Every passive investor will agree there are many advantages of investing in commercial multifamily real estate units. As the population continues to grow so does the potential of this type of real estate. However, people new to real estate often have no idea where to begin. For this reason, we have compiled a step-by-step guide on what you need to know.
1. Crunch the Numbers
You need to have your calculations right before you begin. It is more than just how much capital you will use to obtain the building and the amount you will receive as monthly payments. You will need to make a calculated move to know the type of risk and the kind of returns you should expect after deducting the expenses. Here are the figures you must determine:
a) Profit
The money that remains after deducting expenses such as maintenance and repairs. As a rule of thumb, 50% of what you receive will end in maintenance, while the remainder will be your net operating income (NOI).
b) Cash flow
Cash flow is the net income you receive from your property after deducting expenses and mortgage payments. In other words, this value is the net operating income minus your mortgage. Cashflows can turn out to be either positive or negative. A positive cash flow happens when you have money in your pocket after making all necessary payments and catering for expenses. A venture is only profitable when you experience this kind of cash flow. On the other hand, negative cash flow occurs when the money you receive is insufficient to cater to the mortgage and maintenance costs.
c) Capitalization rates (cap rates)
To calculate the cap rate, you need to multiply the NOI by 12 months to find the annual NOI. You should then divide the result by your mortgage. The cap rate helps you determine the duration it will take for you to break even and start realizing your returns on investment. The higher it is, the better the returns on a riskier investment. Conversely, a lower cap rate shows low returns on a safe investment. A viable investment should have a cap rate between 5-and 10%. Otherwise, a lower one is not worth your money, while a higher figure may be too risky.
Schedule a Free Consultation Today
Mi-Ella is ready to help answer your questions. If you need help learning how you can invest in multifamily real estate we’d be happy to assist!
2. Get in touch with a Commercial Multifamily Real Estate Broker
Once you understand the numbers, you need to find a commercial real estate broker in that area. The agent’s work is to provide you with a list of possible listings available in the location of interest. Certified brokers have lots of knowledge to help you identify a perfect match while sticking to your budget. They are also a great resource to help you understand the market, surrounding amenities, local contractors, and municipality rules.
The best commercial multifamily real estate brokers will help you identify the type of seller of the property. For example, a property owned by an individual will have a different process of acquisition from one owned by an institution. Moreover, brokers help you and provide you with finance options for passive income, which include:
a) Crowdfunding
In the traditional world of investments, only a small portion of investors can finance a multifamily real estate complex. However, a new way of private financing is breaking this barrier called crowdfunding. The practice capitalizes on many investors to raise money for the same goal. In this method, developers pair with commercial real estate brokers to develop high-end multifamily units. The broker does all the management, collects rent, and divides profits amongst the investors at a fee.
The crowdfunding model relies on the internet to attract investors and raise funds for a project. Therefore, it is easy for members to fund the project from anywhere globally as long as you meet the requirements. Your contribution amount determines your account level and investment options. Typically, the goal for the investment is passive income over time, diversification, and growth of your money.
The fund managers determine the most viable investment opportunities on behalf of the thousands who have contributed to the fund. The investors pay an advisory, asset management fee, or a percentage of their total investment.
It is wise to ensure you select a reputable company with exceptional Better Bureau Ratings and a good customer experience or work with a broker that can help and advise you through the process. Transparency of minimum investments, fees, and redemption options will help you choose a good company.
b) Syndication
Another method of raising funds for a multifamily apartment is through syndication. Here, investors use their resources, intellect, and money to build the property together. A project which could otherwise be impossible for all of them becomes a reality in this method.
The idea initiator or syndicator usually receives a small commission for this idea, typically 1% of the total collection. The work of the syndicator is to arrange for financing, negotiations, asset management, and dealing with investor relations.
As an investor, your responsibility is to give money towards the project and not worry about the acquisition or management of the project. You will enjoy cash flow, tax breaks, and appreciation benefits from the property.
The eligibility criteria for syndication are different from other private funding platforms. In this case, you must be an accredited investor with a minimum earning of $200000 or $300000 if you have a spouse. Else, your net worth must exceed $1 million. Otherwise, you can only be a sophisticated investor to be part of syndication. A sophisticated investor means you have lots of knowledge to evaluate and give the green light to close a deal.
Unlike crowdfunding, where you may not have total control, syndication allows you to choose the multifamily units you want to invest in. Ensuring that your capital is spread across various real estate syndicates is advisable to minimize the risks.
c) Private Equity
Private equity is pooling capital to a common fund to develop a multifamily plan. This method is only available to institutional investors and high net worth individuals. In most private equities, investors make a minimum of $250000. However, there are equities where investors can have minimum contributions in millions.
The broker normally holds the funds for several years before liquidity, typically 5-7 years. It is worth noting that private equity does not have strict requirements or oversight compared to REIT investments.
As an investor, you will be entitled to any form of profit from the investment with little or no active effort. Usually, the returns are substantial at a considerably lower level of risk.
3. Verification
Real estate investment requires that you have proof of ownership. Before getting into this business, ensure that the property you are eyeing has no litigation. Conduct thorough research to confirm the property’s condition. This action will give you a rough estimate of how much you need to use in renovations and addressing pest problems. Going through websites such as Craigslist or Rentometer will help determine the property’s potential income as they provide current rental prices in a particular market.
4. Make an Offer
After the verification of key points, amenities, condition, valuation of the investment property and projected income, it is time to make an offer. Consider working with a wise, commercial real estate broker to help you negotiate the best deals. Once you have an agreement on the cost, proceed with the transaction.
Parting Thoughts
If you want to take your portfolio to the next level, commercial multifamily real estate rentals are the way to go. You do not need to be a guru to invest in this type of real estate, as commercial real estate brokers will handle all the technical and management aspects. It is easy to invest in commercial multifamily 50 units plus; you can start by filling out the online request form or contact us via a call. If you need a prospectus investment kit, send us an email, and we shall send it to you immediately. You can also secure an account right away through our online application. Remember, you do not need to have a lot of money in cash to get started in larger commercial multifamily real estate investing. Through the guidance of our brokers, you can start with lower amounts and see your money grow.
Schedule a Free Consultation Today
Mi-Ella is ready to help answer your questions. If you need help learning how you can invest in multifamily real estate we’d be happy to assist!