If there has ever been a time-tested and greatest investment, it’s real estate. That’s probably why there are over 22.7 million real estate investors in the US alone.
Well, if you’re planning to become a landlord yourself, then congratulations! However, there’s a lot to learn before getting started. Let’s talk about some important tips for managing a multi-family property.
1. A Multi-Family Property Is a Business
Before you even look at properties, the first and most important tip is to acknowledge that a rental property isn’t just an investment. It’s a business. Even if your property isn’t considered “commercial real estate”, it still needs to be treated like a business.
Revenue and expenses need to be tracked like a business, your tenants are your clients, and you often need to invest money into the property in order to make more. As a landlord, you are a small business owner who is taking care of your investment. That mindset is important to success in the industry.
2. Research Properties
There are a few things that are out of your control as a landlord that could sink your investment, and one is the property itself. However, the location and integrity of the building are important factors you can take into account before purchasing.
For example, an “up and coming” neighborhood doesn’t guarantee its success, nor does a neighborhood that’s been established for a century. If the neighborhood goes down, so does your investment.
Consequently, the same goes for the building and property itself. Buying a building that’s 15 years old is a much lower risk than a building that’s from the 1800s. However, that still doesn’t come with any guarantees.
The best you can do is to mitigate your risk. Thorough inspections are an essential business expense before purchase, and a little research on the neighborhood will go a long way. Buildings near public schools, important landmarks, parks, grocery stores, and public transportation tend to be safer than those without!
3. Take Your Budget Into Account
Make sure you are buying what you can afford. Now, your lender will act as a “check” on your impulses if you’re trying to reach too far, but it’s a good idea to have some extra savings after the initial purchase.
What happens if you lose a tenant next month and have to pay their rent in mortgage along with a few thousand to make their unit habitable again? Well, there’s nothing forcing your water heater to continue working during that time either.
Being prepared for unexpected expenses comes with the job. Ideally, you should have somewhere in the ballpark of $10,000 after the downpayment, lawyer fees, first insurance payment, and all of the other initial expenses.
On the other hand, you do want to reach a little bit. It’s okay to continue saving for the right property if that’s what you need to do. Crunch the numbers and look for the best deals, but make sure you can afford them.
4. Crunch the Numbers
Crunch the numbers and see how you can maximize your income before buying.
Ensure that a multi-unit will be worth it to you. Let’s say that you plan on living in a two-unit and the rental income from the other unit pays your mortgage entirely. Well, that’s worth it.
Assuming you have other income, you won’t be paying rent or mortgage out of pocket, giving you ample opportunity to save for unexpected expenses! Even if you have to pay a few hundred out of pocket, you should still be able to put money away for when you need it. So, what would a bad investment look like?
Let’s say you bought a 3-unit property in a neighborhood with decreasing home values. You spent $250,000 on it and the total rental income is $2,400 a month. Well, you’re now making under 1% of your investment on income a month (you should be aiming for close to 2%) and the property value is decreasing.
Also, you have to factor in maintenance and repair costs and, if you don’t use tenant screening services, the costs of bad tenants.
5. Don’t Forget the Contracts
Contracts will make or break your investment. Even if you want to be the most generous landlord in the world, you don’t want to have your investment stomped on, especially in the early stages of ownership.
Once you have tenants, you need a strong lease. It’s always good to have a real estate lawyer to help you with the process, but there are some general guidelines for lease agreements.
Remember, no landlord wants to evict their tenants, but sometimes, they have no choice. For that reason, you need to have the law on your side.
6. Don’t Do It Alone
Finally, you don’t have to do any of this alone. Being a landlord requires a large learning curve, especially if you try to do it all yourself.
We mentioned before that rental properties are businesses. Well, business owners work a lot of hours if they don’t have a manager.
Fortunately, there are experienced property management companies that can cover everything for you. Marketing, tenant screening, maintenance, and even rent collection, all for a small percentage of your rental income. You’ll then be free to travel, move, or work full-time while your property is taken care of!
Help Is on the Way!
Now that you know some key tips before buying a multi-family property, put them to use and get the most out of your investment! Real estate is an excellent way to earn passive income, but only if you have someone else handling it for you.
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