With the current volatile state of the stock market, real estate investing can certainly look attractive. It’s also a better way to grow capital than simply investing and waiting for passive returns to come in. The two major options for real estate investors are single-family dwellings and multi-family properties. Those just getting started in this business are often advised not to get into the multi-family sector. But there are many reasons you should jump into multi-family investing. So let’s take a look at some agent tips for buying multi-family properties in Redlands.
Understand the Pros of Buying Multi-Family Properties
The success of any undertaking – but especially an investment venture that requires a lot of time and money – depends on a solid commitment to what you’re doing. And when it comes to buying multi-family properties in Redlands, that typically means understanding the outstanding benefits. These are . . .
“At first sight, it might seem as though securing a loan for a single-family property would be a lot easier than trying to raise money for a million-dollar complex, but the truth is that a multi-family property is more likely to be approved by a bank for a loan than the average home. That’s because multi-family real estate consistently generates a strong cash flow every month.”
EASIER/FASTER TO GROW PORTFOLIO
Buying Redlands multi-family properties is also better (and easier} for investors who want to build a large portfolio of rental units. Why?
“Acquiring a 20 unit apartment building is a lot easier and much more time-efficient than purchasing 20 different single-family homes. With the latter option, one would need to work back and forth with 20 different sellers, and conduct inspections on 20 houses that are each located at a different address.”
PROPERTY MANAGEMENT FINANCIALLY FEASIBLE
With multi-family properties, investors can take a more hands-off approach because property management makes financial sense. “The amount of money that multi-family properties produces each month give their owners room to take advantage of property management services without the need to significantly cut into their margins.”
Understand the Financial Aspects
For buying multi-family properties in Redlands, agents advise that you first take the time to understand the financial aspects and do the math. Here’s what you should take into account . . .
DETERMINE YOUR 50%
The first step is to get a rough idea of how much a particular property can earn for you, which is done by calculating the difference between expected income and expenses. For a quick way to get a rough idea of a property’s earning potential, you can simply calculate the 50%.
“Ifyou do not have access to information clear neighborhood comps, youcan use the 50% rule. Simply take the expected income and HALVE it,this then becomes your estimated expense number. The difference between your estimated monthly income and estimated monthly expense is your net operating income (NOI).”
To get a more exact figure, especially with respect to neighborhood comps, contact a Redlands agent at (951) 232-9704.
CALCULATE CASH FLOW
To stay in business as an investor, you have to have cash flow. So the next step prior to buying multi-family properties in Redlands is to figure out what your cash flow will be.
You can at arrive at a cash-flow estimate by subtracting the monthly mortgage payment from the net operating income (NOI) you found in calculating the 50%. This will also let you know whether a particular property will actually be a worthwhile investment.
DETERMINE THE CAP RATE
The third important calculation among the financial aspects is the cap rate (or cap). This will let you know how soon you can expect to begin realizing a return on your investment.
“To calculate the cap rate, take your monthly NOI, and multiply it by 12 to get the annual number. Then, divide that number by the property’s current market value. The key thing to understand about the cap rate is that higher is not always better. A higher cap rate generally denotes higher risk and higher returns. While a lower cap rate, conversely, indicates a lower risk and lower return. A good rule-of-thumb is to shoot for a cap rate in the 5%-10% range.”
Know What to Look For
You simply must know what to look for – that is, what makes a good investment property – when buying multi-family properties in Redlands. For example . . .
As always with any real estate, location is paramount. Is the property in a desired location? Is it in a high-yield, high-growth area? Is it in a good neighborhood? Again, your Redlands agent can help you make these determinations. (Just call (951) 232-9704 to find out more.)
NUMBER OF UNITS
The number of units in a multi-family property (as well as the number of rooms in each unit) is another important consideration. The most common advice from investing experts is for beginning investors to focus on properties with fewer units such as duplexes, triplexes, and four-plexes. These are more affordable and pose less risk.
An often overlooked but important consideration in buying multi-family properties is the seller. “The purchase price can vary greatly depending on the seller and their motivation. Therefore, investors must gain an understanding of who they’re dealing with. Bank-owned properties are dealt with differently than for-sale-by-owner properties. This means there’s potential for cost savings.”
The Common Thread in Buying Multi-Family Properties
If there’s one common thread that runs throughout all the advice and tips for buying multi-family properties, it’s that most investors are better off using a good agent. It’s a complicated matter, and there’s quite a bit of risk (but also the potential for great rewards). So don’t take a chance by trying to go it alone. If buying multi-family properties in Redlands is your goal, contact us today at (951) 232-9704.