When buyers consider the potential of an investment property, they must consider certain factors, among which is the potential it will present to future buyers or investors.
If you are investing in a multi-family building, you should consider the following eight factors.
Prior to investing in a multi-family property, buyers must understand the current market. Buying at the right time is one of the most important things you can consider. Since economies go through boom and bust cycles, potential buyers must make sure they know in which part of the cycle they are investing. It’s crucial to consider whether you are buying in a real estate market when the cost per unit is in your favour.
Before considering a specific building, you must choose the location in which you want to invest. You must understand how different locations in the city present different approaches, tenants, benefits and challenges. Prime areas command the highest rents and can withstand poor markets, while others are well-known for pest problems, which present an added expense.
What’s more, Edmonton is a growing city, and some locations, like those near the University of Alberta, are different than those in the suburbs. Every location is unique and presents its own benefits and challenges.
Potential buyers should also leverage the experience of a team of professionals, such as a realtor, real estate lawyer, mortgage broker/lender, and a property management company.
A mistake that first-time investors tend to make is that they do not involve experts in their buying decision. A property management company that is reputable and knowledgeable will be able to advise you, so you make an intelligent buying decision. They have the expertise to see things differently than an investor and can identify problems and costs that are not clear to the investor.
For example, a property management company could accompany you on your property walk-through and compile a list of costs that may be necessary. You can then use these costs in your decision process to either put in an intelligent offer or renegotiate a current one with a professional report.
Consider why you are buying the property. The obvious reason why people choose to invest in multi-family buildings is to make money. In multi-family investments, there are multiple way to get the best ROI on your investment; therefore, you should always consider the type of return you are looking for and how much risk you are willing to take.
For one, you can choose to do either a long-term hold, or a short-term hold. Prior to buying your multi-family investment property, you should discuss these scenarios with your professional property management company. You need to know what you want and what your strategy is, because not every property will work with every type of strategy.
Keep in mind that you will not know everything or be fully ready when you choose to buy your first multi-family investment property. It will always be a learning experience, so it is important that you obtain as much education as possible prior to making this commitment.
If you, as the investor, are not an expert, then you should learn to lean on your team of advisors and team members. Ask as many questions as you need before you make your final decision. Join organizations and communities that can provide you with the education you need to know about investing. Or you can reach out to a successful investor to glean some insight into what you can do to ensure success.
Prior to investing in a multi-family building, you should take into account that it is more financially beneficial to purchase a property with a good tenant base at market rents, than it is to invest in a multi-family building with a poor tenant base at above market rents.
Investors that buy a property based off of the projected income and the rents that were being achieved often don’t take into account the tenant profile. For example, what if 90% of the tenants in a property are in arrears or do not pay rent? It is always best to err on the side of caution and remember that something can look very profitable on paper, but the reality can be much different.
Building Condition and Facilities
One of the biggest things you can overlook prior to making an offer, is the actual condition of the units in your multi-family investment property. For example, many units may need significant renovations on turn over, or may even require immediate renovations.
Remember that every property will present different challenges, so it is very important that you take the time to go through the property and have the right team members to provide you with a report on future expenditures, or current issues. You should ensure that you understand all of these costs and must factor them into your offer.
Another important thing you must understand are the costs associated with owning a multi-family property. Account for your purchase cost and budget for a contingency to reflect the lifespans of the building components. Your power team can help you with this.
It is possible to predict projected lifespans on building components, but they aren’t always accurate. Some boilers could last for over 40 years, while others last for only 20. And due to a change in markets, rents can either increase or decrease. Prospective investors must make sure to take into consideration unforeseen expenses and budget for any surprises. Multi-family investments, while lucrative, do present surprises, so you should keep a contingency.
Edmonton offers huge opportunity because of its population and the potential economic growth. It can be a great time for people to consider investing in multi-family properties, as Alberta still stands as the best province in which to invest.
If you are considering purchasing a multi-family investment property, we have the resources and experience to be a pillar in your power team. If you have any questions about investing, contact us and we’ll be happy to help you.