- What to Know About Investing in Multifamily Homes
- What Services Do Property Management Firms Provide for Multifamily Homes?
- How Much Does Property Management Cost For Multifamily Dwellings?
- Who Should Consider Property Management for Multifamily Homes?
- What to Look for in a Property Management Firm for Multifamily Homes
Property Management for Multifamily Homes
Many real estate professionals see multifamily homes as a path to quickly building a real estate portfolio. This is because buying a four-unit apartment block involves just one seller, one closing and one loan, compared to four separate sellers, loans and contracts for four single-family homes. There are also plenty of prospective tenants, as more Americans are renting than at any point since 1965. The market is expected to grow due to the millennial generation, many of whom are priced out of the property market or prefer the flexibility of renting.
Key Point Module
- 1 Some owners of multifamily dwellings choose to live in one unit and rent the rest. This may let you apply for an owner-occupier loan, which generally has a lower interest rate and requires a smaller down payment.
- 2 Although multifamily dwellings are more expensive to maintain overall, the cost is less per unit than similar maintenance on a single-family home. This is because many multiunit properties share building features that require regular maintenance, such as a roof or HVAC system.
- 3 The value of multifamily housing is generally based on the potential income of the property rather than the prevailing housing market. This means that increasing rents increases the value of the property.
- 4 More tenants equals more personalities, which can be challenging for landlords to manage. A property manager can take over tenant relations for landlords, enforcing community rules and listening to tenant complaints.
However, some investors avoid multifamily dwellings because the price can be intimidating, as can the responsibility of managing so many tenants. A property manager can help solve the second problem by taking on the day-to-day management of the property, allowing investors to enjoy the fruits of their investment.
This guide covers the benefits and challenges of purchasing a multifamily dwelling and how a property manager can help investors. It also discusses the cost of property management, who should hire a property manager and how to find the right property management firm for your property.
What to Know About Investing in Multifamily Homes
Multifamily homes are defined as multiple units under a single roof or as part of a single complex. Multifamily dwellings can be just two units or hundreds of apartments in a skyscraper. Apartment blocks are among the more common multifamily properties, but many other types include duplexes and triplexes, townhouses and converted warehouses.
Traditional single-family homes that have a mother-in-law apartment can also count as multifamily dwellings. These are becoming more popular as homeowners struggling with loans look for ways their home can help pay their mortgage.
There are many benefits of investing in multifamily dwellings. There’s a larger cash-flow because each unit on the property brings in rent. The loss of income due to a vacancy is also offset, as other apartments are still occupied. Larger multifamily complexes also have opportunities for extra income through amenities such as coin-operated laundry facilities.
Multifamily dwellings also let landlords take advantage of economies of scale. Paint and doors can be purchased in bulk with a discount and used in all the apartments. In addition, a landlord only has one roof, one exterior and, sometimes, one HVAC system, which cuts down on maintenance costs. Economies of scale even translate to tax time because you only have to pay tax on one building.
Financially, multifamily dwellings also make sense. Although these properties are often priced higher, the cost per unit is cheaper than multiple single-family homes. Banks are also more likely to provide financing for these properties as they know rent will be coming in so you’ll be able to cover the loan.
This doesn’t mean that there aren’t downsides to investing in multifamily homes. These properties tend to have a higher turnover, which means more time finding new tenants and an impact on your bottom line. Plus, each additional tenant increases the time needed to manage tenant relations, maintenance and everything else that comes with owning a rental property.
Multifamily dwellings can be harder to liquidate. If you find yourself in a situation where you need access to cash quickly, the higher cost of a multifamily home means that it may sit on the market for longer. On the other hand, fewer available multifamily properties can mean more competition. This can speed up a sale when you’re ready to divest yourself of the property, though it can make it harder to find one to purchase when you’re ready to buy.
What Services Do Property Management Firms Provide for Multifamily Homes?
Managing a multifamily home can be very challenging. A property manager can alleviate that stress by taking over most of the day-to-day tasks. This includes everything in a rental life cycle, such as advertising for a tenant, showing them around the units, doing a background check, signing contracts, collecting rents and carrying out inspections. This also includes taking midnight phone calls for emergency repairs and prioritizing maintenance jobs.
Most importantly, in multifamily dwellings, property managers take care of tenant relations. There are many different personalities living close together in a multifamily house, so conflicts and clashes are bound to happen. Many landlords of these types of properties receive regular phone calls complaining about other tenants who many not follow the property rules.
Making sure all tenants understand their responsibilities is essential in a multifamily dwelling, and a property manager can help you implement these guidelines. Remember, experienced property managers have probably dealt with problems that you’ve never considered, which allows them to manage each situation efficiently.
