Investing in multi family buildings can be one of the safest assets for your money – and it should be no surprise that real estate investing creates more millionaires than ANY other business (multi family buildings specifically). But why should you invest in multi family buildings as opposed to the more common strategy of single family homes?
Investing in single family homes is without a doubt easier. The tenant quality is MUCH higher, it’s simpler to understand as we can all relate to a residential home, and it’s much more forgiving. If you happen to make a mistake on one of your properties, it’s unlikely that you’ll lose your shirt (and everything else you own!).
The game is played at a much smaller level – especially financially.
Now it’s not to say that investing in single family real estate is useless, far from it! These properties should definitely be a part of your portfolio as well!
They are your bread and butter.
Something you can rely on almost every month as the tenant quality is so much higher (caveat: that is if you’re investing in the right areas).
I personally own many single family rental properties, and I always will. As I said, they’re extremely reliable.
But the REAL money is made in multi family buildings, and that’s because it’s based purely business!
Multi Family Buildings Are Built On Fundamentals
The positive of investing in multi family buildings is that you’re working with other sophisticated investor’s (properties with 6 units or more, and especially 20 units+) who also bought on fundamentals.
Remember, multi family buildings are primarily valued based off of how much income the property generates – period!
Comparables and building condition/upgrades do play a part in valuation but it really comes down to income. For example, let’s say a 15 unit building is valued at $1,500,000 in Kitchener and it’s NET OPERATING income (rental income minus all expenses – not including mortgage payments) is $65,000 a year.
This would mean that the seller is valuing their property based on a 4.3% cap rate.
But let’s say that because you’re an expert (or because you’re working with an expert real estate agent that specializes with investors – that’s me!), that they know this building is in a “B class area” in Kitchener and the condition of the building would also place is it as a “B class”. Which means the cap rate should be 6% at most (every city AND neighborhood will have they’re own Cap Rates. Expert realtors know this!).
This means that you have to calculate your offer as such – $65,000 (net operating income) DIVIDE 0.06 = $1,083,333.33
This means that the MOST you’re willing to pay is $1,083,333.33
Remember, commercial lenders (6 units or more) DO NOT CARE that the seller wants 1.5M. And they DON’T CARE if you’re willing to pay 1.5M – all their lending you money on is based on a value of $1,083,333.33 – PERIOD!
This is how investing in multi family buildings work – it’s just straight business. And that’s why it leads to positive reason number two below …
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