a professional or a mentor who thoroughly understands this market. As a matter of fact, we invite you start with Assets America® for projects starting at $10 million ($10M) and beyond. This way, you know you’ll be getting the expertise required to succeed for your first decent-sized deal.
How much money do you need to get into multifamily investing?
You will need at least 20% of the property value to start, plus additional funds for closing and reserve requirements. That being said, you might need as little as $25,000 in cash. However, large apartment complexes may assuredly require tens of millions of dollars.