Multi Family Properties
For the buyer that wants to purchase an investment property other than a single family home, below is some information on multifamily properties:
What are Multifamily Properties?
There are two types of multifamily properties that are based on the number of units which are as follows:
- Multifamily properties that have 2 – 4 units are considered residential multifamily properties and are valued by comps (or sales) based on other similar typed properties in the general vicinity of where that property is located at.
- Multifamily properties that have 5 or more units are considered commercial multifamily properties and are valued by the net operating income (income and expenses for a property) or income that is produced on the property.
How to increase the value of a multifamily property?
For residential (2-4 units) multifamily property, value is increased by substantial improvements (or rehabbing) to a property or appreciation over time.
For commercial (5+ units) multifamily property, value is increased by manipulation of the net operating income (increasing income and decreasing expenses), improvements to the property, by appreciation over time or by forced appreciation.
In valuing commercial multifamily property, a term called the cap rate is used to determine the return on the property or the investment. The cap rate is the ratio of Net Operating Income (NOI) or the rate of return on a real estate investment property to the property asset value.
For example, if a property recently sold for $1,000,000 and had an NOI of $100,000, then the cap rate would be $100,000/$1,000,000, or 10%. This would be the rate of return on the property or investment.
Subsequently, if you increase the income or decrease expenses on a property, you can directly increase the value of your property.
Ways to increase the NOI of a multifamily property?
Below are a few different ways to increase the income and decrease expenses of a commercial multifamily property:
- Increasing the rents
- Change the rental model
- Offer unfurnished and long-term rentals; and/or
- Offer furnished and short-terms rentals
- Furnished and short-term rentals command higher rents
- Filling vacancies
- Charging back utilities
- Improving the interior and/or exterior appearance of the building
- Changing Property Management
- Utilizing unused space in the property, if applicable, to charge for the following:
- Storage space
- Additional parking
- Additional amenities
- Set up a coin operated laundry facility
- Install vending machines to increase revenue
Which property type is better - Residential or Commercial Multifamily?
Every investor is different and has their own requirements and their own comfort levels.
- For the investor that is looking to be less aggressive with their investment choice and want less risk, possibly less stable returns – a residential (2 -4 unit) property may be the right fit.
- For the investor that is looking to be more aggressive and have more risk, higher and possibly more stable returns – a commercial (5+ unit) property may be the right fit.
Both are excellent choices and can be managed with professional property management.