Multifamily Investment Strategy
Table of Contents
One of the reasons why investors are drawn towards real estate is because of the diverse options it provides. Investors can put money into retail centers, office buildings, hotels, industrial properties, residential homes, and more.
At a certain point, you may want to add multifamily real estate into your portfolio. It pays to have a solid strategy for investing in multifamily real estate. Here we will discuss everything you need to know about multifamily real estate investing so you can make better investment decisions that boost your income.
The Multifamily Investing Playbook
First-time investors are usually drawn towards multifamily investing because the concept is easy enough to understand. It involves purchasing a home which could be rented out. The expenses such as mortgage, taxes, insurance, maintenance costs, and interest can typically be covered by the income you get from rent. The concept is familiar enough to most people so it’s easy to see the appeal. 
Multifamily real estate is a simple concept, and most investors know that it can be profitable. But there is more to it that you need to understand if you want to ensure your success.
What is A Multifamily Real Estate Property?
Let’s begin with the basics. A multifamily property, also known as a multi-unit property, is any residential real estate that has more than one unit that can be occupied by multiple families. This means even a duplex or a triplex can be considered a multifamily property because they have more than one unit. 
With that said, multifamily homes can also be a lot larger. Apartment buildings and condominiums are also multifamily properties. Wealthier investors such as high-net-worth individuals (HNWIs) may focus on these bigger investments because they have more units and can therefore provide a guaranteed cash flow with their low vacancy rate.
Best Practices for Multifamily Real Estate Investing
There are plenty of great investment opportunities for investors that want to try multifamily real estate investing. There are duplexes, apartment complexes, townhomes, and condominiums.
However, larger multifamily properties tend to be more expensive, which makes it difficult for lone investors to purchase them. This is where multifamily syndication comes in. We will discuss this strategy in detail later on. But first we will take a look at some of the best strategies for multifamily real estate investing.
New investors and experienced investors alike can benefit from the unique experience of investing in multifamily real estate. It’s an effective way to diversify your portfolio rather than just focus on single-family properties. 
Before you invest in multifamily real estate, here are a few things you need to know.
Use the 50% Rule
Choosing a multifamily property to invest in can be tough. Investors need to crunch the numbers to find the best potential investments. Calculating the difference between expected income and expenses is one of the best ways to quickly narrow down your options. By using the 50% rule, investors can determine how much a specific property can make for them. 
The 50% rule in real estate says that investors should anticipate that a property’s operating expenses should be roughly 50% of its gross income. This includes things like insurance, property taxes, maintenance costs, repairs, vacancy losses, and other utilities—but not any mortgage payments, if applicable. 
Using the 50% rule, real estate investors can quickly evaluate the potential of rental properties. While this should not be the only basis of your decision when choosing a multifamily property to invest in, this could provide a ballpark estimate of a property’s expenses. This should help you make a more informed investing decision.
According to the 50% rule, if you purchase a real estate property in cash, you need to anticipate having half of the rental income left after covering all of the standard costs of owning the property. So if your property could generate a monthly rent of $2,000, it means you will have to spend $1,000 on the rental property expenses. This also means you get to receive the other half as the net operating income from the property. 
If you have a mortgage on the property, you have to include the monthly mortgage payment in your calculation of cash flow. Keep in mind that this 50% rule is just a guideline. In a real-world scenario, it’s not likely for your property’s expenses to be exactly 50%. Still, this provides a good estimate.
Calculate Your Estimated Monthly Cash Flow
Another important thing to do before investing in a multifamily property is to calculate your estimated monthly cash flow. This puts into consideration the estimated mortgage payments along with other important factors. This should allow investors to calculate just how much money they can actually earn. This is done by subtracting the monthly mortgage from the property’s net operating income or NOI. The calculation should help you estimate your monthly cash flow. The result will help you determine if the investment is worthwhile. 
In real estate, cash flow refers to the difference between a property’s income and expenses including debts. It is used in investment properties that are supposed to produce income—this includes rental real estate properties. If a property has a positive cash flow, it means there is more income than expenses, which shows that the investment is profitable. If an investment has a negative cash flow, then the landlord is losing money each month on expenses and financing costs. 
As an investor, your goal is to own rental properties that have a positive cash flow. With a great cash flow, investors can earn more from their investment. This income can also serve as a safety net in case something unexpected happens like an emergency repair. The bigger the cash flow, the easier it is to sustain business expenses.
It is easy to calculate a property’s cash flow. You just need to determine the property’s gross income, deduct all the expenses, and subtract any debt service: the resulting number is the property’s cash flow. 
Calculate Your Cap Rate
Lastly, you need to figure out the investment property’s capitalization rate or cap rate. Cap rate shows how quickly you can get a return on your investment.
To calculate cap rate, you need to take your monthly NOI and then multiply it by 12 for the annual number. Then, divide it by the property’s current market value. A high cap rate isn’t always a good thing. It usually means higher returns—but also a higher risk. A lower cap rate therefore indicates that an investment has a lower risk and lower potential return. 
