Multifamily Home Purchase | How to Choose the Best Investment?
What Constitutes a Multifamily Home?
In Massachusetts, a multifamily home is generally defined as a residential building with two to four housing units/apartments. Typically, each unit has its own kitchen, bathroom, entrance/exit, and mailing address. Investor Alert! Consult with local town officials where the property is located to ensure that the reference property is legally recorded as a multifamily property.
Multifamily Home Ownership | Risks and Rewards
There are many but one major reason why investors like these types of investments is the dual potential of earning passive income and the long-term build-up of equity. Note in next month’s newsletter, I will be publishing a related article that discusses in detail the risks and rewards of investing in these types of properties.
Investment Considerations
Like any investment in real estate, it’s important that investors consider the location and potential profitability of the property.
Location: In real estate, location is king. Investors investing in a multifamily property typically do so for rental income. Therefore, it’s important that the location of your property is attractive to prospective tenants. Some examples of what tenants find attractive include a place with a good school district, low crime rate or close to public transportation.
Potential Profitability: The property must generate positive income/cash flow. This analysis typically begins with the question – how much should I pay for the property? Followed by – can I make a profit commensurate with my needs? In that regard, investors should analyze the following characteristics of the property before making an offer.
Offer (Purchase) Price: Completing a comparative market analysis will help you determine the appropriate offer price for the property in question. It’s an estimate of the home’s price based on recently sold, similar properties in the immediate area. Investors are encouraged to consult with a professional real estate agent for help with this step.
Potential Monthly Income: In this step, we are principally talking about rental income. You want to determine how much rental income you can charge per month based on comparable rents in the area. When determining the rental income, remember to take into consideration the vacancy rate at different levels of occupancy. Other sources of income like parking should be considered as well.
Monthly Operating Expenses: As part of your analysis of a property’s potential profitability, investors need to understand the property’s monthly operating expense. Operating expenses include items such as taxes, insurance, utilities, maintenance, and the cost of management company if applicable. It could also include landscaping and snow removal. Regardless, make sure you’re accounting for all expenses.
Monthly Net Operating Income: Net operating income = potential monthly income of the property less your estimate of monthly operating expenses.
Monthly Mortgage Payment: Don’t forget to include the cost of borrowing when you evaluate monthly cash flows. Talk to a loan officer and make sure you have sufficient funds (cash flow) to meets all monthly expenses: operating and finance.
- Monthly Cash-Flow: The equation is as follows: Cash flow = Net operating income – Mortgage payment. A good investment should have a positive cash flow.
Wendy Jiang is a real estate agent and member of Team Coyle @ Compass.
About TEAM COYLE
Team Coyle, a professional group of real estate agents at Compass, has more than ten years of experience helping individuals and families buy and sell real estate in the Greater Boston Region of Massachusetts (primarily MetroWest).