When looking to diversify your real estate investments, one of the ways to do so is by creating a multifamily portfolio. Here are 6 tips to diversify your portfolio successfully.
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There are many different investment options for investors looking to diversify their real estate portfolio. While they all can bring some rewards, the real winner among many seasoned investors seems to be multi-family rental properties.
Whether you are new to investing or are just looking to invest in something new, here are 6 tips for building a multifamily portfolio.
Tip 1: Location, Location, Location
Choosing where you invest in your multi-family rental is just as important – if not more so – than the rental itself. You may want to consider something that is easily accessible to important destinations, such as grocery stores, dining and shopping, medical services, etc. Regardless of who your tenants are, having things handy and close by can make a positive impact on their decision to apply as tenants.
Pay attention to the rental markets, too, so that you are not investing in an area that doesn’t have a very bright future.
Tip 2: Look For Smaller Multifamily Properties
You are an investor and know what you can and cannot handle. But, if you are new to the world of multi-family properties, you may want to consider starting small. Choose properties like a duplex, or quadruplex first. Or maybe even a small building of 8 or 10 units. This is much more manageable to start with and gives you a chance to get your feet wet, so to speak. Diving headfirst into a 150-unit high rise could prove to be too much for your multifamily portfolio.
Tip 3: Consider the Condition of the Property
Not all rental properties are created equal. There is a lot to go wrong with multi-family properties, such as units that may have been subjected to different levels of tenant care, a lot of plumbing, as well as potential maintenance and repair costs.
Be sure to thoroughly assess the property before jumping in or else you may find yourself putting more money into the property than you intended.
Tip 4: Perform a Sensitivity Analysis
A sensitivity analysis is a sort of what-if type of assessment. You look at all the variables that will impact whether or not this is a wise investment. And you want to add the properties to your multifamily portfolio that look as though they will have the least amount of negative impact on your return. For instance, consider looking at the answers to questions such as these:
- How much rent do I need to charge to make a profit? How long can I go on rent and still make a profit?
- What will the outlook on the property be if the market goes down? Or, up?
- What vacancy rate can I have before I begin to lose money?
You can answer these or choose some of your own that matter most to you and your investment strategy.
Tip 5: Be Prepared for Anything
If you expand into a multifamily portfolio, then you are going to need to be prepared for anything. You have many chances for repairs and maintenance needs. You also have multiple units to fill so you may carry a higher vacancy rate for a while. Things like this happen – and they tend to happen more often when you have larger properties. So as you build your multifamily portfolio, by preparing yourself, it will be less of a shock when it does happen.
Tip 6: Hire a Property Management Team
When you invest in multi-family properties, you want to take steps to keep your costs down and your units occupied. You can do that with a property management team. They will work to provide routine maintenance to reduce the incidence of emergency repairs as well as thorough tenant screening services so that you always have high-quality and even long-term tenants.
One of the biggest mistakes investors make is trying to do everything on their own. Handling one or two single-family rental properties is one thing. But handling a multi-family property is an entirely different situation. By choosing a property management team, you free up yourself to continue searching for investment opportunities while you bring in the money from your multi-family property.
Why the Interest in Multifamily Rentals?
Many investors prefer single-family homes for filling their rental portfolios, but that doesn’t mean multi-family housing doesn’t have its perks. More and more investors are looking to diversify their portfolios by adding a multi-family rental property or two. And, then, of course, some have left the SFH in the dust and have solely built multifamily portfolios. So, why the interest? What are the perks?
For starters, these rentals offer a great opportunity to grow and increase your profit. Cash flow is one of the most common reasons investors turn to multi-family rentals. Not only do they typically provide great returns, but you also have the chance to increase rent annually, say 3% – 5%.
They also provide a great source of passive income. Granted, not if you do all the work yourself. But, if you hire a property manager to handle your property for you, you can collect the money while someone else handles every aspect of managing your rental. Plus, you don’t have to worry about taking out multiple loans to purchase multiple properties. This gives you multiple rentals – but only one loan.
Truthfully, we could keep going on and on about the perks of a multifamily portfolio, though it would be wrong to not mention that there are potential downfalls, too, such as the fact that these properties are often much more expensive than single-family rentals and they require more maintenance. However, as we discussed, with an experienced, successful Phoenix property manager like Real Property Management Evolve, this wouldn’t be an issue.
If you are interested in building a multifamily portfolio and believe that it is the right investment strategy for you, then follow these tips – start small, pay attention to the location and the condition of the property, go through the what-ifs, and hire a property manager. In doing so, you may just find multi-family properties to be a rewarding decision for your portfolio.