Residential real estate properties that feature more than one unit are regarded as multifamily property. The multifamily properties that offer the lowest down payments are either a duplex, triplex, or four-plex while five units and above are move up to the class of commercial financing.
As with any income-producing property, the advantage is that the rented units should be able to repay the mortgage from the income.
The success or failure of income property hinges on the generated income to satisfy the debt obligation. Your investment will either increase or decrease based upon this principle of having your tenants pay the debt.
Reasons People Invest in Residential Income Property are:
Cash Flow – While the mortgage remains fixed rents tend to increase over time which puts more cash in your account.
Appreciation – Equity builds up over time
Tax benefits – Ability to depreciate the property with tax deductions
Leverage – Over time as equity builds up it may help you buy another property
Safety – Unlike the stock market, real estate has consistently appreciated when held over time
Financing – 2 to 4 unit buildings are eligible for conventional financing ranging from 20% down to zero down
Over 90% of millionaires made their fortune by investing in real estate
How to improve cash flow:
Buy a property with lower than average market rents
Make Improvements in the units ( granite counters, tile flooring, cabinets, dual pane windows )
Coin Operated Laundry
Rent Garages out for an additional income
Which Properties to Buy
2-3 bedroom units tend to have a more stable tenancy. Conversely, 1-bedroom apartments tend to attract more of a transient population, which means the turnover is typically greater.
Large units with more bedrooms tend to fetch a better rental price, and consequently have better price appreciation.
Look for income properties that bring in 1.5-2% of the purchase price or greater.
(Example: Purchase price: $200,000. All units collectively should bring in $3,000/mo or more. That would be $750 per unit on a 4-plex)
Which Rental Properties to Avoid for Income Property
Properties that tend to not appreciate as much as detached buildings are condos, townhomes, buildings with all 1 bedrooms, functional obsolescence, older structures with low ceilings, separate septic tanks
Other Helpful Tips
It is very important that you be aware of any changes in landlord tenant law in your state.
Use 1031 exchanges to defer capital gains taxes when you sale for a profit
Build up your holdings so you can live off the generated income
Income, location, and condition determine the property’s valuation.
There are definitely other elements that play a role since every location is unique but for the most part these are some good guidelines to follow.
Keep in mind that like with any investment, there is always a risk involved. Please consult with your tax adviser about the potential pros and cons regarding capital gains and property taxes.