You may have heard stories about people who get rich quickly by investing in real estate. For example, Steven Taylor landlord, a California-based professional who has completed transactions of $500 million in total, got his start when he bought his first property at the age of 24 and resold it a few days later.
However, for every success story such as this one, there are also cautionary tales of people who rushed into real estate investment without really knowing what they were doing and suffered losses as a result.
Investment in a multifamily property can be a good idea. It just takes careful planning and consideration beforehand. Here are some important things you need to think about before taking the next step.
1. Your Taxes Will Become More Complicated
Not only will you require a form that may be new to you (Schedule E) to complete your taxes, you will also have to read an entire publication on residential rental property from the IRS to be sure you are in compliance with the applicable rules.
2. You Will Require a Larger Down Payment
Financing a multifamily property can be more complex than financing a single-family home. A bank may insist upon a 25% down payment for a multifamily property. This is true even when using the potential rental income to qualify for the purchase.
3. You May Save by Living on the Property
Choosing to live on the property yourself may help you to qualify for owner-occupied financing. This may help to reduce the amount you are required to pay down by at least 5%. However, this only applies if the property you want to purchase has four residential units or fewer.
4. Professional Management May Help
If this is your first apartment building purchase, you may want to consider hiring professional property management. There is a fee involved in this, typically amounting to about 3% to 10% of revenue from rents, but it may be worth it to avoid having to handle repairs and other day-to-day issues for tenants.
