How to analyze a multifamily property in Oakland
Are you thinking about diving into the world of commercial real estate? A great place to start is with a multifamily property. In simple terms, a multifamily property is any property with more than one unit, ranging from a duplex to a high-rise apartment building.
One of the best options for first-time investors is to buy a two- to four-unit multifamily property. These properties are often financed in the same way as single-family homes are, and many investors will start through a method called House Hacking by owner-occupying one of the units and renting out the others.
This can have many advantages, such as qualifying for better financing with lower interest rates and less of a down payment. Living on-site allows you to more easily manage the property and even save on property management fees. The larger the multifamily real estate, the more units and potential for rental income.
It’s worth noting that some multifamily properties may cater to a specific demographic, such as students or seniors, but most are agnostic to demographics. Nevertheless, with some light research and planning, multifamily properties can be a great way to get started in commercial real estate investing.
What To Look For When Investing In Multifamily Properties
When considering investing in multifamily real estate, it’s important to do your research and due diligence. Here are some key things to keep in mind:
- Location: The property’s location is crucial for multifamily real estate investments. Look for areas that are in high demand, with well-maintained neighborhoods. Choosing a location where renters will be attracted to living in the units is important.
- Units: Evaluate the total number of units on the property, including the number of rooms in each unit. For beginner commercial real estate investors, starting with duplexes, triplexes, or four-plexes is recommended, as they offer the most potential for success with the least risk.
- Potential Income: Determine the cash flow income potential of the property by researching rental prices in the area and considering the 50% rule, which states that 50% of an investment’s income should go towards expenses instead of the mortgage.
- Costs: Financing multifamily properties can be different than single-family properties. Consider owner-occupied financing and your credit score when evaluating financing options. Lenders typically look at credit, debt-to-income ratio, and down payment when determining loan eligibility.
- Seller: Understand who you’re dealing with when purchasing a multifamily property. The purchase price can vary greatly depending on the seller and their motivation. Bank-owned properties may have different terms and conditions than for-sale-by-owner properties. Because of this, it’s important to work with a skilled agent familiar with the area’s trends and pricing.
Why is Investing in Commercial Real Estate Different?
Find Your 50%: To quickly scan potential deals, calculate the difference between expected income and expenses. If you don’t have access to neighborhood comps, you can use the 50% rule, taking the expected income and halving it to estimate expenses.
Calculate Your Cash Flow: Estimate your monthly cash flow by subtracting the monthly mortgage from the property’s net operating income. This will help you determine if the investment is worthwhile.
Figure Out Your Cap Rate: The capitalization rate, or cap rate, indicates how quickly you’ll get a return on your investment. A good rule of thumb is to aim for a cap rate in the 5%-10% range. It’s important to remember that a higher cap rate denotes higher risk and higher returns, while a lower cap rate indicates lower risk and lower return.
Oakland’s highly desirable neighborhoods may have cap rates <4%. However, even in the most challenging communities with the highest perceived risk, we’re still likely in the 8% range.
It’s important to remember that these calculations are just a starting point, and other factors, like property value increases, monthly NOI boosts, or tax breaks, should also be considered when making a decision.
The Benefits of Multifamily Real Estate Investing
Investing in multifamily property can be a great way to generate cash flow, passive income, and long-term appreciation. Plus, it’s considered a relatively safe investment with lower risk, easier financing, and simpler insurance options. Some other benefits to consider include the following:
- Cash flow: Multifamily properties can generate steady rental income each month.
- Passive income: You can hire a property manager to handle the day-to-day responsibilities of your investment property for you.
- Valuation potential: Multifamily properties tend to appreciate over time, even during economic downturns.
- Lowered risk: People always need a place to live, even during a recession, which can create prolonged demand for multifamily property.
- Fewer loans: Buying a multifamily property typically requires one traditional bank loan, unlike buying multiple single-family rental properties.
- Insurance simplicity: Getting a single policy that covers all your assets under the same provider is easy.
- Scalability: It’s easy to grow your residential rental property by adding units over time.
- Tax benefits: Multifamily properties have tax advantages, like deductions for mortgage interest and depreciation.
- Diversity of product types: Multifamily properties can range from duplexes to high-rise apartment buildings, providing various options.
3 Drawbacks to Multifamily Real Estate Investing
Investing in multifamily property can come with some downsides, such as:
- Management intensity: Dealing with multiple tenants and their various needs can be more demanding than managing a single tenant in a commercial property.
- Cost: Multifamily properties can be expensive, with high down payment requirements and intense competition in some markets.
- Competition: Experienced investors often dominate the market, making it harder for first-time investors to break in.
It’s important to consider these downsides of commercial real estate deals and the benefits of investing in multifamily property and weigh the pros and cons before deciding. Working with an experienced partner or property manager may help mitigate some downsides.
How Does the Property Management Work?
Managing a multifamily property can seem daunting, but don’t worry – there are ways to make it more manageable. One option is to work with a property management company. They can handle tasks like renting out units, signing leases, managing maintenance requests, and overseeing workers. This makes multifamily investing run more smoothly, but it does come at a cost.
If you choose the self-management route, there are still ways to make it more manageable. Research online tools to help you organize tenant communications, important documents, and rent collection, for example. Managing a multifamily property can be a big responsibility, but there are ways to make it more efficient for investors.
Multifamily Real Estate Investing is a Viable Option
In conclusion, investing in a multifamily real estate deal can be a great way to get started in the world of rental properties. With the ability to start small, with just two or four units, and the option to owner-occupy initially, it’s a less intimidating way to dip your toes into the rental property waters.
As your portfolio grows, you can continue to invest in larger multifamily properties through a 1031 exchange or by leveraging the equity in your current properties. The most important thing is just to get started with an experienced local real estate agent.
When you work with a real estate agent who is well-versed in both the residential and commercial investment space in Oakland, your property selection process will go more smoothly. The guidance and years of knowledge our team brings to the table can help you avoid pitfalls and, instead, pursue the most promising opportunities.
So, don’t be shy if you’re considering investing in rental properties. We’re here to help!
