While single-family homes still dominate the real estate market, the reality is that it is increasingly unaffordable for the average buyer. The best choice for a growing number of people is renting, not owning. This is driving demand for apartments and condos across the country. However, potential real estate investors need to be careful, because property development is a risky endeavor. Here are 5 things you should consider when developing a multi-unit property.
The Risk versus Reward Analysis
Multi-family investing can come with an 8 percent ROI. More importantly, you’re seeing these returns regularly, since you’ll have paying tenants in at least some of the units at all times. Note that you want to simplify the management of multi-family properties. For example, you should only buy multi-units at the same address. Then they can be easily handled by the same property manager. You don’t want to take on more than you can handle, either. The solution is to start with a smaller 10 to 20 unit building instead of something larger. This is big enough to outsource to a property manager but small enough to handle on your own in a pinch.
The Difference Between Buy and Hold and Property Development
The standard real estate investor follows a buy and hold approach; they buy the building, they may fix it up to attract new tenants, or they may be required to fix various issues with the building. Then they sit back and collect the rent payments.
Property development can be very different. This approach can include buying raw land and building multi-family housing. It can also include buying run-down properties, which is common in markets such as Detroit, and renovating them and renting them out as luxury units.
You should also work with multi unit housing design services in Detroit Michigan if this is the market you were targeting. You could work with design teams like Neuman Smith, for instance, who will be able to add the amenities these tenants demand and find ways to generate additional revenue from the building.
The Snowball Method
It isn’t uncommon for someone to build a portfolio of rented out single-family homes before deciding to sell them and invest in a multi-unit building instead. What many don’t know is that you can continue the snowball and grow your multi-family property portfolio. You could upgrade the 16-unit apartment building, sell it for a profit, and invest in a larger 30-unit building. Or you could get your feet wet with a small apartment building, saving the profits every month until you can put a down payment on another small apartment building.
The Legal Concern
Earning a profit from multi-family housing is more than buying low before fixing and flipping. For example, you’re much more likely to run into problems with zoning with multi-family housing.
Can you add another building with eight more units on the back lot? Do you need to make changes to become BCA compliant or meet new building codes if you’re making other renovations to the property?
Zoning may also prevent you from converting apartments to condos. You should only work with developers and contractors who understand the local building code and planning process. The alternative is risking an order to tear down your new construction because it isn’t in compliance or lacked the necessary permits.
The Value of Marketing
Marketing is essential to successful multi-unit property development. You must know the market price, demand for rentals, and the overall neighborhood. Understand what attracts people to the area and how much they’ll pay. Then you need to market to prospective tenants via the channels they prefer. This will pay off when your vacancy rate is near zero.
Property development offers excellent long-term returns and steady cash flow when it is done right. Understand all of the factors you need to consider going in so that you minimize the risks that come with it.