A few years ago, traditional housing dominated the real estate market. However, after the Great Recession crippled the American economy, families began to turn to more affordable housing. These forms of affordable housing usually consisted of some sort of multifamily residential such as apartments and condominiums. In 2013, new multifamily residential construction increased by about 25%. With demand reaching record highs, investors sprung into action in an attempt to turn a profit by financing these properties. How much does it cost to finance these properties, and is the investment even worth it? The housing market is evolving, and investors need to know these answers in order to stay ahead of the market.
Types of Multifamily Properties
There are two main ways that an investor can finance a property: the property can either be financed from scratch and built up, or an existing building can be financed for remodeling. Trying to remodel an existing multifamily property is typically much less expensive, but there is more risk involved. On the other hand, financing a property from scratch is much more expensive but allows you total creative control in the construction process. In addition to the two main ways of financing, there are also two main types of multifamily properties that are typically built: apartments and condominiums. Physically there is no major difference between a condo and an apartment other than ownership. In an apartment, one owner owns the whole building and each tenant pays that owner rent. However, in a condo each tenant owns each individual living space. This gives investors a little extra creative control with condos as they can choose whether to rent the living spaces, to sell each individual space, or to sell only a few and rent the rest out. The decision of what type of multifamily property you would like to finance plays a major role in price and affordability.
Affordability of Financing
Undertaking a major financial project such as a multifamily property requires strong commitment and great planning. However, there are tools that investors can take advantage of to make financing these properties much more affordable. For example, an investor could take a large loan out in order to ease their immediate financial burden. These loans typically range from $250,000 to $5 million with an interest rate typically ranging from 8 to 10%. These loans offer a term length of about 2 to 3 years, allowing you plenty of time to earn your money back through your property’s rent. Depending on location, monthly rent can range from a few hundred dollars to a few thousand. This means that these properties will become very profitable as long as the investor can survive the initial financial hit that comes with financing a property. Condos are typically a safer investment because they offer the investor the financial flexibility of either selling the living spaces or renting them out. In addition to choosing between investing in a condo or an apartment, an investor must choose between remodeling an existing property or buying and building one from scratch.
Regardless of what type of property you want to finance, it’s likely going to be a worthwhile investment. As millennials age and enter the workforce, the demand for buildings such as apartments skyrockets. Have a payment plan ready before you take out a loan, and ensure that you have the capital to make every payment of your loan. It may be rough at first, but if you can survive the beginning and pay back the loan, you will be set. Money from your tenets will begin to flow in, justifying your long term investment. Although it may look like a steep price now, in today’s market this investment is more than justifiable if an investor can afford it.