Are you planning on investing in your first multifamily rental property in 2020? If so, you’ve come to the right place!
One of the first things that you need to do before invest in a multifamily property is to take the time to properly evaluate the property to make sure that it’s going to be an excellent investment for you.
In this article, I will share with you several tips you can use for evaluating a multifamily property so you can have confidence that it’s going to be the right property for you.
Step 1 – Do A Comparable Analysis
The most “time tested” way to evaluate a multifamily property by reviewing other comparable properties that have recently sold in the area within the last three to six months.
To do a comparative analysis, you can use a wide variety of websites like Zillow.com, Realtor.com or the local MLS listings.
If you don’t want to do the “legwork” yourself in completing a comparable analysis, it’s best to hire a local real estate agent because they can assist by providing you with all of the data that you need including helping with closing the sale.
Step 2 – Ask the Right Questions
After doing a comparative analysis, the next thing to do is to “dig deeper” into the deal by asking the right questions which include the following:
- Is there a demand for rental properties in the area where the multifamily property is located?
- What is the area like? Is public transportation, shops, and stores nearby?
- Why is the owner selling the property now?
- Are the vacancy rates high for this property?
- Will you be able to increase the rent on most tenants after taking over the property?
Step 3 – Estimate the Repairs That the Property Needs
Although it makes look like a great property on the outside, the reality is that looks can be deceiving and you will never know what a multifamily property is really going to cost you until you take the time to estimate the repairs that it’s going to need.
The first question to ask yourself during the process of estimating repairs is if basic maintenance has been neglected over the years. Once you’ve determined what the basic maintenance needs of the property are, you can next turn your attention to the plumbing, HVAC and electrical systems to determine if any of these systems are going to need to be repaired or replaced once you purchase the property.
While estimating repairs, you should always keep in mind that the repairs should be estimated at the high end and low end. For best results, it’s always a smart choice to estimate on the high end because you don’t want to get caught off guard and not have the cash flow that you’re going to need to cover repairs or maintenance.
Step 4 – Determine Your Cap Rate
The next thing to do when evaluating an investment property is to determine your cap rate. This is done by taking the net operating income that’s expected from the property (minus expenses) then divide that number by the purchase price to confirm your cap rate.
Step 5 – What Is the Unit Mix?
The unit mix is the number of bedrooms that each unit in the property has. This is by far one of the most important pieces of information to consider when investing in a multifamily property because the unit mix may not appeal to renters in the market where the property is located so it’s best to get a confirmation of this before moving with purchasing a multifamily property in 2020.
Step 6 – Find Out Why the Current Owner Is Selling the Property
Yes, even though the property may look like a great deal on paper, the reality is that there may be another reason why the owner is selling and it’s best to find out what this reason is before you purchase the property.
Step 7 – Are There Value-Add Opportunities?
Once you get closer to purchasing a multifamily property, one of the last things that you should investigate before purchasing a property is finding out if it has any value-add opportunities.
A value-add opportunity is anything that you can do to add or improve the property to increase your monthly cash flow
With multifamily properties there are almost always opportunities to increase cash flow, you could add coin-operated laundry, vending machines or premium parking. You could also add value to your property by offering your tenants additional options like furniture rental, self-storage, cleaning, WiFi or other technology upgrades in their units.
The key to success with purchasing a multifamily property in 2020 and beyond is doing your “due diligence” by following the steps in this article to confirm if a property is right for you or not. Each time you take the time to fully investigate a multifamily property before purchasing it, you’re putting yourself in the position of making an informed decision and a smart investment.
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