Mark Zuckerberg said, "The only strategy that is guaranteed to fail is not taking risks." When compared to developing a portfolio of single-family investment properties, investing in Novi multi family properties is a risky—and unique—process.
At JMZ Management, we're always driven to help the investors we work for succeed when it comes to investing in multifamily housing. To that end, here are some of our expert tips to help gain a better understanding of how to delve into the challenges of investing in Novi multi family properties—and things to look out for during the initial stages.
1. Determine Your NOI
NOI, or net operating income, is the difference between the approximate monthly income and approximate monthly expense. This number is important, but it may be difficult to calculate if there are no comps in the area of the property you are investigating.
- Examples of monthly income would include rent payments and other fees like parking and storage.
- Some types of expenses include repairs and maintenance costs or other expenses associated with Novi multi family properties and their ownership.
- If a comp is not available to help estimate your expenses, take the anticipated income amount, and cut it in half. This can represent the expenses and works for the formula to figure out the NOI.
2. Estimate Cash Flow
The next step is to figure out how much money you can expect to put in your pocket. The monthly mortgage payment becomes a significant factor in this equation.
- To calculate the cash flow, the monthly mortgage amount should be subtracted from the NOI.
- The total will help you determine if the investment is worth it or not, since it reflects the estimated amount you can hope to take home.
3. Understand Your Cap Rate
- Another essential calculation to make is the capitalization or cap rate.
- This rate will help you understand when you can expect to get a return on your investment.
- While an important number, the cap rate does not take into account an increase in property value, fluctuating monthly NOI, or savings from tax benefits for owners of Novi multi family properties.
To calculate the cap rate, take the monthly NOI, and multiply it by 12 to get the annual NOI. Then, take that total and divide it by the current market value of the property. The results tell a lot:
- The higher the rate, the higher the risk and return
- The lower the rate, the lower the risk—and return.
In general, a good rate to aim for is between 5% and 10%.
4. When Investing in Novi Multi Family Properties, Keep These in Mind!
Finding Novi multi family properties to invest in involves more than just casually visiting open houses! For serious investors, finding a property for a good price that is financially sensible takes due diligence.
- Once a potential property is located, compare the purchase price, expenses, and rental expectations.
- Multi family properties like duplexes and triplexes demand more details, so the first concern of the investor should be the numbers.
- Doing the necessary calculations will reveal the true value of the property.
A profitable investment is determined by more than the calculations we mentioned above: there are additional factors that influence investment viability.
Location
Renters are always looking for a convenient location, so investors should aim to focus on high growth, high yield areas. Multifamily housing in these locations is typically in high-demand neighborhoods. Given that they are sought-after locations, the rental occupancy rate will stay relatively consistent when compared to communities with lower demand.
Number of Units
- After a property is located in an ideal location, it must be comprehensively evaluated.
- The availability of multifamily housing and the number of rooms in each unit should be considered.
- For those investors just getting into the multifamily game, the duplex, triplex, and fourplex are good starting points.
- While generally more affordable, these kinds of properties still offer the most benefits with the least risk.
Associated Costs
No two financing situations are the same—and with multifamily investing, there are a few key things investors need to remember.
- When searching for financing options, investors need to think about their credit score.
- Your score will determine whether or not you are qualified for financing.
- If you decide that you want to live in one of the units, you qualify for owner-occupied financing.
However, no matter the type of financing institution, they most likely will investigate what you plan to offer for a down payment amount, your debt-to-income ratio, and your credit score.
Details About the Seller
- Depending on the seller and their motivation for selling, the price may fluctuate wildly for multifamily housing.
- To get the edge on the sale, investors need to understand who is on the other side of the deal.
- If a property is bank owned, the process is very different than a property that is FSBO!
- This creates room for cost savings: the appearance of the units will tell you how well they've been managed.
JMZ Management Makes Growing Your Portfolio Easy!
Investing in multifamily housing is a detailed process that is very different than investing in single-family properties.
- For successful purchasing, the numbers have to be crunched to see if the investment will be profitable.
- Location, number of units, and costs associated with owning multifamily housing have to be considered along with the seller's motives.
- If all this is taken into consideration, it is the foundation of a solid deal when investing in Novi multi family properties!
JMZ Management is your "in" for a win when it comes to investing! We make adding new properties to your portfolio straightforward with our proven property management techniques. Whether you're seeking a duplex, triplex, fourplex, or any other plex, get in touch with us! We're your resource for multi family property management.