Green investors often ask how they can get started in the multifamily space when they aren’t yet designated as accredited investors. According to the SEC, an accredited investor must meet one of the following requirements:
The SEC has put these rules in place to ensure those investing in unregistered securities are able to bear the financial risk. However, being an accredited investor is only one way to gain all the benefits of investing in multifamily real estate.
Another avenue of participating in multifamily is to investigate smaller properties such as duplexes, triplexes, or fourplexes. Multifamily homes often generate higher monthly rental income, have lower maintenance costs, and can be much more profitable.
There are a few strategies new multifamily investors can utilize to get into the space, and once they have professional knowledge of multifamily or amass enough income or assets to qualify, they can become accredited and invest in passive income opportunities like syndication deals.
The first step is to choose a location. The ideal location will have high growth potential, high demand, and be well-maintained. Investors often begin their journey by searching their local area. Investing in local properties allows investors to have easier access to their properties for maintenance or any other issues that may arise. As their portfolio grows, they may want to utilize a team to manage projects for them.
Once the location is selected, it is imperative to consider the pros and cons of potential investment properties. Many investors take advantage of the myriad benefits provided by living in one unit while renting out the other(s).
By living in one unit, an investor will likely qualify for a higher mortgage and their personal living expense will be covered, at least in part, by the tenant’s rent. There are also tax benefits to this setup. An owner will be able to take advantage of standard homeowner deductions, while also deducting many expenses associated with maintenance and depreciation. In some cases, selling an owner-occupied multifamily property can provide exclusions to capital gains tax.
To determine the potential income for a property, looking at similar rentals in the area is a good place to start. Online marketplaces like Craigslist or Zillow are useful to verify what other landlords are charging so you can remain competitive while also maximizing income.
Once you have established what your rental income will be, you need to ascertain the net operating income (NOI) for the year. NOI is determined by subtracting annual property expenses from annual rental income. To assess cash flow, take the gross income and subtract all expenses (vacancy factor, mortgage, taxes, insurance, repairs, and costs).
Another factor to evaluate is your capitalization rate or cap rate, which is the rate of return on an investment based on the income that property is expected to generate. To determine the cap rate, take your annual NOI divided by the total mortgage. For example, if a property has an annual NOI of $24,000 and was purchased for $300,000, the cap rate would be 8%. Generally speaking, a cap rate of 5%–10% is considered a good investment.
To continue to build a multifamily portfolio quickly, investors can take a few paths. Equity within a property can be built by renovation, paying down the mortgage with rental income, and home value increases. Once equity is built, an investor can then withdraw that cash to repeat the process on another investment. This rinse and repeat method is a solid way to build wealth before moving into syndication deals with truly passive income. It will also allow you to learn the ins and outs of your market, as well as multifamily investing as a whole.
There is a lot more to multifamily investing than what is listed above, but, if you’ve been itching to dip your toes in the multifamily world, starting local is the best place to dive in! From there, it is simple: analyze the numbers, add value, and build your multifamily portfolio.
About the Author:
Veena Jetti is the founding partner of Vive Funds, a unique commercial real estate firm that specializes in curating conservative opportunities for investors.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.