Buying a multifamily building

Your goals and objectives

Before purchasing a multifamily property, it's important to determine how long you plan to keep it. Generally buyers choose one of two strategies: a shorter-term value-add and fix and flip strategy, or a longer-term buy and hold strategy. Shorter-term investors typically hope to buy a property, make improvements and adjustments that can increase the property's income, and re-sell the property for a profit within 2-5 years. In contrast, buy and hold investors typically plan to keep the property for the long haul, say, 20-30 years, while enjoying the annual income that it provides. As a landlord you still make value added improvements but make them over a longer time period. After that, you may sell the property, use the equity to purchase another property or pass it on to your heirs.

Getting a Multifamily loan

Owner occupied buyers of a multifamily home can use rental income to help qualify for a loan. This means if you are approved to purchase a single-family home at a certain limit, you may have more purchasing power if you instead buy a two-four-unit property that has rental income. There are some nuanced underwriting guidelines depending on the loan program and number of units, so always check with your loan officer to clarify any requirements. Investors that do not intend to live in the multifamily property have different guidelines, but you are still able to use rental income to help qualify for a loan.

In either case, the lender will need to order an appraisal, look at current lease agreements, tax bills, current operating statements and copies of current service contracts the building may have. Lenders will also need financial information about the persons or company who will be making the loan.

Choosing a neighborhood

Buyers with a 4-5 year hold horizon may be willing to pay more for an apartment building in an area where costs are currently rising. In contrast, an investor with a 20-year hold horizon may seek a lower-priced property in an area that seems positioned for growth to begin over the next 5-15 years. While it's impossible to predict the future, creating a series of educated market assumptions can help narrow down likely possibilities. It's not necessary to purchase a multifamily property near your current home; doing so can have certain benefits. For one, you're likely to be familiar with the local market, so you may know things that other investors don't, giving you a certain advantage. Plus, it's easier to monitor your property if you live nearby, making things more convenient, especially if you plan on doing your own property management and maintenance.

Evaluating properties that are for sale

The rent roll is a list of all current rental income received by a property owner; the financial statement represents the property's income and expenses over the previous 12 month period or last calendar year. Keep in mind that documents may be somewhat exaggerated to make a property better than it really is, so it's essential that you look at these with a critical eye and verify any information that appears inaccurate or confusing. We have worksheets that help clarify building financials making it easier to understand and evaluate different properties.

Adding value after you close

Some buyer's search for a property that need improvement, whether in the form of physical upgrades or deciding to self manage and do maintenance around the building themselves. This process is generally referred to as value-add. For instance, a landlord may acquire a property, replace the management company, upgrade the units, increase rents, or utilize other methods to increase profitability.

A large part of our business is leasing apartments in multifamily buildings, we can help estimate what rent increases can be accomplished with certain improvements.

Every step of the way

It may seem like building a building is a huge endeavor and it is, but understanding what to expect and having a good plan makes it possible.

Baird & Warner and I will help make the Search to Contract and Contract to Close process easier.

Tim Brent
Leasing - Sales
Licensed Managing Broker
773-491-0792
tim@homes-condos.com
Baird and Warner logo
Baird & Warner Lincoln Park
2526 N Lincoln Ave
Chicago, IL 60614
773-697-5600
info@homes-condos.com