Many first-time property investors have the same sort of dream before they start investing: buy their first multifamily investment property at a great purchase price, then sit back and enjoy receiving regular passive income from their property ownership for the foreseeable future.
The next step is to wait for price appreciation of the investment property so that they can refinance or sell it at a handsome profit!
The foregoing theory works fine in principle; after all, real estate investing in real estate is the primary source of single- and multi-generational wealth in the world!
Yet being a property investor is not that easy
In practice, however, it’s not quite so simple to be a successful real estate investor and any first-timer will need to think carefully about the implications of property ownership—as well as being extremely well prepared for the exciting investment journey ahead.
Indeed, many rental property investors can feel overwhelmed by the complexities associated with finding the right property and securing passive income.
Therefore, all first-time property investors need to approach property ownership with a strategic mindset, so, in this article, we'll share with you 5 great real estate tips which should be considered before making an investment in multifamily real estate.
1. Thoroughly research the multifamily investment market prior to buying a property
Comprehensive research enables first-time property investors to gain valuable insights into overall investment market trends and the specific submarket where investment is planned.
This knowledge allows real estate investors to make informed decisions and increases the chances of success for any property investor.
Choosing the right location for investment
Many first-time investors prefer to acquire properties close to their homes, although it’s important not to limit oneself geographically.
By exploring investment opportunities outside immediate areas, it’s likely that a wider range of options may be found. Up-and-coming markets in different locations can offer significant potential for growth and profitability.
Asking and selling prices of investment property; local area improvements
Potential investors should familiarize themselves with asking and selling prices in several locations under consideration, as well as demand for certain amenities, such as schools, shopping centers, and recreational facilities.
Additionally, consider factors such as proximity to public transportation and parks, as these can greatly impact the desirability and value of a property.
Awareness of major infrastructure projects initiated by local authorities or planned new residential areas planned by the private sector is also important, as these new developments may create interesting property investment opportunities
Before starting to invest, a comprehensive understanding of market dynamics and trends and other factors will enable first-time property investors to identify properties that align with their investment goals and criteria. It also helps determine the potential return on investment and assess any risks involved.
2. Always stay up to date with real estate market trends
Property markets are constantly changing, and the value of a property can fluctuate over time.
By staying up-to-date with market trends, first-time investors can identify emerging opportunities and make timely investment decisions. This information will be particularly valuable for investors to maximize profits and enhance the capital value of such real estate investments.
A property investor, and even property manager, needs to stay informed about industry news, and economic indicators and regularly read property market reports.
It’s also worthwhile following reputable real estate websites, attending seminars and conferences, as well as networking with seasoned property investors who can provide valuable insights.
Identify emerging property trends
By remaining vigilant and knowledgeable about the market, real estate investors can identify emerging trends, understand the factors affecting property values and anticipate potential risks.
Important property market terminology
Understanding risks and matters such as investment yields and capital value drivers is paramount. Therefore, all first-time investors should be familiar with key concepts such as capitalization or cap rates, gross and net yields, leverage, Rate of Return, IRR, and cash flow.
These metrics will help assess the profitability and potential returns of a property and assist investors in setting realistic parameters and criteria for their real estate investments.
Exercise prudence and patience when looking for property investments
In all cases, it’s important to have a discerning eye when evaluating potential investment opportunities.
Although it may be tempting to jump at the first property that comes along, exercising patience and turning down deals that do not meet the set investment criteria can help investors from making costly mistakes.
It is better for first-time property investors to delay a first purchase and wait for the right opportunity that aligns with pre-set goals and financial projections.
3. Arranging finances to facilitate property investment
Preparing and arranging finances is an essential step before venturing into multifamily property investment, it will really help in terms of property taxes and all end-of-year ventures.
Objectively assessing one’s current financial situation and taking steps to strengthen it can significantly impact the ability to make a successful property investment.
By doing so, investors can increase their chances of qualifying for a better mortgage loan interest rate, which can significantly impact overall investment costs, specially if it's a first rental property.
Investors can evaluate their financial standing and determine if there are any actions that can be taken to improve it. This might involve consolidating debts, improving a credit score, or reducing unnecessary expenses.
Increasing the initial deposit available will help reduce the mortgage loan amount
Also, saving up more money to accumulate a significant amount of deposit helps.
