In previous posts- here and here, I spoke about the benefit of investing in real estate, specifically multi-family properties. In this post I’ll give you the step by step on how to start your buying process. If anything, the following is an easy exercise first time home buyers can try to see if investing in a multi-family is feasible for them. The truth is that it’s not that complicated- just some simple math and roll-up-the-sleeves work.
Pick a few towns
First you will need to pick at least three towns you are interested in living in. The towns should have multi-family properties listed for sale. Some town’s zoning laws do not allow for multifamily properties or only a limited number of them, so use Trulia or Zillow to help you weed through (use sort function). Pick towns that you or your spouse will actually live in – I wasted a lot of time looking in towns with great financial deals that my spouse would never live in.
Come up with your budget
Determine how much total money you and your significant other have to put toward a new home. Depending on that number you can back into how much of a property you can afford. Typical down payments are 20% of purchase price (i.e. $250,000 price = $50,000 down payment). FHA loans are available for home buyers and only require 3.5% down (i.e. $250,000 price = $8,750). Closing costs are typically 2-5% of the purchase price (i.e. $250,000 price *3% = $7,500). Use 3% for your estimation of closing costs.
Search for properties
Armed with a range of house prices you can afford, given down payment and closing costs, use Trulia to search for properties in a town. Enter the town in the search function and make sure to update the Property Type to only include Multi Family Home and Income Investment. Set the min/max to your budget. Open the resulting posts, noting whether the properties are 2, 3 or 4 family (i.e. 2, 3, or 4 units). Determine how many bedrooms are in each unit. Don’t assume a 2 family property with 4 bedrooms is: 2 bedrooms in unit one and 2 bedrooms in unit two. Read descriptions to determine what the layout is if available. Also, it is important to write down the annual property taxes on the property.
Determine monthly cost
Next step is to determine what the monthly mortgage + taxes will be on the property. If you are going to use a conventional loan (20% down) use the following online calculator- https://www.whatsmypayment.com/Conventional/
If using FHA (as low as 3.5% down) use this online calculator:
The only variable you should be missing is annual insurance which will be approximately 0.35% of the property’s purchase price per year.
Determine monthly income
Use- https://www.rentometer.com/. Type in the property address you want to assess, take a guess on the rent $ for one unit and put the number of bedrooms in for one of the units. The resulting page will include the average rent you can get for the unit in the area you prescribed, based on real local current rents. Do this again for each unit in the property and add the resulting average rent amounts. For example, if I was searching a three family property that was split — unit1: 1 bedroom, unit2: 2 bedroom, and unit3: 2 bedroom, I would do two searches on the same address, one for 2 bedrooms and the other for 1 bedroom. I’d add the 2 bedroom twice and add the 1 bedroom once.
Compare cost to income
See how the monthly cash flow panned out. Are you cash flow positive on this property, meaning, does monthly income outweigh cost? My typical criteria is that I want to at least generate $250 per unit (in positive cash flow). In example, a two family would at least put $500 in my pocket each month if it was fully rented. Don’t be surprised if your property is not cash flow positive; finding the right property will take time. It took me a summer of searching before I came across my first multi-family property I bought.
Learn the market
By doing the above steps over and over in different towns and properties, you will really start to learn the real estate market in those areas. You will find yourself quickly being able to tell if a property is a good deal or is grossly overpriced. This is huge. Being an educated investor will help you make a great financial decision that your future early-retired self will thank.
Call the broker, ask questions, and see some properties
Do not be intimidated by brokers. They do not try to sell of solicit you over the phone. Ask them questions and schedule to see properties you like. Seeing the properties you’ve been analyzing is the fun part.
Most of all have fun doing this! Buying a multi-family property will require you to be more educated than a regular home buyer, however, the benefits are tremendous. Good luck out there you crazy kids!