Income producing multi-family property has a certain allure for investors looking to diversify their portfolio into real estate!
And why not, as on the 1st of each and every month the owner will receive cash flow from the building’s residents who will seek them out to hand over their rent check! One would hope!
This type of investment can range anywhere from a two-family house where the investor occupies one unit and a tenant the other, to a building with many units in which the owner lives or where the owner lives elsewhere.
Removing from the equation, for now, the way in which this type of property would be valued (net operating income and capitalization rate) and financed, there are certain potential drawbacks that an investor needs to be aware of BEFORE they sign on the dotted line.
Some Of The Things A Multi-Family Property Buyer Needs To Be Aware Of And Consider!
- So you want to be a landlord? Sounds simple from the standpoint of filling the buildings empty units as, of course, the rent will be fair and the building desirable for prospective tenants. Or, at least you hope that will be the case! But once the tenants are in, will you be prepared for all of the potential demands and complaints that can come your way 24/7? And, if you plan on hiring a building manager, they will need to be paid and repair expenses will not go away. So make sure that you factor this into your projections.
- Collections! As mentioned earlier the basis for your real estate investment being a good one is 100% occupancy with paying tenants! And hopefully that will be the case but, unfortunately, life sometimes gets in the way for everyone. A lost job, an unexpected health issue, divorce, etc. are issues that no one counts on happening. But, happen they can and at any time. Or maybe, after having carefully vetted your tenant, they turn out to be a deadbeat. Then you will encounter the time and legal expense involved with eviction on top of the lost rent!
- Trusting in the kindness of strangers! If you are a real estate company with 100’s or 1,000’s of apartments, the process of vetting prospective tenants can become somewhat cookie cutter and still, renting to a bad apple can occur. For an owner with one unit to rent or maybe 10, the process becomes one of luck and can be incredibly hit or miss. You rely on a cursory background check and then, if they pass, hope that they will continue to pay their rent and not leave the oven on or bathtub running and go to bed.
- Two times the fun! Or even more fun than that if the building being purchased has many units. In our own lives, we deal with broken washing machines, clogged gutters, missing shingles, leaky windows and any number of other items around our homes that break. When you become a multi-family building owner you can now take these potential problems and multiply them by the number of units you are now responsible for.
- Is this really my property? As with any real estate purchase, make sure that the title insurance provider selected by either the buyer or real estate attorney for the transaction has the three following critical attributes:
a) Is using a top underwriter
b) Has a historical claims experience indicating they are expert at protecting what may be their client’s most costly financial expenditure to date,
c) Charges reasonable rates for the non-title insurance premium fees that go into the policy and closing.
While these issues and more exist on the negative side of the investment property ownership ledger, if a buyer recognizes and accounts for all of the potential downside and can handle it, a multi-family property can be a phenomenal investment.
Michael Haltman, President
Hallmark Abstract Service
Phone: (646) 741-4723