Here’s What You Need To Know Before Buying One Of The Many Multifamily Properties For Sale On The Real Estate Market
Key Performance Indicators will determine if the building is performing well financially and structurally, or if it’s gone horribly wrong.
The first and most important thing to understand is that when you're going out there to buy a multifamily building, always buy a building when it's performing horribly. That way, you can add value, increase that value, and do something with it on the back end.
Key Performance Indicators For Multifamily Properties
One KPI that our team focuses on is what I call the Rent-To-Price Ratio. You take the gross monthly rental income and divide that by the actual price of the building.
In my world, something that is performing well has a final number of 1.5% or higher. If it’s not performing well, that means the number will be 1% or lower.
Then you ask yourself some very important questions…
“Is there an opportunity here to increase the value?”
“Is there an opportunity here to increase the income?”
If there is, then you have to understand how you can create that increased value. Perhaps you raise the rents, refurbish, or tear it down just to build again. Either way, whatever method best works for you, then that becomes your play on the property.
Another KPI is understanding the financing or the terms available for the loan that you may or may not meet. One measure that you're going to use in that particular sense is what is known as the Debt Service Coverage, or DSC.
The DSC is going to give you the information that you need to understand whether or not you can even afford an investor. How much will it cost you to take on an investor, and still have enough to take some income home for you?
Other Considerations In Buying Multifamily Properties For Sale:
- Closing costs: These are generally 2% to 5% of the sales price of the property and include lender fees, title insurance, property insurance, and property taxes. The higher the home’s sale price, the higher your closing costs will be.
- Carrying costs: These are the monthly recurring costs of holding onto the property, including your mortgage, taxes, insurance, and utilities.
- Renovation costs: Depending on the property’s condition, you may need minor and/or major renovations before renting it out. Consider how much you will need to spend on the property before taking further steps.
- Ongoing repair costs: These are variable costs that can pop up anytime, like a clogged pipe, broken water heater, or roof leak. Therefore, you need a planned profit margin to cover unexpected expenses.
- Timeline: Your timeline involves the time it takes to make repairs or renovations, find a tenant, and start accepting payments. The longer renovations take, the higher your carrying costs will be.
To learn more about investing into multifamily properties…
Access the FREE Short Term Rental Blueprint video course: https://cashflowdiary.com/blueprint
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