10 Things First-Time Buyers Need to Think About as They Start the Search for a Multifamily Property
Updated: Sep 22, 2020
If you are new to investing in multifamily commercial real estate, the idea of where to start can be quite daunting. The ten questions listed below will provide a roadmap of items for you to delve into as you begin the rewarding journey of becoming a multifamily investor. These questions are meant to jump start your search and prompt you to focus on the criteria that will result in you locating the property that is the best fit for you.
1. What is Your Purchasing Power?
As you do when contemplating making any large purchase, be realistic about what your budget is. Take steps to set aside funds for your down payment and find out how much financing you can obtain. Keep in mind that in California, multifamily properties that are five units and above will require a commercial loan.
2. Do You Want Partners?
Do you want to be the sole owner of your property, or do you want to have partners? If you are the type of person who needs complete control over how your property is managed, then partnering up may not be a good option for you. On the other hand, if you do not have enough funds to buy the type of property that you are seeking, then bringing in one or more partners may be necessary to get started. It can also be beneficial to partner with someone who is more experienced than you are to avoid making (expensive) mistakes.
3. What is Your End Goal?
Why do you want to invest in multifamily real estate? Are you more interested in having high cash flow immediately, or are you looking for appreciation value? Or both? Do you want to flip the property and perhaps do a 1031 tax-deferred exchange into a larger property? If so, what is your timeline for doing so? Or, do you want to purchase a property and hold on to it for years to come? Are you buying an investment property because you want to supplement your income with the cash flow? Do you want to leave the property for your loved ones? These are all questions you should start thinking about as you are looking for your property. Of course, nothing is set in stone, but having an end goal or exit strategy in place before you buy your property will save you from having to figure it out as you go and will also ensure that the property you end up purchasing actually fits your needs.
4. What is Your Preferred Market Area?
This is all about location, location, location! Choosing the right market area is critical to being successful as a multifamily investor. Start out by choosing specific areas that you are interested in, and then conduct thorough market research. Look for strong population and job growth. Study sales comparables and get out and drive in the neighborhoods you are considering investing in. If you are going to be managing the property yourself (see below for more on this), determine how far away the property can be from your home before it becomes a burden to own and manage.
5. What is Your Preferred Unit Range/Building Size?
If you are completely new to multifamily investing and will be the sole owner, perhaps you want to start out with a smaller building. Or, if you are confident in your abilities, or will have help, then you may be able to handle a larger building. Also, keep in mind that the number of units you can purchase with your available funds may vary greatly between different market areas. Either way, it is useful to have a defined unit range as you start your search.
6. What is Your Preferred Unit Mix?
The term “unit mix” refers to the breakdown of the units in the building. For example, in an eight-unit building, you might have four units that are 2 bedroom + 1 bath, two units that are 1 bedroom + 1 bath, and two units that are studios. Depending on the market area you are focusing on, different unit mixes will be optimal. For example, if you are focusing on market areas that are popular with families, then a unit mix that his heavy on 2-bedroom units may be preferable.
7. What Property Layout Do You Prefer?
As you drive around different market areas, take note of the type of properties that appeal to you. Are you most interested in properties where each unit is a standalone structure, or those with shared common walls? Do you want a property that has all single-story units? Or do you prefer double-story properties? Are there any other factors layout-wise that are important to you?
8. Are You Comfortable with Deferred Maintenance and Older Buildings?
Think about how comfortable you are owning a property that was built in the 1920s vs. a building that was built within the last twenty years. Newer properties are less likely to have expensive maintenance issues arise, although they will be more expensive to purchase. And while older properties are more prone to having issues, they also provide the opportunity to add value (and profit) through renovations. For example, properties with deferred maintenance can be great investments. If you can come in and take care of deferred maintenance issues, you can greatly increase the value of a property. However, if you are not skilled in this regard, or are too busy to take on a “home improvement” type project, then perhaps you want to avoid properties with too much deferred maintenance.
9. Do You Need a Property Manager?
Is the unit range of the property you’re looking for small enough that you can take on managing it yourself? Do you have the time to do so? Is the property close enough to you that you will not be wasting time commuting every time an issue comes up? Alternatively, are you comfortable with giving up some of your income on the property to a property management company in exchange for peace of mind?
10. Are You Knowledgeable About Rent Control?
California is now the third state in the country to enact statewide-rent control. Although the statewide rent cap is at 5% plus inflation, certain areas in California have more restrictive rent caps. You should be aware of the various caps and related restrictions that apply in various market areas.