You’ve made the decision: you want to buy a multifamily property. Making the decision is an important first step, but there are several factors that you should consider before signing the property deed papers. Multifamily units can be a great investment and source of income. But they’re not always stunning successes. I’ve advised countless clients over the last 18 years, and while the multifamily market has changed in many ways, the essential elements have remained the same. Here are three things I always advise clients to think about before diving into the multifamily pool:
What’s your profile?
There’s a lot to consider when investing in multifamily. The first step to sorting it out is to take a step back and look in the mirror. Is this your first investment? What are you hoping to gain? Will the rental income be your primary means of supporting yourself? If you’re a first-time buyer, you should consider your cash flow and the unknown expenses that may arise – you never know when a building’s heating system could collapse. Annual maintenance and repairs are serious expenses. Sketch out a framework for what you want, what you can afford and how to marry the two. You might be focused on trying to find the hottest area for a good investment, but take into consideration your own lifestyle. Sure, maybe Cambridge is a good multifamily investment, but if you live in Western Massachusetts, it’s going to be hard to trek into town for things like snow removal.
What’s the return on investment?
The typical measurement for return on investment in multifamily is the capitalization – or cap – rate. A good cap rate is all about location. A property in a town like Brookline will always appreciate at a favorable rate. That’s likely less true in a city like Springfield. A property with a high cap rate may be a good investment, but it’s not the only consideration. A better cap rate might come at the expense of a lower appreciation rate. If you’re going to rely on your multifamily property as a primary means of support, you should consider a building that will offer a decent return but not necessarily sacrifice location. It’s also important to think of the building in terms of units and do your research. Is it really worth $100,000 a unit?
Who’s going to manage the property?
It might seem like a small consideration, but it’s not. Who is going to manage your building and its maintenance is key to deciding where to buy and how big to buy it. If you have the income to pay a property management firm, you have more flexibility when it comes to investing in a property that is a little further away. You can also worry less about things like how to remove snow from steep steps. If you are planning to do-it-yourself, you need to think about location in proximity to your home or business. Pipes can burst in the middle of the night. You should also think about how much time you’re willing to take to repaint walls or re-sand old crown moldings. It will likely make the most sense to hunt for a small property near your own home that is already in good shape.
This is a brief look into multifamily for the first time investor. If you require additional coaching call Carl Christie, at 617-457-3400 x 2169
An executive vice president with NAI Hunneman’s Investment Services Group, Carl Christie specializes in the sale of multifamily investment property throughout New England. His successful marketing approach and vast list of contacts has made him one of the most successful brokers in the business. With more than 20 years of experience Carl has completed more than 350 sales transactions, valued in total in excess of $1 billion.