It doesn’t matter if you are a new or inexperienced investor, the key to success with investing in multifamily properties is taking the time to analyze deals because, doing your due diligence will also give you confidence that a property will earn passive income for you on a monthly basis.
If you don’t have experience analyzing multi-family deals, this article will provide you with several tips that you can use to successfully analyze deals before purchasing your first multi-family property.
Tips For Analyzing A Multifamily Property For Passive Income
Choose The Right Location
One of the first things that you should look for before investing in a multi-family property is to choose a property that’s in a great location.
As I mentioned in my previous blog post, there are several different property classes for you to choose from including Class A, Class B, and Class C Properties.
Most multifamily investors tend to opt for investing in Class B multifamily properties because these properties are not typically what you consider to be the ‘cream of the crop’ but, they’re not going to be in rough shape either.
You can expect a Class B multifamily property to be in decent condition, have no deferred maintenance, and have consistent tenants who pay their rents every month.
When it comes to analyzing the area, your goal should be to find a property that’s in a location that has a low crime rate, a good school district and it must be close to shops or stores that people want to use regularly like Walmart, Kohl’s, Target, or grocery stores like Kroger.
By doing a little internet research, you could find out exactly what’s located near a multi-family property so that you can have confidence that if you were to be a renter in that property, the area would have a lot to offer your family.
Most important of all, when analyzing a multi-family property, to ensure that it’s going to produce passive income, you want to analyze the crime rate for that area as well.
Analyzing the crime rate for the local area can be as easy as calling the local police department, or using your favorite search engine for area crime statistics since there are a lot of free tools that you can use to research area statistics online.
During the process of researching the area, you should also be paying close attention to what comparable properties are renting for as well. This is important because you want to make sure that you’re going to get plenty of cash flow from that rental property to cover your mortgage and other expenses every month.
Analyze The Cash Flow
Analyzing the cash flow that you can expect to earn from a multi-family property is easy. All you have to do is subtract the total income from the property from the property expenses.
The total income from a multi-family property typically includes the total rent from each occupied unit in the property plus any fees that the property earns every month including late fees, pet fees, or money earned from the coin-operated laundry.
When it comes to you calculating the expenses that a multi-family property has every month, most properties have the same types of expenses including vacancy expenses, property taxes, insurance, maintenance costs, management costs, utilities, repairs, and also professional fees.
During the process of calculating your expenses, it’s also important that you remember to think about calculating Capital Expenditures (CapEx) because every property is going to have them sooner rather than later.
For example, one of the most common Capital Expenditures that a multi-family owner faces are having to replace the roof on the property. If the roof is going to cost you $15,000 to replace, but you won’t have to replace it for about 15 years. This means that you should save about $1,000 per year, or $100 to $250 per unit, per year.
Once again, the passive income that your property is going to earn depends upon the location, age, condition of the property as well as demand for rental properties in the area.
Ideally, you should expect to see cash flow from a property that will give you at least a double-digit cash on cash return.
Look For Opportunities To Raise Value And Earn More Passive Income
Once you know how much passive income a multi-family property is going to earn every month, the next thing that you should do is look for opportunities to raise the value of the property and increase your net operating income.
Some of the things that you can do to increase your net operating income include raising the rents (depending on state), charging additional fees, adding a card or coin-operated laundry, installing paid storage, adding cell towers, building a dog walk, or any other idea that you can think of which will add value to your property.
Besides searching for ideas to add value to your multifamily property, you should also be thinking about ways to decrease your expenses as well. This may include fixing leaky pipes, installing energy-efficient appliances, adding new windows, chargeback utilities, and more.
Think About Your Purchase Price
After you’ve taken the time to analyze the property, the next thing that you need to do is determine what your purchase price is going to be. This is done solely based on your analysis of the net operating income, expenses and cap rate for the property.
If all of the numbers make sense, you shouldn’t hesitate to make a great offer, especially if the property is going to cash flow and produce passive income.
Your goal as an investor should be to invest in a great multi-family property that starts cash-flowing immediately so that you can hire a property manager to manage that property and move on to investing in your next deal
Contact Trier Capital
At Trier Capital, we are a private equity firm that makes it easy for you to passively invest in lucrative apartment building syndications.
Our simple step-by-step process allows you to accelerate your wealth creation so you can live a magnificent life on your terms, whether that means traveling the world, spending more time with family and friends, or making an impact.
To learn more about the benefits of investing with us, contact me today by calling (630) 229-2383 or click here to connect with me online.