This cap rate does not account for a number of factors such as tax breaks and increases in property value. This means it can only be used as an estimate rather than a reliable way of assessing investments.
As a rule of thumb, a cap rate of 5% to 10% is considered ideal. Anything lower than that may not have enough yield. If the cap rate is higher, that investment may be a bit riskier.
What to Look for in a Multifamily Property Investment
When it comes to multifamily real estate investing, you need to conduct your due diligence. Analyzing and assessing a property’s financial sensibility is the best way to approach this type of investment.
Aside from the actual work involved in finding an investment property, there are also a couple of factors you need to look into when choosing a multifamily investment. This includes: location, number of units, potential income, costs, and the seller. 
Location alone is such a key component in determining the best real estate investment. But you also want to consider the number of units on the property, including how many rooms are in each unit. You may want to start small with a duplex or go for much bigger properties. Duplexes, triplexes, and four-plex units are generally the best for beginner investors because they are more affordable.
Investors should also think about the potential income of a prospective investment property as well as the costs of maintaining the place. Use techniques such as the 50% rule, estimated monthly cash flow, and cap rate to determine whether or not something is worth investing into. 
Another factor that you need to consider is the seller. Investors need to know who they are dealing with. For example, a property that is being sold by the owner will be handled differently than a bank-owned property. Prices may vary greatly depending on the seller and their reason for selling.
Before investing into multifamily real estate—or any type of real estate for that matter—always practice your due diligence.
Why Location is Important When it comes to Multifamily Investing
For real estate investors, location is everything. This is even more important when you are trying to invest in a multifamily property. The main reason for this is because you want to rent out a place that people actually want to live in. If a location is appealing to tenants, the property will basically sell itself—no need for marketing. A desirable location guarantees a continuous cash flow and a low vacancy rate because tenants are willing to pay rent to live in that area.
Multifamily properties need to be well-located because there are many units that need to be occupied. The location itself needs to appeal to renters. This is why investors look for areas that have high-growth potential. Properties in such areas are in well-maintained neighborhoods that naturally generate a lot of demand. 
When people look for a place to live in, they don’t just look at the house itself or the amenities. They think about the community surrounding the property and its proximity to schools, hospitals, cultural centers, malls, restaurants, transportation, etc. They don’t just think about how much they like the house or whether or not it could be remodeled. Tenants think about lifestyle: what it would be like to live there.
As a multifamily investor, you need to think like a renter. Location is the one thing you can’t change about the property you own. That’s what makes it so important. Location is the single most important driving force behind a property’s value. 
But what makes a “good” location? There are many factors to consider. For example, the majority of today’s homebuyers are millennials, so investors should consider appealing to this demographic. Multifamily properties that are close to good schools, transport links, and peaceful communities are desirable for millennial homebuyers.
The quiet, suburban location may appeal more to boomers and may therefore not be as profitable.
The definition of a “good” location varies from one person to another. But when choosing a multifamily property to invest in, think about what that community or area might look like in the future. If a place is still developing, then there’s room for improvement. That area may have the potential to bring in more people in the future. Cities and communities are always changing after all.
This means it’s not just the present amenities that matter, but also the future ones. Look out for plans for new development within the area. If there are plans for new civic infrastructure, schools, hospitals, public transportation, and major employers—then that area may be worth looking into. 
Single-Family vs. Multifamily Investing
Some investors struggle to choose between a single-family and a multifamily investment property. This may be because they do not understand the distinct benefits of each choice. Keep in mind that both of these options have incredible advantages. Each side provides a different exit strategy, management style, and income potential. 
Learning about the ins and outs of single-family and multifamily investing will help you make the best decision. At the end of the day, it is all a matter of personal preference, budget, and goals.
Benefits of Investing in Multifamily Real Estate
A multifamily real estate property has more than one unit under a single roof. This provides some distinct advantages that multifamily investors can enjoy. For example, investors can expect a bigger cash flow since it generates monthly income from multiple tenants. It’s easy to see why this investment type is appealing to a lot of real estate investors. Through a single investment, one can generate a much larger income. Investors even have the option to live in one unit while they rent out the others. 
With a larger pool of tenants, multifamily properties are less risky. It’s not the same as single-family units where income is lost when the home becomes vacant. Multifamily properties have multiple units that provide a continuous cash flow. It is a very flexible type of investment that offers multiple streams of income.
Multifamily properties are also ideal for property management. These properties could generate enough income for you to hire a property management company. This means you do not have to handle day-to-day operations or emergency situations. You can turn it into a passive investment and minimize your involvement. 
Not to mention that multifamily properties also offer several tax benefits. Investors are able to depreciate their property and offset a great deal of the rental income they collect each year.
