Ready to dive into multifamily investing? These 3 key steps will set you on the path to becoming a successful multifamily real estate investor.
Step 1: Know Your Why, What, How, and Where
Multifamily real estate investing is an incredibly powerful way to generate long-term growth and passive income. Best of all, you don’t need prior experience to start! But before you dive in, take a moment to reflect on your motivations and resources. You need to know your why, what, how, and where. By understanding your motivations, resources, and goals, you’ll be better equipped to navigate this complex but rewarding field.
The first step involves knowing your “why”—your personal reasons for investing. Are you seeking financial freedom, passive income, or a means to support your retirement? Recognizing your purpose will drive your commitment. Next, assess your “what”—the unique value you bring to the table. Identify your strengths, resources, and willingness to learn and grow. You don’t need a lot of money, but you do need some capital, along with time (a minimum of three to four hours a week) and a commitment to learn the business. The “how” is about your determination and mindset; it’s the fuel that will push you through challenges. How strong is your desire to succeed? How badly do you want to escape your job or leave financial legacy for your family?
Finally, consider your “where”—where should you invest? To minimize risks and leverage familiarity, begin your search within a three-hour drive radius from where you live. If local prices are high and you need to search further, seek mentorship or specialized training rather than going it alone. This thoughtful introspection sets a solid foundation for your investment journey, guiding you with clarity and purpose.
Step 2: Basic Understanding of Multifamily Real Estate
The next step is to grasp the foundational concepts. This step will help you understand the basics of analyzing deals, calculating cash flow, and determining your return on investment (ROI). By mastering these fundamental skills, you’ll be better equipped to make informed decisions and maximize your profits.
Analyzing Multifamily Real Estate
- Cash Flow: Knowing how to calculate cash flow is crucial. This figure represents the amount of money left after accounting for all income and expenses, including debt service. Aim for a return higher than 1-3%. In multifamily investing, a good target is to double or triple that return.
- Return on Investment (ROI): This measures an investment’s profitability, calculated by dividing the net profit by the initial investment cost. A 1-3% ROI is not ideal; multifamily investing often offers much higher returns.
Key Investment Terms
Key terms such as cash flow, cash-on-cash return, and cap rate are part of the vocabulary you’ll use regularly.
- Cash Flow: The net amount of cash being transferred in and out. Positive cash flow indicates the property is generating profit.
- Cash on Cash Return (ROI): Your return on investment.
- Cap Rate (Capitalization Rate): A measure used to evaluate the potential return on an investment property. It’s calculated by dividing the NOI by the property’s current market value.
- Net Operating Income (NOI): The total income generated from the property after deducting operating expenses.
For more key commercial real estate terms, check out 18 Key Commercial Terms You Must Know.
Guiding Principles of Investment
Understanding key guiding principles will further your ability to identify and seize opportunities.
- Set Investment Criteria: Develop guiding principles for your investments to ensure you only buy properties that fit your criteria. This includes factors like location, property size, and potential for appreciation.
- Force Appreciation: Identify opportunities to force appreciation. Forced appreciation is the increase in a property’s value due to improvements, rent increases, and increased income. As you raise rents and make improvements, your property value increases, creating potential for substantial profits.
Explore these principles and more in my best-selling book, Commercial Real Estate for Beginners. Get your free copy here:”: Commercial Real Estate for Beginners
What You Don’t Need
Here’s what you don’t need to get started in multifamily investing:
- Real Estate License: You don’t need a real estate license to get started. In fact, as a beginner, having a license increases your liability. By law, a licensed individual is considered an expert. Without experience, you risk facing harsh consequences if things go wrong.
- Experience in Single-Family Rentals: No previous single-family investment experience is required. Most of our successful students began their journey straight into multifamily investing.
- College Degree: No need for a degree to succeed in this field.
- Wealth: Many students start without being well-off or rich and find success.
- U.S. Citizenship: Even non-citizens can buy multifamily real estate in the U.S.
Pitfalls to Avoid
These common pitfalls can be major setbacks:
- Don’t Fall in Love with the Property: Focus on the deal and the numbers. A beautiful property isn’t worth it if it doesn’t cash flow or have adequate ROI.
- You Can Fix a Property, But Not a Location: A multifamily property in need of repairs, in a great location can succeed; a bad location will fail. Bad areas attract bad tenants who don’t pay.
- Never Buy Based on Proforma Numbers: Proformas are speculative. Always buy based on current numbers, not projections. Focus on today’s figures, as future gains are yours, not the seller’s.
Step 3: Take Action and Build Your Team
After completing the first two steps, it’s time to put your knowledge into action with these three tasks:
Analyzing Deals
Begin by analyzing local deals to practice calculating cash flow and cash-on-cash return. For help evaluating potential deals quickly and efficiently watch 3 Simple Steps to Analyzing Multifamily in 5 Minutes. If local deals don’t cash flow, explore off-market opportunities.
Building Your Team
Next, start building your team—multifamily investing is a team sport. At a minimum, you’ll need a property manager, lender, and agent. There are more team members to add later, but these three are essential to get started. Check out Beginner’s Guide to Multifamily Investing for more guidance.
Making Offers
Finally, put your learning into practice by making offers on properties. All the knowledge from steps one and two is useless if you don’t take this step. Dive into 3 Keys to Buying Multifamily Right to understand which properties to target. If you need help, consider getting a mentor to guide you through the process and avoid costly mistakes.
If you have any questions, post a comment below or text PETER to 833-942-4516.
Every Successful Multifamily Investor Has a Mentor
With these steps, you’re on your way to multifamily investing success. Start now and achieve your multifamily investing goals! Get your mentor here: Commercial Property Advisors Protege Program
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