Running The Numbers On Multifamily Properties

Running the numbers on a subject property are of the utmost importance; right up there with marketing and funding. You could very easily make a case that the most important aspects of acquiring a home are the numbers behind it, and multifamily properties are no exception. Not unlike their single-family counterparts, multifamily properties, or at least their viability to a respective investor, are contingent on whether or not the numbers add up; there is essentially no reason to move forward with a property in the event there is no way to make a profit. The numbers are an investor’s blueprint for success; they paint the best picture of what to expect. The more accurate the numbers, the better you will be able to predict an outcome.

Of course, to make a profit, your incoming cash flow needs exceed your costs. It’s really simple; you need to be making more than you are spending. That said, it is just as important to know how much cash a multifamily property can bring in as it is to know how much it will cost to keep it up and running. In analyzing a potential multifamily deal, pay special consideration to the associated costs, as they are different from single-family homes. Expenditures from multifamily homes will mirror those of single-family properties, but are magnified by the amount of units.

The following is a list of expenses you should expect to encounter in the event you decide to pursue a career in multifamily properties:

Vacancy: Multifamily properties must account for vacancies. As a landlord’s worst nightmare, or every investors’ in this case, non-performing properties are a significant burden on respective owners. Without a means of paying off the mortgage, the same asset that was intended to bring you financial freedom could end up costing you a significant amount. For what it’s worth, vacancies are the one cost every multifamily landlord must account for, yet never hopes to experience. Nonetheless, it is better to be prepared for them.

Credit Rate: The parallels between single-family and multifamily investing are abundant, and savvy investors are probably already aware that the implications of credit scores are no different. However, few are aware that a respective credit score can account for both higher and lower acquisition costs. If for nothing else, loans will cost more for those with poor credit.

Taxes: Investors need to account for the myriad of property taxes associated with the development, purchase or sale of multifamily properties. You must be aware of what the property taxes have been on a subject property and, perhaps even more importantly, how much they are going to be once you buy the place.

According to National Real Estate Investor, “Unfortunately, some investors wrongly assume that property tax values will remain unchanged following a transaction. Although a sale will not necessarily result in a new tax value, tax assessors are increasingly trying to catch up to sales prices that exceed current assessed market values.”

Insurance: Not solely the cost of multifamily properties, investors need to account for the cost of insurance. However, there is a rule of thumb when it comes to insurance for multifamily investing: the bigger the complex, the more types of insurance you can expect to need.

Management: This cost is certainly optional, especially if you intend to run the property yourself. However, larger complexes will require an acute attention to detail and the utmost diligence to maintain. You could argue that the larger the complex you intend to run, the more important it is to hire a third party manager. It is important to note that small multifamily properties can be run without the added expense of hiring a third party manager, but the larger complexes get, the more it will make sense to hire a manager — both physically and financially.

Repairs & Maintenance While a cost nonetheless, I am convinced that multifamily investment properties have a significant advantage over their single-family counterparts in the repairs and maintenance department. If for nothing else, multifamily properties typically share one roof and one yard. The added luxury of sharing of certain amenities can really reduce costs. Consider this; it is entirely possible to collect rent from five different tenants while maintaining one roof. To put things into perspective, single-family landlords collecting rent from five tenants will have to worry about five roofs. So while the costs are still there, they are less of a burden than those associated with single-family homes.

In running the numbers on a multifamily property, it is important to account for every penny. However, more often than not, the pennies going out are more important than the ones coming in. By all means, analyze a multifamily property based on its earnings potential, but do not neglect the costs to keep it operating. In neglecting the costs associated with a multifamily property, you are doing yourself and your investment company a severe disservice. Again, it is just as important to account for costs as it is for cashflow.