A larger deposit can not only improve the chances of obtaining a more favorable interest rate but also reduce the amount borrowed, resulting in lower monthly repayments and less financial strain on the investor.
Net income from the investment property
Calculating the expected net income is essential to ensure that the rental income covers the loan repayments.
Net income is determined by subtracting operating expenses, such as, for example, any repairs or maintenance expenses, pest control costs, as well as fees paid to property management companies or leasing agents, from the gross rental income.
It is vital to have a positive net income to ensure any property investment remains financially viable.
Don’t forget to allow for property income taxation
In addition to loan repayments, it is important to consider the tax implications of the property investment.
Take into account any liability to taxation and the impact it will have on net income. Governments more often than not tax rental income and understanding the tax regulations and tax deductibles in the relevant jurisdiction will help real estate investors accurately calculate their net income, complete tax returns and plan for any tax obligations.
4. Key conditions and terms of a property loan
Loan agreements, obviously, vary in the amount of loan being sought but also terms and conditions and it is vitally important to understand the key conditions set by the loan provider, specially when considering a first investment property.
Fixed or variable interest rate
To start, consider whether the interest rate on the loan is fixed or variable.
A fixed interest rate provides stability and allows the first-time investor to plan finances more effectively since the rate remains constant throughout the loan term.
On the other hand, a variable interest rate is subject to market fluctuations and can change over time. For investors opting for a variable rate, it must be ensured that there is enough margin between net income from the property and loan repayments to accommodate possible interest rate increases.
Build into the underwriting a higher interest rate
The impact of a slightly higher interest rate on the loan can have implications for the net income produced by the property.
A reduction in net income will potentially affect overall profitability and, therefore, the potential impact of a higher interest rate should be considered when an investment is being planned.
Factoring the possibility of an increased interest rate into the initial feasibility analysis will help assess the financial viability of the investment and ensure that net income remains positive.
First-time investors should also pay attention to any hidden fees or costs that may be included, as they can impact overall expenses and affect the investment's profitability.
Read the small print to familiarise yourself with the lender's policies and guidelines to ensure that their requirements are complied with throughout the loan term.
Make sure the multifamily investment property can be rented
In fact, some loan providers may have specific policies or restrictions regarding the rental of properties they finance.
If they do allow the property to be rented out, they may slightly increase the interest rate to compensate for the perceived higher risk associated with rental properties.
Rental properties come with their own set of challenges, such as tenant turnover, potential property damage and the need for ongoing property management.
The higher interest rate helps mitigate the lender's risk exposure in such situations.
5. Operational management of the property asset
The first-time investor needs to decide how the property will be managed after acquisition.
If self-management is chosen, owners need to be prepared to be available and responsive to tenant queries and concerns at all times.
This means being on call 24/7 to address any issues that may arise. They may need to handle tenant complaints, arrange repairs and maintenance, coordinate with contractors or workmen, closely monitor vacancy rates and even find new tenants if the current one(s) decides to move out. This level of involvement requires time, effort, and effective communication skills to ensure a smooth and satisfactory experience for the property owner and tenants.
Effective rental policies help maximize income
On the other hand, engaging a property management company, still means that owners should have a basic understanding of tenancy laws and legislation. This will help navigate the legal requirements and obligations that come with being a property owner/landlord.
Understanding the tenant's rights, security of tenure, eviction procedures, and maintenance responsibilities is required to ensure compliance with the law and avoid potential legal issues.
It is also the responsibility of the real estate property owner to have a general understanding of the rental process. This includes knowing how to screen and select tenants, handling security deposits, obtaining credit reports, conducting property inspections, and adhering to local regulations and requirements.
Owners can then make informed decisions and optimize the returns from the investment property.
When considering engaging with a property management company, it is important to carefully review the terms and conditions of any contract or agreement.
Pay attention to any hidden fees, restrictions, or limitations of responsibility.
Some property management companies may charge additional fees for services beyond the basic management tasks, such as advertising, tenant screening or property maintenance.
All first-time property investors should look for as much guidance as possible
There are clearly a number of other issues for the first-time property investor to consider when thinking about making a, hopefully, lucrative investment into real estate.
But, by following these 5 great tips, will undoubtedly help make sure the investment journey heads in the right direction!