Sunday, August 15, 2010

Multi-Family Rental Units

Before you consider purchasing a multi-family rental unit, it is important to consider the cash flow potential of the building. There are many complex models with which to make the calculation, but the best one is a straight forward look at the historical data on the building and comparing similar properties.

A great place to start is to pick up a free copy of a "Renter Guide" or other apartment search magazine. Check out the available rentals for comparable sized units (sq footage), and number of bedrooms within the same vicinity as yours. If there are apartments located within the same neighborhood as your units, find out how much they are renting for. Your prospective renters will be comparing prices, so you should know your competition. Consider options, updates and other features. What makes your unit better? What are some selling points that your units offer?

Once you have researched the comparables, you should request the Schedule E from the current owner. This document is the income or income loss statement for the unit and shows the rental income and expenses and the net income or loss generated for the year. Remember that a net loss is not necessarily a bad thing, as most owners will try to report a loss for tax purposes. You will need to look beyond the bottom line to examine the rents charged. What are the rental prices of the units (are they at or below market value?) What is being charged for utilities? (And what is the actual cost of utilities?) Are there units that spend a long time vacant? How long does a unit sit vacant on average? If a unit sits empty it could mean that it is not a good investment—or it could mean that the landlord did not market the unit properly. Ask the seller—there may be a good reason. You should also check to see what major expenses that the units had – such as electric work or a new roof. This could be the reason for a loss being shown, but are really positives for you. This says that the owner maintained the property, and those are things you won’t need to take care of in the first year of owning a new investment property.

Your next step is to do some simple math. You can expect that for every dollar you make in rent – you really make $0.95. This will roughly take into account the amount of vacancy time you might have. Take that amount and subtract your monthly expenses such as utilities, insurance, lawn care, etc. and your monthly mortgage payment. Then deduct 10% for incidentals for repairs. If the number ends up a positive… then multi unit investment property may be for you!

Finally you should ask the current owner what the length of each current tenants lease is. If the property is currently renting for under market value, you will need to know when you will have the opportunity to raise the rent to the market price.

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