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What buyers should know about multi-family buildings The fundamental difference between a single-family residence and a multi-family building is the fact that it is built primarily, as an income producing property. Managed properly, it will usually generate a higher cash flow, as the number of units per building increases. Multi-family buildings contain tenants. This observation may seem obvious, but buyers sometimes fail to give it adequate consideration. Buyers should evaluate the existing tenants on the basis of their longevity in the building and rent payment history, among other criteria. Failure to accurately weigh the value of the tenants can lead buyers into a money-losing proposition. The value of an experienced, skillful property manager cannot be over-stressed. As multi-family buildings are mostly bought for investment purposes, investors use two valuation models -- the "cap rate" and the "gross rent multiplier" -- to assess a building's income potential. The cap rate is the annual net operating income before taxes divided by the purchase price or present market value. "The cap rate shows the net income in proportion to the purchase price. If you bought a building for $400,000 and earned $40,000 in net income, the return on investment would be 10 percent, and the cap rate would be 10. The "gross rent multiplier" is the purchase price or present market value divided by the gross operating income or total rents. Buyers should investigate local vacancy rates, rent control restrictions, the pace of new construction, employment levels and other marketplace factors. Rents tend to increase when construction of new multi-family housing is prohibitively costly and vacancy rates are low. Market times tend to be longer and value appreciation lower, with respect to an increasing number of units. Again, the importance of an experienced, skillful real estate broker/property manager is difficult to over estimate, but will make a huge difference over time. Multi-family mortgages generally require more down payment, as well as higher interest rates, but produce more cash flow in proportion to the number of units per structure. Obtaining financing to purchase an income-producing property depends more on the property's ability to generate income than on the buyer's credit. People who finance these properties look almost exclusively at the property, and it's ability to produce income. J.R. PROPERTIES can help you decide how many units are best for you! There are a lot of choices. We want to help you make the best ones. We want you to find the property that’s right for you. You’ll talk, we’ll listen. We’ll ask questions, you’ll tell us volumes. It’s team work. We’ll show you as many options as you want. We might show you more options than you want. That’s good too. When you have found just the right thing for you, then we’ve done our job. |
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