Multi-family investors are specialized clients with goals different from most buyers and even other real estate investors. To be successful, it is important to understand their needs and what to look for within your market.
At Royal Empire Realty, our agents specialize in working with investors and specifically multi-family properties. Keep reading to learn some tips for this specialized field!
Understand the investor’s goals
Whether you are helping an investor buy, or listing an investment property, it is important for real estate agents to understand the investor’s perspective.
Before you go looking for an investment property on behalf of a client, gather a good understanding of the investor’s goals.
Here are some key questions to ask multi-family investors at the start of their journey:
- Why do you want to invest in a multi-family property? What do you hope to achieve?
- How much capital do you want to invest? What are your financing options?
- What is your expected return on investment?
- What types of properties are you interested in? Do you want a duplex, a triplex, a fourplex … or an apartment building? Should the property attract luxury renters, provide affordable housing or cater to short-term rentals?
- How involved do you want to become in making the investment successful? Are you looking for a passive investment strategy?
Be sure to clearly explain the practical expectations of multi-family investments.
For example, unless the investor is prepared to hire a property management company, she may be more involved in maintaining the property than she anticipated. If the multi-family investor is interested in more passive income strategies, a syndication might be a better investment.
If you are marketing a property to multi-family investors, keep in mind that what investors are looking for is different from homebuyers. A couple looking for a new home might fall in love with the color of the kitchen cabinets or a charming nook in the dining room of one of the units.
However, investors are only interested in how features will translate to more dollars in their pockets. Highlight the factors of the property that will translate to bigger returns.
For a newer property, a savvy real estate agent will focus on above-market rental fees with low overall costs. An older property will dictate a different strategy, such as marketing for renovations and a quick resell.
Focus on the numbers
Real estate agents should outline a clear picture of what the property would cost to purchase, upgrade and maintain versus what kind of income the investor can expect out of it. As you conduct your research, document your findings as thoroughly as possible.
Below are some steps that can smooth the decision for multi-family investors.
Determine the value of the existing and potential leases
The first step is to calculate the value of the leases for each unit. If tenants are living on the property, find out what they are paying and whether they have a long-term or short-term lease. The status of their leases will change how the property is transferred.
Determine if the current tenants pay on time. Ask if the current owner would be willing to provide receipts or bank statements to prove it. Find out about the security deposit for each current tenant as well.
For the vacant units, do some research on the market rates for local comparable units. If the property was completely rented out, how much could the investor expect to earn each month? Ask about tenant turnover and how quickly vacant units get filled.
Finally, consider if the property would benefit from short-term leases. This is valuable for investors especially in a market like South Florida, where vacation rentals are in high demand.
Calculate monthly expenses
After you have gathered all the potential income factors, outline all the potential monthly or yearly expenses associated with the property. These can include water, trash, lawn maintenance, sewer fees, insurance and property taxes.
Newer multi-family properties often use separate utility meters for each unit, allowing residents to pay directly for their electricity or water use. Older buildings may be calculated together. If one meter tracks the whole property, past utility costs would be helpful to the investor.
A property manager or property management company is often a necessary expense. Find out if the current owner already uses a company that is familiar with the building and what their quality of work is.
Add up needed repairs
Many investment properties need improvements to make them profitable. Before purchasing a property, multi-family investors will want to know what repairs are absolutely necessary. This allows them to calculate how much of their investment should be applied after the initial purchase.
As a first step, ask if the property has recently undergone an inspection or appraisal as those results will be invaluable to the investor.
Optional upgrades need to be weighed against the additional return on investment. Could the investor charge more rent if an outdated kitchen is upgraded? What are the costs needed to make an average unit in a good neighborhood into a luxury rental property?
Determine the return on investment
Your final presentation to the multi-family investor should include the potential monthly income, minus expenses and long-term repairs. The return on investment can be calculated via different techniques to help investors make the right investment choice.
Keep the investor’s goals in mind during this evaluation. For example, investors who want to fix up a property and resell it in a few years might not care that the roof will need to be replaced 10 years from now.
Understand the rules for existing tenants
If multi-family investors want to start making money right after the purchase, they are looking for a property with existing tenants. However, transferring active leases to a new owner can be a complicated process.
Real estate agents should be familiar with the rules in their state, as the process could delay closing. Most states require that active leases and security deposits transfer to the new owner, but vary on the process.
Month-to-month leases can easily be transferred to a new property owner. Tenants must receive a proper amount of notice, which is dictated by their state.
Join a different kind of brokerage!
Of course, this is only the beginning of what real estate agents should know about multi-family investors. At Royal Empire Realty, we educate and mentor new agents on what to expect in the investment real estate market.
Join us at Royal Empire Realty, to invest in your future and education as a real estate agent!