Multifamily

Multifamily properties are an investment vehicle used within real estate.  Instead of renting out a single-family home, the owner can rent out multiple units - thereby minimizing risk by decreasing vacancy factors, taking advantage of economies of scale, and increasing potential cash flow.

The City of Los Angeles, as well as a significant number of its neighborhoods, are beholden to rent control laws.  Please refer to your specific city and/or neighborhood's rent control laws for details as they may vary.

One indicator of the financial health of a multifamily property is the capitalization rate, or CAP rate.  The CAP rate is a measure of how quickly the investment will pay for itself.  In order to calculate the CAP rate, take:

CAP Rate = Annual Net Operating Income / Cost or Value

*Annual Net Operating Income = Gross income minus expenses
*Cost of Value = Purchase price of property

Another indicator that helps investors gauge the health of a property is the gross rent multiplier or GRM.  The GRM determines the number of years it would take to pay off the property based on gross income.  This indicator generally helps gauge a property where the expenses are largely fixed or considered insignificant compared to the income.  In order to determine the GRM:

Gross Rent Multiplier = Purchase Price / Gross Annual Income

Properties with 2-4 units are still considered residential units, while properties with 5+ units are considered commercial properties.  Commercial loans, which are structured differently than residential loans, take into account the income and expenses of the property itself.

Multifamily properties are a great vehicle to make safe, long-term investments within the real estate market, and create an opportunity to create cash flow and earn passive income.  The IRS also allows tax-deferred benefits through Code 1031 to those individuals looking to sell their current income properties, and reinvest their proceeds into a monetarily equal or larger property.