Lessons in Multifamily Property Investing

Do you want to learn how to get started with multifamily property investing? If you’re ready to expand your investment portfolio to include this niche, continue reading for tips from seasoned investors.

In this article, you will discover fundamental lessons in multifamily property investing, including:

  • Class C properties risks and rewards
  • The importance of investing with a more experienced partner
  • Importance of location
  • Assumption deals
  • The importance of inspections
  • Indicators of seller fraud

Class C Multifamily Property Investing Risks and Rewards

You have several options for multifamily property investing. As a result, you need to know the different classes to invest in a property that suits your goals. Property classification highlights the level of risk and returns for a variety of residence types.

To determine a property class, investors consider:

  • Age
  • Amenities
  • Location
  • Rents

As the price of real estate and the cost of building materials increase in the United States, there is a trend toward investing in Class C properties.

Characteristics of a Class C Property:

  • 30+ years old
  • Few amenities & may need maintenance or renovation
  • Low-income neighborhoods
  • Comparatively lower rental rates than Class A or B properties

Benefits of Acquiring a Class C Property:

  • Cheaper than Class A or B
  • Rental rate vs. purchase price=higher return on investment
  • Most potential for cash flow
  • Low-income tenants have a low rate of homeownership, so vacancies should be minimal

Partner Up With an Experienced Investor

If you have decided to explore multifamily property investing, you may have taken the first step by scouting properties and deals.

However, closing the deal is where your inexperience could become an obstacle. Part of the problem may be money, and you can raise some, but not enough. One thing you might consider is partnering with an experienced investor.

Here are the benefits of partnering up:

  • Increased capital
  • Experience
  • Less risk to you personally

Location, Location, Location

A fundamental truth in real estate investing is that location matters. For your first multifamily property investing endeavor, you might be looking into a Class C property. These types of properties exist in low-income areas. Despite that, you will still want to look for high-growth, high-yield areas where property demand is high.

As an investor, familiarity with your area of purchase is vital. Some of the things you can look for that indicate improving neighborhoods include:

  • Neighborhood beautification plans
  • Designation as an Opportunity Zone
  • Gentrification indicators
    • Repaved roads
    • Bars, cafes, art galleries
    • Renovated buildings

Multifamily Property Investing Assumption Agreements: Risks and Rewards

An assumption agreement is when a new owner takes over loan payments from the previous owner. In other words, the assumption agreement shifts the financial burden of the loan to the new owner.

Possible risks and rewards for an assumption agreement are detailed below:

  • The primary drawback is a higher down payment.
  • One potential reward is a lower rate.
  • Another reward is that you will probably pay less in closing costs.
  • Yet another reward is that you will have a smaller loan amount.

One thing to remember is that in an assumption, there are three parties:

  • Buyer
  • Seller
  • Bank

At times, the bank doesn’t care what terms you and the seller agree to, and as a result, the bank may impose additional terms on the deal.

The Importance of Inspections

Don’t let the seller try to pull a fast one on you. Unscrupulous sellers may demand that you give up your right to inspect the property. Denying you access to the property should be a huge red flag.

You need to be present on your multifamily property so you can check for vacancies. In addition, if a unit is not rent-ready, you can negotiate a clause that enables you to recoup some of your closing costs.

Beware Fraud in Multifamily Property Investing

Not all sellers are fraudulent, but the temptation to commit fraud increases with the amount of money changing hands. Shady sellers will want to make their property look as favorable as possible to you so that you feel comfortable closing on a deal.

One thing to look out for is a type of fraud called phantom leases. This type of fraud occurs when the property owner claims a unit is occupied, and that a contract exists, but no paying tenant lives in the property.

This shady tactic makes it appear that the property has fewer vacancies and fraudulently increases its attractiveness. Properly accounting for your tenants is why it is so critical for you to inspect your property personally.

Another unethical strategy involves owner contributions. Review bank statements for the property. Anything ending with “000” is a huge red flag. That amount of money is most likely an owner contribution (not rent), indicating a poorly performing property.

Your Multifamily Property Investing Journey

No matter what type of multifamily property you choose to invest in, you need to be protected. Be sure to apply the lessons in multifamily property investing you learned today to protect your assets.

One way to get rid of the risk you will encounter is to form an LLC. Read more here to learn about the benefits of using an LLC as a multifamily home investor.

Before you dive into the world of multifamily property investing, ensure that you have rock-solid protection, financial strategies, and business structures in place. To discover how you can achieve bulletproof asset protection, check out our FREE, 5-part educational series for real estate investors.

Request your access to the Royal Academy Asset Protection Vault today!

Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.

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