Investing in commercial properties like multifamily units is quickly becoming a popular choice amongst real estate investors because of the opportunity it creates to make steady and passive income, its tax benefits, and its higher value appreciation potential. So, here’s how to buy a multifamily property.
How to Buy a Multifamily Property
While acquiring a multifamily property can appear difficult and overwhelming, especially for new investors, it is still possible to invest in such properties without hassle. To do this, you must understand the processes involved in purchasing one. Here are the steps to take when purchasing a multifamily property:
Determine Your Budget
Purchasing multifamily properties requires more capital than many other property types. This is because commercial multifamily properties are typically bigger and so more expensive when compared to smaller units such as single-family properties.
They also typically require upgrades and renovations to make them more appealing to customers before they can be rented out. It is, therefore, important to factor in these expenses and carefully decide on a realistic budget to acquire the property.
Hire a Real Estate Agent
When purchasing commercial properties, hiring a real estate agent is one of the best decisions you can ever make. A competent real estate agency, such as Si Vales Valeo Real Estate, experienced in handling the purchase of commercial properties like multifamily units, ensures your protection throughout the buying process.
One of the main benefits of working with an agent is the higher chances of finding the best property to suit your requirements in record time. This is due to the pool of information they possess and the vast network of contacts at their disposal. Hence, this makes agents invaluable when looking to find an ideal property.
Not only would they work to ensure that you get your money’s worth when it comes to multifamily properties, they also oversee all necessary negotiation, documentation, and due diligence on the property to be purchased.
Search for Properties
The next thing you want to do is to work with your agent in picking out suitable multifamily properties. There are different ways to find properties. You could either ask people around you, especially recent multifamily property buyers, make use of local multiple listing services, search the internet, or leave everything in the hands of your agent.
When searching for a suitable property, factor in the following:
- Your budget
- The type of multifamily property you want -duplexes, triplexes, apartment complexes, etc.
- The location of the property
- The safety of the neighborhoods
- The property’s proximity to necessary amenities, such as schools and hospitals.
Choose a Lender
Your choice of a lender or financing institution is a major step when purchasing a multifamily property, the effect of which can be felt for many decades after acquiring your property. So you see why you cannot afford to make a mistake with this step; it simply cannot be handled with levity.
When selecting a lender, it is important to consider the following:
- Their interest rates
- The potential for tax benefits
- Down payments
- Additional fees
- Repayment periods.
You also want to ensure that these terms are satisfactory for you in the short term and long-term.
The next step is to obtain a mortgage preapproval from your lender, asserting that the lender has offered to fund your purchase with a certain amount under specific terms. Getting a pre-approval letter gives you an edge over other buyers by demonstrating to sellers that you are a serious buyer who is likely to see the deal through.
It is important to note that your lender must review your credit history, calculate your debt-to-income ratio and check other financial documents to assess your income, assets, and debt. Depending on the mortgage lender, the process could take as little as one or two business days to finalize.
Conduct Thorough Research and Home Inspection
Once you have selected your ideal property, it is crucial that you properly inspect the property before going ahead to purchase it. A thorough property survey would provide detailed information on the property’s condition and reveal any discrepancies in the property’s title.
A property survey would also help you draw up a comprehensive budget to foot additional expenses, such as upgrades and repairs, that may arise while acquiring the property.
When carrying out a home inspection, ensure you employ a professional property inspector to identify any underlying conditions correctly. You could either renegotiate the property’s price with the seller or quit the deal if any issue is found.
Calculate Your Potential Profits and Losses
Once you know the estimated amount you are likely to spend in purchasing the property, it is important to sum up these figures and calculate your potential returns on this investment. These estimates will further help you make an informed decision on whether to go ahead with the purchase.
You must ensure that your potential yield is higher than your overall expense, including the mortgage, utilities, taxes, property management, repairs, and ongoing maintenance. Several metrics are used to calculate a multifamily unit’s potential earnings. Some of them are:
- Cash on cash returns
- Capitalization rate
- Net Operating Income (NOI)
- Loan to Value (LTV) Ratio.
Draw up an Irresistible Offer
After finding an appropriate property, it is time to make an offer on the property. Your offer must be drawn up with expertise to ensure it doesn’t get denied, and this is where your agent comes in handy. They would guide you on how to draw up a strong offer that would be accepted by the seller.
They will also assist you in deciding how much money you want to commit to the property, ensure that the necessary documents are contained in the offer, and inform you of important conditions you should request.
