Sometimes you don't want to be in something for the long haul, and that's ok. There's nothing wrong with that. If you're looking to invest in a short-term multi-family property, you're among hundreds of other investors doing the same thing. A short-term multi-family investment can still make you money if managed correctly.
Rethink Short-Term Multi-Family Investment at This Moment
There is a time when short-term multi-family investments work best and now is not that time. Unlike long-term real estate investments that have time to ride out bad economic conditions, short-term ones do not have that luxury. Short-term multi-family investments are usually held between three and five years. If you were thinking a shorter time frame than this, your investment would not be successful in our current market condition.
Risks Associated with Short-Term Multi-Family Investments
Right now, our market is slowly improving, but the housing market is always delayed once activity picks up, and the commercial housing market is delayed further. It will be another 18-24 months before the multi-family housing market sees a rise in activity. Therefore, you will not be able to achieve a good net operating income (NOI) before the five-year mark.
NOI is a measure of a rental property's net income from every possible source before debt, taxes, and other operating expenses have been deducted. It essentially represents the amount of cash flow and funds available to pay your mortgage. A rental property's NOI impacts its market value and financing considerations. If you are seeking a loan from your financial institution, one of the first things they'll look at is your NOI going back two to three years. A good NOI shows you'll be able to service the loan payment and still have money to spare. A bad NOI during this time is an indicator that you may not be able to meet your financial obligations should a loan be approved.
In our market condition right now, if you don't hold onto a multi-family investment for three to five years, there is a huge possibility that you will lose money. You will not get the ROI you expect. Instead, it will be much lower because your property may still be underperforming and not yet normalized. If it's underperforming, it will sell for less. You will be lucky to get your initial investment capital back.
Not every property will get you the value you expect. Unlike long-term real estate investments, you can't rely on market appreciation with short-term multi-family properties. In this case, you need to depend on the market condition and hope that it's good when you go to sell the property. You will be at the mercy of the market.
What Our Current Market is Good For
Our current market is not good to sell in, but it is great to purchase multi-family properties. You'll be able to get a good one for a great price that's underperforming so you can normalize it again. When the market is bad, you buy.
Searching for a good short-term multi-family investment with potential can take time, as you'll have to sort through a large mess of other properties. What's critical to keep in mind is that not all underperforming buildings will have the same outcome (being normalization). Therefore, you must take the time to do your due diligence and search intently. Having a short-term mindset is essential. Finding the right multi-family property for your specific goal may take you upwards of six months to one year.
In our current market, a short-term multi-family investment is not a wise choice. However, it would be a good time to buy a multi-family building because you'd be able to get it for a good price. Ultimately, the goal of your investment (short-term) will show you how to strategize your management of the building. Having at your arsenal an experienced property management team like Braden Equities Inc. to give you advice would also be a great add-on and advantage.