5 Things To Consider Before Purchasing A Multifamily Property

There are pros and cons to almost everything in real estate. One segment of investors will tell you that multifamily rental properties are the only way to go. Another camp will tell you that they are more trouble than they are worth and you should be focusing on single family properties. The reality lies somewhere in the middle. Multifamily properties are a great way to accumulate long term wealth but only in the right situation. Before you get involved you need to know exactly what you are jumping into. One bad rental property can weigh your portfolio down and become a burden on the rest of your business. Here are five things you need to consider before purchasing a multifamily rental property.

  1. Increased Price Of Entry. Over the past five years the multifamily market has grown in leaps and bounds. Once devastated by the mortgage collapse multifamily homes have seen an increase in home prices for the better part of the last decade. While this may be great as an owner it can cause some problems if you are looking to buy. Multifamily home prices are at a five year high point and in most markets considerably more expensive than the average single family rental. Rising home prices require additional capital for down the down payment, closing costs and property tax escrows. It also means that the rent generated needs to be higher to offset the rising monthly costs. There is a definite trickle-down effect to every aspect of the property solely due to the increased price of entry. Multifamily investing has its benefits but can make ownership a difficult hill to climb.
  2. Higher Mortgage Standards. There is a tremendous difference in the loan items required for a multifamily property as opposed to a single family. With a single family property you can get away with around 10-15% down payment with credit scores considered good but not great. With a multifamily property you need to have excellent credit scores, 20% down payment and have low debt to income. Being strong in two of these areas is not enough. A two or three family property has stricter loan guidelines across the board. With home prices rising coming up with the 20% down payment is a difficult initial hurdle. This money needs to be in an existing account of yours for at least 60 days. Gift funds of any kind are not allowed. Credit scores must be at least 700 and in some cases as high as 720. You also need to look at how you generate income. Most lenders only use 75% of any rental income received and will calculate income based on the adjusted gross income. Before you do anything else you need to reach out to your lender or mortgage broker and find out exactly what you need to do to qualify.
  3. Tenants. Having an additional number of tenants can be considered a blessing and a curse. On one hand more tenants increases your cash flow options. Instead of having just one tenant to rely on you can have two, three, four or more checks coming in. On the other hand more tenants usually mean more potential issues. A three family property has three sets of tenants each with their own set of problems and drama. If you decide to manage the property yourself you can expect a phone call from one of your tenants at least every week. This is one of the reasons it is so important to find quality tenants you can trust. If they don’t respect the property or each other you can have a continuous cycle of problems. There is certainly an upside in collecting more checks but you need to be weary of everything that comes with it.
  4. Increased Maintenance. Yet another example of differing points of view with multifamily rentals is with the cost of maintenance. Investors that favor multifamily rentals will point to the economy of scale associated. Under this scenario you can cover multiple expenses at once. If the roof needs to be repaired there is only one roof on the property, not three. If the lawn needs to be cut or the driveway plowed there is only one item of each regardless of the number of units. The other side to that coin is that the cost of repairs is generally much higher. Additionally you also need to stay on top of multiple units. This means repairing or replacing multiple sets of dishwashers, dryers, stoves, toilets and more. With increased tenants and units the odds are that something will need to be fixed during every lease.
  5. Limited Buyer Pool. Owning a multifamily property works in reverse when you are trying to sell. Even though home prices have jumped higher it still can be difficult finding the right buyer. Not every interested buyer will be able to satisfy the required mortgage guidelines. If, and when, you do find a buyer it will take some time to close. Single family homes are closing in roughly 40 days and multifamily homes take between 50-60. This increased closing timeframe makes it almost impossible to sell in a pinch if you needed to. It also stresses the importance of accepting the right buyer as opposed to the highest offer.

There is nothing wrong with pursuing a multifamily property but you need to know what you are getting into. There are pros and cons associated and it is important that you always form your own opinion.

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Why Every Real Estate Investor Needs a Will

Do you really need a will? If so, how soon should you draft one after buying a home or starting in real estate investing, and how should you go about doing so?

Writing a will and last testament is often one of the last things on a new real estate investor’s mind. There is so much to do and there is already enough paperwork floating around to re-stock an Amazonian rain forest. However, not having a will often means putting your wealth and the future of your heirs into the hands of lady luck.

