Multi-family properties are all the rage in the current real estate market as investors shift their attention away from office and retail properties.

A multi-family property can be any type of residential building ranging from a single-family home with rental unit, to a four-plex, to a large apartment building. Typically, a multi-family property consists of owning both the land and the units on a single title, but with each unit leased individually.

But why should you invest in a multi-family property?

Reliable income

When compared to single-family residences, multi-family properties allow investors to boost their returns while lowering their vacancy rates. If one unit is empty for a period, the others will likely remain tenanted.

Multi-family properties are an excellent investment option to diversify your property portfolio. If located in an area where demand is strong, they can be relied on to generate passive income with minimal effort. Rental rates are typically predictable and stable; in strong markets, units can be turned over easily and re-leased to ensure steady cash flow year in and year out.

Potential to make improvements one unit at a time

Investors often can earn significantly higher returns on their investments and have better quality tenants in units that have been recently updated. 

Unlike a single-family residence, if you want to add capital value through renovation, you don’t have to have a completely vacant building. As leases end and tenants vacate, you can make improvements one unit at a time to increase rent rates and capital gains.

Tax depreciation.

Multi-family properties can be tax depreciated, helping investors earn a higher return by offsetting their rental income.

Hire a property manager

More often than not, a single-family residence doesn’t generate income to warrant the use of a professional property manager. However, when you have multiple units with different tenants and leases, then engaging a property manager can be beneficial to handle day-to-day operations. This frees an investor’s time so they can explore other income-generating opportunities.

 

Tips for Buying Multi-family Investment Properties

For investors looking to venture into multi-family homes, we have put together some tips to finding the right property, giving you the best chance at a successful investment.

#1 Understand your potential income and costs

If you have access to the neighbourhood’s comparably leased properties, this will give you a great start to knowing how much income a property can generate. The current leases at a property you are considering purchasing may not be at market rent, giving you room for growth.

If you don’t know how much comparable units are leasing for, try reaching out to a local property management company. Often, they are more than happy to supply comparable lease rates and estimates for a particular property in an effort to win your business.

Sometimes a property’s costs are not readily available. In these cases, we use the 50% rule and estimate that a property’s costs are approximately 50% of its income. This won’t always be the case but gives a decent safety net for estimates.

Once you have the approximate income and expenses, calculate the net operating income (NOI) by subtracting the monthly expenses from the monthly income.

#2 Know your cash flow

Ideally, a multi-family property should have positive cash flow. Once you have your approximate NOI, you can then subtract your monthly mortgage payment to come to your monthly cash flow estimate. Most investors use this figure to decide whether an investment is a good investment for their circumstances.

#3 Calculate your CAP rate

A capitalization (CAP) rate is the most important metric in real estate investment. It represents the rate of return of an investment. It’s calculated by dividing the NOI of a property with its asset value – with new purchases we use the property’s purchase price.

CAP rates are an excellent tool for comparing potential investment opportunities, however, they shouldn’t be the only indicator used to make an investment decision. There are several other investment characteristics such as potential rental growth and location that are not taken into account in a CAP rate.

During an economic crisis such as the COVID-19 pandemic, housing is always a required resource making multi-family homes a near fool-proof investment type. It’s an excellent long-term real estate asset for investors at all levels because of its stability and excellent margins