Of course, no investment is perfect. Multifamily properties are more expensive, meaning they are harder to acquire for beginner or single investors. They are also more costly to maintain because you have more units to take care of. Taking on the role of landlord is also less than ideal for a lot of investors because it means you have to deal with different tenants as well as emergency situations.
These problems can be solved through multifamily syndication, which we will talk about later on. But first, let’s compare multifamily properties with single-family real estate investment.
Benefits of Investing in Single-Family Real Estate
Single-family real estate investing has its own set of benefits. For starters, these properties are more affordable since they are smaller and only have one unit. They are more accessible to single investors because of the lower expenses. While multifamily properties usually have a 25 to 30 percent down payment, single-family units only need 10 to 15 percent for the down payment. They are also cheaper to maintain, repair, and renovate. Long-term maintenance costs are lower compared to multifamily properties. They also tend to have more affordable insurance rates. 
Single-family properties are normally used by the owner for their occupancy, but of course these properties can also be rented for a monthly income.
Easier to finance and easier to manage, single-family properties definitely have their place in a real estate investor’s portfolio. However, they also generate a smaller monthly income. There is also the risk of not having any income at all if the renters decide to move out. So until the place can be occupied again, investors don’t have any cash flow from this investment.
Multifamily investing is not for everyone. Many investors have no interest in taking on the role of landlord, especially for something with many units and tenants. There’s also the problem of purchasing something so expensive. Multifamily properties are out of reach for a lot of investors. But multifamily syndication solves a lot of these issues.
Multifamily syndication is another way to invest in real estate—and it has certainly grown in popularity in recent years. If you have been turned off by the idea of becoming a landlord, then this might be the investment strategy for you. Whether you are too busy to manage a property on your own, or are just not interested in handling tenant concerns, multifamily syndication is a viable option for you.
Multifamily syndication is when multiple investors pool their money to purchase a single asset. A syndicator, also known as the sponsor, puts the deal together, handles the financing, and then looks for passive investors to participate. Once the deal is closed, the syndicator also manages the investment. Passive investors only have to supply the capital in exchange for equity in the real estate and monthly cash flow. 
Since the syndicator is in charge of managing the property, investors don’t have to play the role of landlord. It is a real passive investment that also allows investors to purchase properties that they wouldn’t be able to afford on their own. This is why multifamily syndication has become so popular. It is safer and provides a consistent income.
Some syndication deals are limited to accredited investors, while others allow investors to participate as long as they have enough knowledge on real estate investing.
Investors love participating in multifamily syndication because of its passive nature. They don’t have to be involved in the property or worry about emergencies. You can even be selective of the properties you want to invest in. It’s not like real estate investment trusts (REITs) or a blind fund. 
If you purchase a multifamily property on your own and then hire a property management company to take care of it, it is still not as passive as simply participating in a syndication deal. Most of the decisions are done by the syndicator, including choosing the real estate property to purchase. You can choose which deal to participate in, but don’t have to worry about all the other details.
Syndication allows investors to take advantage of the benefits of owning real estate, but without the responsibilities that normally go along with it. 
Work With BAM Capital to Implement Our Award-Winning Multifamily Investment Strategy & Grow Your Wealth
BAM Capital lets investors enjoy an award-winning multifamily investment strategy that grows your wealth through syndication.
Working with BAM Capital makes it easier to invest in multifamily real estate. This syndicator has a consistent track record and a solid business plan. You no longer have to look for an investment property by yourself.
BAM Capital is an Indianapolis-based company that has a strong Midwest focus, prioritizing Class A, A-, and B++ multifamily properties. Their main goal is to mitigate investor risk while providing a safe and passive investment for their investors. 
BAM Capital negotiates the purchasing and financing of high quality multifamily properties on behalf of passive investors. But what truly sets BAM Capital apart from other multifamily real estate syndicators is their local expertise. They have developed strong relationships and connections with sellers, brokers, and builders in the Midwest area, providing them with expert knowledge on the assets being purchased for apartment syndication.
BAM Capital utilizes a vertical integration model that mitigates investor risk and creates forced appreciation. This strategy has worked wonders for the company so far. In fact, BAM Capital currently has $700 million AUM and 5,000 units. 
Accredited investors can schedule a call with BAM Capital and invest today.
BAM Multifamily Growth & Income Fund III
BAM Capital created this fund in order to yield consistent and reliable cash flow, long-term appreciation, and accelerated tax benefits. The fund aligns with BAM Capital’s demonstrated track record of successful multifamily investing by continuing to implement our signature investment thesis, now in fund format. The fund aims for greater overall returns and lower risk through a multi-asset diversification strategy.
- Consistent passive income
Lower-risk assets with in-place cash flows with the ability to distribute preferred return after acquisition.
- Significant tax benefits
A cost segregation analysis allows for accelerated deprecation to years of ownership. This large passive loss gets passed onto investors through a K1.
- Vertically integrated company
In-house property management and construction allow for predictable cost reduction and value add.
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