Making a smart investment takes a lot of thinking and research. Are you thinking about investing in real estate? It’s an excellent time to buy real estate, as the appreciation rate for properties has increased in the last year. And with renters making up much of the population, you can be sure your multi-family home is a sound investment.
From Grand Mesa to Fruita, western Colorado is a great place to invest. If you have a family or plan on renting your multi-family home to other families, cities like Palisade are close to several parks, playgrounds, and highly rated preschools. There are plenty of entertainment options for adult crowds, with year-round outdoor activities such as skiing, hiking, and fishing. With these factors in mind, here’s how to invest in a multi-family home.
What are multi-family homes?
Why to invest
Another reason to invest in a multi-family home is if you’re trying to expand your portfolio. A good portfolio is diverse, which better protects it against future risks. Be sure you’re ready to commit to maintaining the property, finding new tenants, and paying fees related to owning the property. A multi-family home is an active investment and can reap significant rewards if you stay the course.
Multi-family real estate investing is also scalable to your needs and goals. If you want to make a significant investment all at once, you can buy an apartment complex. You can buy a duplex if you’re searching for a little more cash flow. Although there may be some more upfront costs with investing in a larger property, there are perks like tax benefits and blanket insurance policies when you buy multi-family homes.
What you’ll need
Now that you know why to invest, here’s what you’ll need to invest smartly. If you plan on using a mortgage to finance your property, you’ll need to save up for a down payment. Down payments for multi-family homes are usually higher than those for single-family homes. If you plan on living on the property, then a 20% down payment is typical. If you plan to use it solely for investment, the figure will be closer to 25%.
Also, check your debt-to-income ratio (DTI). The lower this number is, the higher your chance of qualifying for a mortgage for your property. Ideally, a DTI should be under 43%, but that’s flexible depending on your loan type. When starting your search, consider the 50% rule (halving your expected income to account for your estimated expenses).
Some other numbers to keep in mind when planning to invest are your capitalization rate (cap rate) and your cash flow. Your cap rate helps you estimate when you’ll get a return on your investment. Although a preliminary estimate won’t cover factors like property value increases or tax breaks, you should still calculate it for a rough time frame. Your cash flow is how much money you earn from your investment and is found by subtracting your mortgage payment from your net operating income.
How to start investing
Once you’ve found the financing option that works best for you, make an offer on the property. When you own your apartment or condo, prepare it for tenants by making any needed functional and cosmetic repairs. This will help you attract more renters to your property. Then, create a plan for how you’ll manage the property, whether hiring somebody or dedicating time out of the week to manage it yourself.
Ready to invest in multi-family homes?
*Header photo courtesy of Shutterstock