Congratulations! You are thinking about your future and hoping to profit from your investment. This is an exciting step and while there can be huge benefits, just like with any investment it is important to do your homework and decide if it is the right option for you. Multi-families are 2-4 unit buildings, 5+ will be considered commercial property.
Here are some preliminary points to think about:
1) Are you ready to take on the responsibilities of becoming a landlord? If you are just starting off it may not be financially sound to hire a property manager or a maintenance company to take over responsibilities until you start seeing a profit. Here you can find some important information to ensure you are complying with Massachusetts state law, protecting yourself and the tenants. Don't forget you need to take care of the snow removal - and as we Northeasterners know this can be a frequent task!
2) Can you afford the property? Working with a Mortgage Broker right off the bat will allow you to understand what you qualify for and what options you have for loans. If you are a first time home buyer you may qualify for an FHA loan that allows for a 3% down payment if it is owner occupied. If you would like a referral for some reputable brokers please do not hesitate to reach out to me! Also keep in mind that the bank may have approved you for a loan for X amount, but try to track your personal income and expenses to see what you are comfortable taking on.
3) How organized are you? Staying organized is KEY and I cannot stress this enough. I like to use Excel spreadsheets to keep track of my active and archived tenant information, finances, improvements, and much more. There are great courses and tutorials you can find online to learn programs or even expand your knowledge with them. The millennial in me likes to keep my forms (leases, lead paint forms, etc.) online in a protected drive where you can track and access easily. While you may have some physical documents on hand that you will have in a locked filing cabinet - I like having everything online. Make sure all sensitive information is protected and CANNOT be accessed by any other party.
4) Are you handy? As mentioned above - if you are just starting off you may not be able to afford to pay a handyman to help you out with all of your improvements. I recommend asking around with your family and friends to see if there is someone who can teach you the ropes to ensure your improvements go smoothly and are SAFE. If you do not know someone who can help then places like Home Depot, for example, offer DIY classes!
So, you read the above points and feel confident in your decision to move forward? Great! Now you are ready to start shopping.
You have met with a mortgage broker and you understand what the bank will be willing to loan you. Based off this number and your personal budget you have made a decision on what price range you would like to stay in.
One question you may have is - should I purchase a 2, 3, or 4 family home? This can definitely be a case by case basis, but I will lay out an example for you so you can see the math..
Example Loan:
Down Payment: 20%
Loan Terms: 30 Year Fixed Mortgage
Interest Rate: 3.57%
2 Family: Sold $441,500
Mortgage Payment (monthly): $2,000
| Unit | Beds | Baths | Ave Rent | Actual Rent |
| 1 | 1 | 1 | $1,775 | $1,350 |
| 2 | 1 | 1 | $1,775 | $1,350 |
| TOTAL | $3,550 | $2,700 | ||
| PROFIT | $1,550 | $700 |
3 Family: Sold $520,000
Mortgage Payment (monthly): $2,355
| Unit | Beds | Baths | Ave Rent | Actual Rent |
| 1 | 2 | 1 | $1,950 | $1,300 |
| 2 | 2 | 1 | $1,950 | $1,150 |
| 3 | 1 | 1 | $1,775 | $875 |
| TOTAL | $5,675 | $3,325 | ||
| PROFIT | $3,320 | $970 |
4 Family: Sold $535,000
Mortgage Payment (monthly): $2,423
| Unit | Beds | Baths | Ave Rent | Actual Rent |
| 1 | 1 | 1 | $1,775 | $1,200 |
| 2 | 1 | 1 | $1,775 | $1,300 |
| 3 | 1 | 1 | $1,775 | $1,300 |
| 4 | 1 | 1 | $1,775 | $1,300 |
| TOTAL | $7,100 | $5,100 | ||
| PROFIT | $4,677 | $2,677 |
CONCLUSION: Based off of these REAL properties in Framingham that have sold in the past 6 months based on both average market rate and actual income - the 4 family is the most profitable and a 2 family is the least.
Although the numbers may speak to you - just keep in mind:
- More units = more attention to property management
- More units = more potential repairs and unexpected costs
It is all about deciding what the best fit for you - all are great options!
When Making An Offer:
- For most people, it is in your best interest to put in a contingency to review the leases to confirm the rental income, any deposits currently held in escrow, and learn the lease terms.
- It is advised that you put in an inspection contingency. There are some cases that people waive an inspection, but for most cases this is NOT advised.
Investment Improvements:
- The first improvements you should focus on are any repairs involving safety. For example: Lifted floor boards, broken hallway lights, broken windows or doors. Your inspector should be able to point out such issues, so take notes!
- If you want to be on par with the market rental rates you can improve your units at a lower cost with a deep clean, a new paint job, replacing cabinet handles (if needed), and other small upgrades.
- Although you may be excited for your new property and want to make it the best it can be, be mindful that you are taking improvements slow and not spending more money than you have or are getting back in rental income. Improving cosmetics too quickly can put you on a fast track to debt.
Happy shopping! As with any big purchase it is always important to do your research, set realistic goals, and read everything before signing it!
If there is anything else you may want to know about the process please reach out to start the process!
