How to Mitigate Risk When Purchasing a Multi-Family Investment Property

The global real estate market reached a value of $3.69 trillion in 2021.

In recent years, many people have turned towards newer forms of investing. Cryptocurrency has become very popular with currencies like Bitcoin and Ethereum showing a lot of potential, but investing in property may still be the best way to generate income.

Any property investment can have good returns. As a real estate investor, there are plenty of different types of properties you can invest in, with multi-family properties having excellent potential. With that being said, as with any investment, there are still risks involved.

For a rundown of some of the best ways to mitigate risk when investing in multi-family properties, keep reading.

Choose the Right Mortgage

When investing in real estate, the mortgage is one of the most important aspects. Many people simply think having a lower interest rate is better as you’ll be saving more money, but there are several other factors you should consider.

Model the EV at the End of the First Mortgage Term

Before investing in a property, you should calculate the EV (economic value) of the property at the end of the mortgage term. It’s also a good idea to calculate the potential future EV.

The EV of every property is different, depending on the property itself, the banking institution involved, and the economic parameters of this institution. 

Consider a 10 Years Term

When you do invest in property, you’ll have various mortgage options. While a shorter term such as 5 years has its appeal, there’s less risk with a longer term. In the US, 10-year mortgages are common among wealthy investors for this reason.

With 10-year terms, there’s less risk of adverse consequences that can be caused by increasing interest rates.

Active Portfolio Management

In the world of real estate and finance, things can change very fast. Many people only assess a property’s financial analysis when they purchase it. You’re much better off doing this regularly – at least annually, if not more often.

Doing this can make it easier to predict risks, and you can then make adjustments as you see fit to help mitigate them. This could include things like saving more money, increasing rent, or finding new financial partners.

Contingency Fund

Money management is crucial whether you have just one investment property or several. If you can’t organize your finances and stick to a budget, you’ll struggle to make profits.

From your monthly income, as well as the income from your property, you should always set up a contingency fund. You never know what’s going to happen, so if you ever get caught with an unexpected expense or you experience any cash flow issues, a contingency fund could come in very handy.

You can bolster these funds through things like a small business or side hustles if you have the time to work on them.

Partnership

You don’t always have to invest alone. While many people prefer this, it also means that 100% of the risk is on you.

By investing with a partner, you immediately split the risk between the two of you. This will also decrease the risk for banks, which is ideal. On top of mitigating risk, having an investing partner increases purchasing power, and can provide better financing or refinancing solutions.

Use Market Analytics

Experienced real estate investors know that the time at which you invest will have a huge impact on your success. You always want to invest in a strong market for the best results.

For any given market there are various metrics you can analyze to help make decisions. Doing this regularly will help you buy at the best time.

One of the first things to look at is overall market growth – primarily the population increase. If more new people are moving into the market, the demand for rental properties will increase.

Population growth also ties into job growth. A higher job rate tends to lead to more demand for rental units. Along with this, the price of rent will generally go up.

Stick to Conservative Underwriting

This is an ideal way to always ensure you have a contingency fund as mentioned above. You can do this by looking at past rent growth along with projected rent growth. You should then underwrite lower than these values.

With property ownership, there will always be issues that come up almost out of nowhere. This provides a margin so that anything above the underwritten growth can be put aside for use in an emergency.

Something you should also look at is the cap rate (capitalization rate). This is a measure of the profitability and potential returns of a property. A high cap rate is better for investors as it indicates a low purchase price, while a low cap is better for sellers as it indicates a high sale price.

A high cap rate is typically a sign of more risk. This tends to be because an older property with more credit-challenged tenants will often have a lower price.

Diversification

With real estate investing, or any other kind of investing, one of the riskiest things you can do is to invest in just one market. If you put all of your money into one area, and something causes it to collapse, you’ll be in a bad position.

It’s much safer to split your finances between various types of investment properties; that way if there is a problem with one market, it will only affect a portion of your portfolio. In all types of investments, diversification is one of the best ways to minimize risk and ensure success.

You could also generate a bit of extra income through a side hustle. Doing freelance work in something like SEO (search engine optimization) can bring in some extra cash.

Investing Securely

Whatever you’re investing in, minimizing risk is crucial. Make sure you think about things like your mortgage and the market to ensure you’re making the right decisions.

At Cashflow Tribe, we help educate and inform people so that they can make the best investment choices for their future. We offer a range of memberships – click here to sign up for a free 14-day trial today.

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