Real estate investors in competitive markets are always looking for the next big opportunity. These days, many are carving out a new niche for themselves by investing in multifamily properties, such as duplexes or small apartment buildings.
The truth is that this type of transition is typically easier than the jump from residential real estate to commercial offices, warehouses, or retail strip centers. After all, the biggest difference between a single family home and a duplex is the number of rentable units.
Still, there are additional factors investors need to consider when purchasing a multifamily property, especially if the building contains 5 or more units and is categorized as commercial real estate.
If you’re in the market for a multifamily investment property, be sure to keep the following considerations in mind.
Are you looking to make a commercial or residential investment?
As mentioned earlier, commercial and residential multifamily properties are differentiated by the number of units. Any property that contains 4 or fewer units is considered residential – like duplexes, triplexes, and small condo buildings. Anything larger – from 5 units and above – is technically a commercial property.
The importance of this distinction becomes clear when you consider benefits for commercial real estate investors are set to enjoy thanks to the new tax reform bill that was signed into law in December 2017. The reduction in the commercial tax rate gives investors the opportunity to earn a greater return.
But commercial multifamily investors face a few additional challenges as well. Managing the property can be a difficult and time-consuming task for certain investors. Multifamily property owners also must deal with the pressure of keeping the property fully-tenanted.
The distinction between residential and commercial also matters when it comes to financing the property. The loan transaction process for commercial multifamily properties is less complex than one might expect with an office or warehouse property, but there are still elements that differentiate it from the typical home loan transaction. You can expect a lengthier turnaround for the property appraisal, more work related to the rent roll, and a longer transaction process in general.
Can you determine the property’s rental potential?
One of the primary benefits of investing in multifamily properties is the passive income stream that comes from collecting multiple rents each month. As such, it’s vital that the property you purchase either contains renters already or has the potential to be fully tenanted soon.
Obtaining rental history information from the multifamily property’s seller is an important first step. But you can also gain insight by researching the surrounding area and determining the general demand for housing.
But acquiring tenants is only part of the deal – keeping them each month is another story. Carefully inspecting a potential investment property can help you discover any structural issues that could limit its rental potential.
Are you prepared to manage the property, or do you need help?
Those who own larger properties often find that they need to employ a property manager – something the owner of a duplex typically would not require. The process of collecting rents, ordering repairs, and dealing with tenant complaints can be taxing for multifamily property owners, especially those who do not actively manage their real estate investments. If you feel daunted by the prospect of managing a multi-unit property by yourself, then hiring an experienced professional could be a wise move.
Whether you are new to this type of investment or a seasoned veteran, you can benefit greatly by working with partners who have a deep understanding of multifamily properties. The mortgage experts at Commercial Direct can help you better understand the issues listed here and work with you to create a custom loan to help you meet your real estate investment goals. Visit our loan customizer today to get started!