If you are considering investing in multi-family housing (or have already gathered a portfolio), you are likely aware of some of the benefits that may accompany your purchase. Ownership of multi-family housing units can offer positive cash flow, excellent tax advantages, economies of scale, and other welcome opportunities.
Looking at the capitalization rate (or cap rate) is a great first step in evaluating a potential acquisition. Cap rate is the initial rate of return that a property is expected to bring, and you calculate it by dividing the NOI (net operating income) by the property's value. Different property classes typically have varying cap rates, and that is due to the difference in risk. There is often an inverse relationship between cap rate and price. If you buy a Class A apartment complex (always a newer property with more amenities), it will have a high price, but because it will have higher income and higher expenses, it will also have a lower cap rate.
Potential appreciation is another excellent metric for properties, particularly if you consider those that are not newly built. If you buy Class B or C assets and spend some capital on improvements, you may be able to increase the value and, ultimately, the income level.
The multi-family housing sector has subcategories, each of which has different advantages and risks. In addition to the various classes based on age and condition, you can choose to direct your efforts toward the size of the complex, retirement-focused communities, student housing, or other specialties.
There are several answers to the question of how to identify attractive properties in multi-family housing. As with most real estate investments, some are straightforward, while others involve some digging, and still others require a bit of luck. Several listing services and realtors offer access to the properties that are "on the market," and there is plenty of competition for the most desirable prospects on those listings.
Some experts advise taking a different route, digging for treasure on your own. You can do this in a couple of ways:
Be prepared for opportunities by having access to financing before you need it. That doesn’t mean you need a big cash cushion sitting in the bank, but if you are ready to say yes when a great property comes to your attention, you won’t have to scramble and possibly lose out to an investor who was a step ahead.