Some professionals advise going the extra mile, especially since multifamily investments are a highly competitive market. If you are privy to this information, this may involve little gestures, such as the seller’s favorite flowers, confections, or pastries. Remember that you may be sent a counteroffer for several reasons, such as a change in the property’s value after appraisal.
Send Your Offer to the Seller
Once your offer has been drawn up, it is sent to the seller, typically through your agent. Most of the time, this is done via email. However, it can also be sent to the seller’s residence through the mail or a dispatch agency. Your agent must also notify the seller’s agent so they can look out for your offer.
Carry Out an Appraisal
Carrying out a property appraisal is one of the major requirements to fulfill in order to obtain financing from a lender. The appraisal is typically carried out by an approved appraisal company, usually one that is suggested by the lender. Lenders do this to ascertain the current market value of the prospective property and ensure that they are only issuing loans as high as the property value.
There are several ways an appraisal can be carried out. However, the most common method is the comparison approach which compares the prospective property to at least three recent sales in the area. This method typically uses properties sold within the past 12 months to provide an up-to-date picture of the current market.
Close the Deal
This phase includes paying the down payment on the property and signing all the necessary documents related to the purchase of your property, including loan documents to seal the deal.
It is necessary to hire a professional solicitor to handle all legal affairs related to your property to ensure you are well protected before signing any of the documents.
Your agent would also provide you with the list of the necessary documents you are required to bring along to the closing, such as a means of identification, i.e., a government-issued ID card and all other necessary documents.
Record the New Ownership in the County Recorder’s Office
After closing the deal, it is necessary to have the purchase documented with the appropriate authorities. Your title or escrow agent typically files for the original deed of the property in the appropriate government office in your county.
This document legally proves that you are now the owner of the property. When there are no discrepancies in the property title, this process typically takes a couple of days to a few weeks.
How to Buy a Multifamily Property With No Money
While most financial institutions and lenders require a stipulated amount as a down payment, this does not mean that investors with limited funds can not invest in the multifamily market. Here are some ways one can acquire a multifamily property without money:
Search for an Equity Share Investor
When working with an equity share investor, you are required to give a certain percentage of profits or equity realized from the property to the investor in exchange for funds required as a down payment on the multifamily property.
For instance, an equity share investor gives you $800,000 in exchange for a 35% share of the property’s equity to assist you in purchasing a multifamily property. This means that you would be paying the investor both 35% of the monthly income from the property and 35% of the proceeds from the eventual sale of the property.
Real Estate Crowdfunding
This requires you to solicit financial assistance from a group of investors who contribute little amounts of money each instead of a large amount from a single donor to enable you to raise funds to buy your intended property.
You may either invest with no money and be the one in charge of maintaining the property while the other investors receive passive returns, or you may invest with little money -becoming joint owners with the other investors- and receive passive returns from the property.
Borrowing for Hard Lenders
Financial institutions and lenders must review an investor’s credit history to determine if the investor is fit to make their monthly mortgage payments on time and ensure there are not incurring losses.
However, hard lenders ignore this and are majorly after making profits from the potential good yield of the property. Therefore, they are more likely to assist you in financing your purchase without a down payment.
Bear in mind that working with hard lenders means they have stricter ways of collecting what they are owed, and you will be dealing with higher interest rates and a shorter amortization period.
This is another method of acquiring multifamily properties without a down payment that many investors need to be made aware of. Here, the seller agrees to finance the property instead of a mortgage institution after both parties have agreed to the guiding terms of the contract.
This type of financing is usually seen with sellers with no mortgage, for example, a seller who inherited the property from a parent and has no use for it.
What Is the Minimum Down Payment for Multifamily Property?
The minimum down payment for multifamily properties depends on the type of property in question. For example, the minimum down payment required for a duplex is between 15% to 20% of the total purchase price. However, most triplexes and fourplexes require a minimum of 25%.
Is It Worth Investing in a Multifamily?
There is no one-answer-fits-all to this question; however, purchasing a multifamily property could be a good investment. While it is typically more expensive to acquire a multifamily unit, investing in such commercial properties comes with some impressive benefits, such as:
- A higher potential for value appreciation when compared to single-family units
- Steady income yields even when the market is unstable
- Tax benefits and deductions such as capital gains tax deferment
- More flexible financing terms and rates
- Security against inflation
- A good avenue to quickly build and expand your investment portfolio.
Purchasing a multifamily property is a very lucrative investment as it offers steady cash flow and protection against inflation. However, like any other transaction, it is important to conduct thorough research and employ the necessary professionals. This is to help you avoid incurring losses and possibly legal issues during the commercial real estate transaction process.