Multi-family investments averaged an annual total return of 9.75% from 1992-2018, according to CBRE research. That eclipses every other real estate investment, including hotels, industrial, and retail. 

Returns on multi-family real estate investment even match the stock market (the S&P has had an average annualized return of 9.8%). In comparison to stocks, the advantage multi-family investments offer is much less volatility. 

Clearly, multi-family real estate is one of the best investments for growing and maintaining wealth. This type of investment delivers reliable returns and has low risk. That’s why so many larger operators and investors are moving to multi-family housing.

As an investor, you may wish to enter this space. It’s a smart move. So, you may be wondering: How do I find and analyze multi-family deals? 

In this article, we’ll discuss all you need to do to find, analyze, and execute multi-family deals—and ultimately achieve the success you seek in real estate investing. 

Define your investment parameters, metrics, and goals

Before you look for multi-family deals, define your investment box. Decide the following:

  • Asset class: Will you invest in Class A, B, and/or C housing? Will you invest in apartment buildings, condominiums, townhouses, duplexes, student housing, and/or age-restricted complexes?
  • Market: Will you investment in multi-family real estate in primary markets, such as New York or Los Angeles? Or will you invest in secondary and tertiary markets?
  • Value: Will you look in areas where you can find great value? For instance, you can find deals with great value if renovations or better management could boost returns. Remember: You make money on the buy.  

“It’s not only important to define your investment paraments, but also the specific metrics you want to hit. Before you find and analyze deals, you must have metrics as a reference for your analysis. That way, you can see if a certain multi-family investment can achieve your goals,” states Nathan Trunfio, President of Direct Lending Partners, a provider of private loans for real estate investors. 

For example, at Direct Lending Partners, we want to find properties that deliver cash flow of 10% or higher by year two. We also want a cap rate on cost of 8.5% or higher by year two. We also look for deals to drive home 18%+ IRR. Looking at metrics like these ensures we mitigate asset risk and only enter multi-family deals that can achieve good ROI. 

In addition, you should also analyze return on capital, a profitability ratio that shows whether a specific multi-family investment will create value. Calculate to answer this question: Will the capital you deploy in this multi-family investment generate the income you seek? 

Build your network and prove you can execute

Want to know how to find multi-family deals? 

First, network with professionals in the real estate sector and industries involved in real estate, such as banking. This enables you to source meaningful deal flow.

The easiest and most important step is to build good relationships with realty brokers. They have their boots on the ground. For each of your markets, find brokers that can send good deals your way.  

“But don’t just hire any broker. Partner with brokers that are aligned with your investment strategy. If you build a great relationship with them, that’s when they’ll start to give you the real off-market deals,” advises Trunfio. 

Outside of partnering with realty brokers, connect with other professionals involved in real estate transactions. For instance, asset managers at banks know what properties may go into foreclosure, as they know the balance sheets of their underlying assets. 

You can also try direct-to-seller outreach, even in the multi-family realm. You can get lists for the following: 

  • People that have owned properties for a long time
  • Investors that live out-of-state
  • Operators with expiring debt

So, how do you build a list of motivated sellers?

Start with your network—the leads brokers and asset managers feed to you. Engage in digital and social media marketing, as well as event and in-person marketing. Put yourself out there, and you’ll find properties and sellers to add to your list. 

Additionally, do internet research and stay active on real estate websites. You can search how much buyers paid for multi-family properties and make them offers directly. This can be done via mail, call, or another creative method. 

One more way to network that gets overlooked is partnering with other operators. This allows you to expand your efforts and find good acquisitions.

“Most multi-family operators partner in some degree with other investors, whether that be through raising capital or partnering on some deals. Finding like-minded operators and combining resources is a great way to get the right deals,” adds Trunfio. 

In the end, deals will come your way if you prove yourself as a strong investor that can execute. Show that you can close and take on properties. 

“In the multi-family space, there are too many people that break out of contract or can’t execute the transaction. The more you show you can transact and will have the capital when it’s time to close, the more those people with deals will come to you. Because the people with deals need strong, reliable buyers, ” attests Trunfio. 

See whether a multi-family investment delivers value

If you want to know how to analyze a multi-family deal, it begins with finding accurate sales comps (comparable sales) and rental comps (comparable rents). The more data you can gather, the better. 

How do you uncover this data? 

For sales comps, look for properties with the following similarities:

  1. Location: This drives the market. Analyze sales of similar homes within the same neighborhood. Is the price you’re paying higher, lower, or about the same?
  2. Timeframe: Get data on the most recent sales. Pending sales give you a live look at current market prices.
  3. Property features: Analyze homes with similar style and size to the one you’re considering. Is the multi-family property in similar shape? Does it have good management? 

Furthermore, look at the price-per-door. Are you paying more or less than market value there? 

By accumulating lots of data on sales comps and analyzing those deals, you’ll know whether you’re going to pay a good price on your property. Don’t overpay!

For example, investors in San Francisco who bought in 2018 may have overpaid. At that time, nearly 52% of sales involved a bidding war, which drove prices higher. Compare that to 2019, where only 12% of sales involved a bidding war. No wonder the market declined 3.1% from July 2018 to July 2019

The lesson is this: Don’t get caught up in the market. Stick to the numbers and conservative estimates, and only enter deals that will achieve your investment goals.  Remember: You make money on the buy. 

When it comes to rent comps, you need to find similar properties, as you would with sales comps. These properties must have a similar potential performance as well. 

“Find true similarities in terms of the number of tenants, footprint, or amount of rentable property, and location. For those properties, examine rental income, vacancy rates, and expenses, such as property taxes, HOA fees, and repairs and maintenance. Get a good idea of your net operating income and calculate whether the property can achieve your defined metrics and goals,” says Trunfio. 

By doing comprehensive due diligence and analysis, you can see what you actually charge for rent, your cash flow over the years, and ultimately your profitability. When it comes down to it,  finding great multi-family deals centers around finding value. An income-based approach to your analysis will ensure you get the best deals.

Winning deals and realizing real estate investing success

To find the best multi-family deals, first define your investment parameters and goals. Then, employ a strategy to locate deals, being sure to leverage the power of your personal network. When you analyze deals, find comparable properties, use conservative estimates, and apply an income-based approach. This will enable you to proceed with only those deals that will become profitable. 

Along the way, manage real estate investment risks. You can’t let things like getting swept up in market hysteria lead you into a bad deal. Stick to the process you’ve established. 

Lastly, don’t get trapped without the funds to make a good deal. Partner with a reliable provider of capital to ensure you can close those multi-family deals with the most potential. At Direct Lending Partners, we’re ready to help you achieve success in the multi-family space.