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On the surface, it sounds like an easy get-rich-quick plan: Buy a multi-unit building, sweat equity into it, rent out the units, then sit back and reap the profits.
While many people have created a large nest egg with a great cash flow, purchasing such a building is not as easy as it seems. And there are pitfalls to being a landlord.
In fact, most real estate experts say that buying and managing a multi-family unit building is akin to running a small business. That's why there are a number of things to consider when purchasing a multi-family building:
- Location is critical. Where the building is located will dictate what type of rent you charge. Another consideration is how much cash do you have to buy a multi- family building? As with any real estate purchase, you'll need to cover a down payment and closing costs.
- Costs increase. When you buy a big building, the costs and fees go up. A one- to four-unit building may require a 20 percent down payment while a building with five or more units may require 30 percent down. Keep in mind that buildings with five or more units are usually considered commercial properties. You may have to pay a higher interest rate than for a residential mortgage property and additional fees.
- Management. Before you buy a large property, think about who will manage the building. If you plan to manage it, plan to spend at least 20 hours a week as you get things up and running.
- Repair. If the building is in poor condition, you'll need cash to put it in better shape. Costs go up dramatically when upgrading a large building. A new heating system could set a landlord back tens of thousands of dollars. If you're handy, you can save money by doing your own minor repairs. Then again, you will be on call 24 hours per day.
Multi-family buildings have other costs, including hazard insurance, liability insurance, grounds keeping, landscaping, trash removal, snow removal, advertising, property taxes and maintenance. The rent you charge should cover all of these, plus utilities. |
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 When shopping for a multi-family building, set a financial goal. You may aim to pay for the building in 10 or 15 years so that the property can provide you with a substantial cash flow. Another goal may be to trade up to a larger building or buy a second property when the net equity of the first reaches $50,000 or $100,000.
If you charge the maximum market rent, you may lose tenants early, since tenants always look for value. You'll get a better crop of tenants if you charge slightly below the market rate for rents.
Make sure you hire a real estate attorney, even if you're in a state that doesn't normally require them for house closings. When you buy commercial properties, there are other disclosures and issues that could put your family's finances at risk. An attorney who helps you with these issues and others is worth his or her fee.
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