Property managers are also experts in the laws and regulations surrounding rental housing in your location. They can ensure that all interactions with the tenants follow these rules, protecting you from litigation.
Other jobs that property management firms can perform include advising a fair rent based on prevailing market prices, keeping paperwork in order for accounting and tax purposes, making sure tenants are fulfilling their obligations and evicting tenants who break the rules.
How Much Does Property Management Cost For Multifamily Dwellings?
The main fee associated with property management is the monthly management fee, which is generally 5-10% of the gross rent. Investors can also benefit from economies of scale here, with many firms charging a lower percentage when there are multiple dwellings under one roof. Some firms have a flat fee, though this is less common.
The monthly management fee varies based on the property location and type. Be aware that some firms calculate fees based on the gross collected rents while others charge based on the rent due. An agreement based on rent due means that you must pay the firm even if your tenants aren’t paying you. Payment based on collected rents gives your firm an incentive to make sure they collect all rents promptly.
Investors must also be concerned about the cost of maintenance. Although the price of maintenance per unit is generally lower than a comparable single-family home, the actual cost for the property is higher. Many property management firms negotiate discounts with their preferred contractors, which they can pass along to you; however, others may charge a maintenance fee for setting up repairs. It’s more common for this to be included in the monthly management fee, so if you see it in the fee structure, ask for clarification.
Many management firms require you to set up a repair reserve fund. This usually comes to 100-150% of a month’s rent for all the units in the dwelling. This fund is used for everyday maintenance and repairs. You can put a limit to how much your manager can spend without your written approval. Any funds spent should also be accounted for in the firm’s regular reports.
The firm may levy other fees. A set-up fee, which gets the property entered into the firm’s systems, is quite common. Many firms also charge a leasing fee, which is the cost involved in finding a tenant, doing background checks and signing a contract. Additional fees can include lease-renewal fees and eviction fees. All expenses are also passed on to landlords, including advertising costs, repair costs and any legal fees associated with evictions or debt recovery.
Who Should Consider Property Management for Multifamily Homes?
Many benefits accrue from hiring a property management firm. Managing a property can take a lot of time, which is freed up by having someone look after the property for you. This time can be used for your day job, relaxing, or finding your next investment.
Self-management puts a limit on the number of properties you can own, as you need time to manage each one properly. There’s also a limit on location. Generally, you need to be in the same general area as the property or willing to fly or drive there regularly to take care of the many jobs required in managing a property. A property management firm removes these limits, letting you buy as many properties as you can afford throughout the country to keep building your real estate portfolio.
Property management works particularly well for people who don’t have the time or inclination to manage all the little jobs that come with a multifamily dwelling. It’s also good for people with very little experience who are worried about understanding the property regulations. People who own more than one property or a large multifamily dwelling with many apartments may find that property management ensures the property is managed properly.
However, property management isn’t for everyone. People living on the premises may not need property management because they’re already on site. This goes for people living in the main house and renting out a mother-in-law apartment and those living in one apartment in a larger block. People who have the experience and legal knowledge to manage a property or those looking to learn the skills required may also choose not to hire a property management firm. Landlords who want to keep firm control of their investment may also find that property management isn’t for them.
Money can be a key factor in deciding whether to hire a property management firm. Some investors find their profit margins are too slim to justify hiring outside assistance, although the extra rent brought in through multiple apartments generally makes property management more cost-effective for multifamily dwellings than single-family homes. Property managers can also help increase the value of your property by making sure the rents are at market value, and they can quickly finding new tenants to fill vacancies, ensuring you get paid.
What to Look for in a Property Management Firm for Multifamily Homes
Many multifamily dwellings already have an existing property manager. If the previous owners speak well of the firm, it’s worth considering them. If they already have a good relationship with the tenants, it can help decrease turnover and keep other issues to a minimum.
If this isn’t an option, start your search for a firm by asking fellow investors for recommendations. Make sure you check reviews and ask for references from both a client and a tenant. A client can give you information on their reporting and the value they bring to the property, while a tenant can provide insight into how quickly they respond to maintenance requests and other issues.
Make sure they have experience in both the location of your property and in multifamily dwellings. Property management certifications, like those offered by the Institute of Real Estate Management, are also a testament to their professionalism. Ask about the firm’s staff turnover and succession planning to ensure your property will still be looked after if your property manager retires or leaves the firm. Lastly, as you’ll be communicating with them regularly, make sure you like them and feel you can build a good relationship with them.
Multifamily homes are not without their challenges, but the possibility of quickly growing your investment portfolio and income makes them an appealing option for real estate investment. Property management firms can take over the day-to-day running of the property, taking stress off your shoulders and giving you time to spend as you wish.