So you found a multi-unit property you like? Perhaps you found a single-family home that you could foresee as a multi-unit. Either way, there are some key considerations to keep in mind before you purchase a multi-unit property. Multi-units are a wonderful investments, but there are a few caveats unique to multi-units that can tie you up and prevent you from realizing the full profit they can offer.
1) Zoning
Multi-units are subject to zoning laws, which are determined by each community. Communities generally want multi-units to be in certain areas and prohibit the conversion of new multi-unit buildings in other areas. They also regulate what features a multi-unit must have. They control the location and structure of multi-units through zoning permits, which a building must have if it is a multi-unit, similar to a driver needing a driver’s license. If a multi-unit violates the zoning law, it is subject to steep fines that can be in the thousands of dollars. Unfortunately, the permit system is not perfect and many multi-units exist that violate zoning regulations. If they are sold, the new owner is responsible for the fees and construction involved to comply with the standards, even though that owner did not build or initially create the multi-unit complex. That is why it is imperative that you make sure your building is in compliance with zoning laws, even if it has existed for quite a while.
2) Costs
Maintenance in a multi-unit building is often more labor intensive than in a single-family home, because you have a larger number of appliances, more people to deal with and often a yard or a common area that no one is responsible for. A safe way to determine maintenance costs is to set aside a minimum of 5% of the gross scheduled income per unit. This is not your total cost, however–vacancy should also be a minimum of 5% of the gross scheduled income per unit. If it is an older building, bump the numbers up to a minimum of 10%. If you figure in taxes and insurance, your gross operating costs should accumulate to about 30% to 40% of the gross income. If you hire a property management group, obviously the costs are going to be a little bit higher. If the multi-unit has a yard and you don’t feel like making the trek to manage it, it is always possible to ask a tenant to do this in exchange for lower rent, or just pay him or her. Again, this would add on to your expenses.
Tell us what you think by leaving a comment. If you would like to be notified when new posts are made to this site, be sure to subscribe to the RSS feed.
IndianaInvestmentPropertyGroup.com
InvestmentPropertyMadeEasy.com
Based out of Indiana, Jay Redding is a real estate entrepreneur, with experience in single family and multi-family investing.