Without a written will, virtually anything could happen to your estate and assets if anything were to happen to you. This would mean all of your hustle and hard work could be for nothing. Not only could your family be left in the lurch, but you could be too if you are living but unable to manage your money yourself any longer.

For these reasons, having a written will is a must. However, most homeowners and real estate investors simply don’t feel they have the time to deal with the back and forth with an attorney or don’t want to pay out the big bucks. While the best choice is probably to hire the best (and often most expensive) estate attorney you can find to craft one for you, there are other options available.

There are now plenty of inexpensive options for fill-in-the-blank wills to be found online. If this is your desired route, just be sure to do your research, as there can be some issues with these due to variations between state laws and/or outdated information.

If you don’t think you have the time or energy to write your own, there are other online tools that can help you with the process. For example, LawDepot.com is a relatively cheap (under $100) option that guides you through the process in just 15 minutes.

Even the busiest and stingiest real estate investors can’t afford to be without a will. You don’t know for sure what’s in store for you the rest of today, let alone in the weeks ahead. Crafting your own right now even if rudimentary, is a smart start. It can always be updated and revised later, but at least your chances of seeing your desires executed will be a whole lot better.

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The Pros & Cons of Investing in College Housing

Investing in college housing has become an even hotter trend lately but what are the real pros and cons?

Investing in college towns has long been a profitable niche for real estate investors across the nation. Typically, good schools enjoying booming local businesses and growing communities making for good fundamentals for real estate investing. Now major players including private equity and big home builders are getting in on the action with deluxe dorms.

So what are the real advantages and disadvantages and is investing in college housing for you?

The Pros of Real Estate Investing in College Housing:

  • Can be seen as a form of social good, helping to fuel education
  • Good schools can be surrounded by grounds which are ripe for growth
  • Multiple tenant housing and rooming can result in much higher rents per unit
  • You might get your kids’ college housing for free or at least save on the expense
  • You could get bought out by the college as it desires to expand and soak up more land
    Most students aren’t very demanding tenants
  • Individual vacancies make little impact on overall returns and cash flow

The Cons of Real Estate Investing in College Housing:

  • Student loans are defaulting at an unsustainable rate which may be a concern
  • Students are exiting higher education unable to get jobs with their degrees while dropouts launch multibillion dollar businesses, creating a shift in trends and future demand
  • Property maintenance can be a nightmare; your tenants are students after all
  • Students can be extremely unreliable tenants
  • You may have to deal with parents too
  • Colleges (for example in Ottawa U) can push local government to seize property by eminent domain for expansion
  • Challenges of handling property management from a distance
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Real Estate Investing: How to Build Wealth that Lasts Generations

Many are drawn to real estate investing and flipping houses for fast money, great returns and big paychecks, but there is a huge difference between making a great income and building real wealth and having wealth that can last for generations.

Some people dream all their lives of winning $1 million dollars. They envision that will set them up for the rest of their lives and they’ll never have to work again. For a few it might.

Most will need millions just to be able to retire reasonably comfortably at 65 or 70. Those in real estate investing soon realize that $1 million is pocket change for the truly wealthy. Then consider what a lavish lifestyle really costs; between having to drop at least $20 million for a respectable home, a few more for a private jet, over $1 million for a highly envied sports car and well over $2 billion (yes with a B) to boast having the biggest private yacht among your new friends.

Of course there is little need for this extravagance but it does highlight the difference between making good money and being truly wealthy.

Real estate investing is obviously one of the strongholds of the world’s richest individuals and if not their primary way to get there, at least one of their best performing and favorite wealth management tools.

Carlos Slim is in, Warren Buffett is in, Bill Gates certainly owns his share of real estate as do most of the others on the Forbes 400.

So what can we learn from them about creating the type of wealth that can last generations? How can you create so much money through real estate investing that you’ll never be able to spend it all in your lifetime, it will last your family for generations and you can still afford to give billions through philanthropic efforts?

Robert Kuok, the world’s 32nd richest person according to Bloomberg and a real estate titan in the hotel industry recently gave his first interview with Western media in 16 years. He says his wealth can last for generations. So what tips and real estate education lessons in building lasting wealth can be picked up from him?

Firstly he has a strong personal brand, and at 89 he’s still in charge. He also weathered the recent downturn just fine. So be in a position where you can ride fluctuations out for bigger gains. When you have that kind of money you can live through an $8 billion drop in the value of your real estate holdings without having to sell and wait for it to bounce back higher.

