Cap rates and a multi family home are not always thought of when you’re buying a house. However, this could be the smartest idea especially for a 1st time home buyer.
You don’t have to be a major real estate investor with loads of real estate investment properties to accumulate wealth. One multi family home will make an amazing difference in your life. Let me explain why.
What’s A Cap Rate?
Let’s begin with understanding what a cap rate is because this is something you really need to know.
The term is actually capitalization rate; cap rate is it’s nickname. This is the rate of return that’s expected from the income you get from an investment property. Cap rates are used in commercial real estate to analyze a property. Since I’m not a commercial broker, I won’t go into this. Be that as it may, cap rates are also used to analyze residential investment property.
A serious commercial investor wants a cap rate of 8%. However, my residential investors are happy with a lower capitalization rate because they look at this differently. They’re happy beating what you can get with CD’s and view stocks as too risky. As a result, a cap rate of 4-5% is often very acceptable.
Determining A Capitalization Rate
Figuring a cap rate is easy. You simply take the net income and divide it by the purchase price times 100. If your net income is $30,000 and your purchase price is $400,000 that’s a cap rate of 7.5%
Multi Family Homes As A 1st Purchase
Multi family homes as a first purchase is a very good idea. At least this is what I believe.
Rutle #1 in my view is this: Are you willing to be a landlord? If you’re not, don’t even think about it.
Since this is an investment, you’re actually buying a business. While it will be your home, it’s also a business. Therefore you’ll need a good accountant and your real estate attorney to advise you along the way.
Because you’ll live there as your principal residence, you qualify for a residential owner/occupier mortgage. This is great because investor loans have tougher and more expensive demands.
A really big difference is privacy. Buy a multi family home and you’re living with someone else literally next to you. Additionally, your apartment won’t have as much space as a house.
The Big Payoff
Invest in real estate long term. Think big picture. This is how you get that big payoff.
Even if the 2 family you buy costs more than that single family house (which you qualify for due to tenant income), what it actually costs you every month is less. So what do you do with that difference? Ask your accountant but I can tell you this for sure – use it wisely and it’s a huge gain long term.
7 years later you’ve saved enough for a down payment on your own house. Rents have been increasing so your apartment will give you positive cash flow.
You have so many advantages over the next 20 years or so. Your 2 family can enable you to retire early. You might do a 1031 Exchange to buy a better income property. How about some refinancing to pull tax free cash out? You can also use the income to pay off the mortgage or to diversify into other investment types. There are so many opportunities.
Build Wealth With A Multi Family Home
This is why my residential customers aren’t worried about an 8% return. Cap rates do matter but not as much as the long term gain. With the help of a good financial advisor, buying a 2 family as your 1st home can be a fabulous wealth building investment.