Kuok has also diversified into many other channels, including launching some of the world’s top hotels around the globe.

Family is important to him, and instead of focusing on materialism he alludes to the fact that with the right entrepreneurial spirit and character it doesn’t matter what you start with, while all the wealth in the world can be quickly wasted by those that don’t appreciate it or manage it well.

So invest in real estate, diversify, build your personal brand, recognize that you don’t have to start with a lot to make it big, and while enjoying your wealth is great there are more important things in life too.

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5 Ways To Improve Rental Property Cash Flow

Cash flow is the most important consideration when buying a rental property. Appreciation is nice but far from a guarantee. A rental property with strong monthly cash flow will positively impact your overall real estate portfolio. It is important to stay on top of your rental market, expenses and any changes in rent at all times. Overlooking or ignoring just a few items can turn positive cash flow into one that is treading water. Fortunately there are some things you can do that will give your monthly cash flow a boost.

In the simplest terms cash flow is money that is left over after all expenses are paid. The most common expenses are for the mortgage, insurance, taxes, utilities, property management, maintenance, vacancy and more. The only source of income you have on the property is the rents received. It is important to assign a monthly figure on all expenses even if you do not pay them every month. You probably don’t need to do repairs on the property every month but you will at some point. If the funds are not available when you need them you end up taking money from an alternate source. Cash flow is not static month in and month out. If your expenses increase your cash flow will decline. Here are five things you can do to increase your monthly cash flow.

  1. Check All Expenses. Most property owners can quickly rattle off what they pay every month for the large expenses. The mortgage, insurance and even property tax payments are almost engrained in your head. It is the seemingly minor expenses that quickly add up that can become a problem with rental property cash flow. It is important that you take a day every month or so to do a full review of all your expenses. Make a spreadsheet that lists every single expense you make on the property. Be sure to include hidden items such as snow removal, lawn maintenance and quarterly water bills. Dive into each account to see if there are ways you can reduce your payment. This can mean switching companies or finding ways to improve efficiency. A $100 savings on a $1,200 monthly rental is a savings of roughly 8%. You can probably find $100 a month of savings without digging too deep.
  2. Improvements. Making the right improvements to your rental serves a number of positive purposes. It adds appeal which increases demand which improves your bottom line. The right improvements allow you to maximize your rental price. Regardless of the market if you can supply a superior product tenants will pay a premium for it. This doesn’t mean you can name your rent but you can charge more than other properties in your area. The key is doing work that combines quality and affordability. The work needs to be practical for the area and provide something that tenants really want. If you make the right improvements you will see the impact in your monthly cash flow.
  3. Refinance. The largest monthly rental expense you have is with your mortgage payment. Depending on when you took your loan out there may be a benefit in refinancing. Interest rates are still hovering near all-time lows. To take advantage of these you need to look at what your current rate is, your principal balance and an estimation on the current value. If your loan balance is near 70% of the value you may be in business. Actual monthly savings is based on the size of the loan and the change in interest rate. Lowering your rate by one full point on a $100,000 loan does not have the same impact as lowering it a half a point on a $400,000 loan. In some cases a refinance can save you a few hundred dollars or more depending on your current situation.
  4. Deferred Maintenance. All properties will need maintenance at some point. You may think you are saving money by avoiding annual checkups but all you are really doing is making the problem worse. Avoiding these smaller bills will lead to bigger ones down the road. These have a huge impact on your monthly cash flow. Never avoid seasonal checkups on the furnace, oil tank, fireplace and water heater. Every owner wants to squeeze every day they can out of these items but most go about it the wrong way. Don’t let them run until they stop working. Protect your investment, and improve your cash flow, but taking care of these items every year.
  5. Increase Rent. It stands to reason that one of the ways to increase cash flow is by increasing the rent. The timing of your increase is critical. You can’t just decide you want to increase the rent without some justification. There needs to be a positive shift in the market, improvements to the property or some other factor that makes your property appealing. How you increase is also important. Typically you need to make any increases incremental. Take a look at what is in your market and how your property stacks up. If you increase too much it may have a negative impact. Instead of getting more rent you may end up with a vacancy. Before you decide to change your rent you need to do your homework.

Rental property cash flow can be a moving target at times. There are ways you can improve your cash flow but you need to stay on top of it with every expense every month.

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