Multifamily Washington DC Real Estate Investment Strategy
Breaking down house hacking in the District of Columbia
The Ultimate Scale
Section: Investor Intel
Author: Susan Isaacs, Washington DC Real Estate Strategist
How can I maximize my Washington DC real estate investment portfolio?
Seasoned real estate investors often turn to a multifamily portfolio to achieve maximum cash flow, tax advantages and equity build.
About Multifamily
âMultifamilyâ refers to a property that has more than one unit.
Examples of smaller DC multifamily properties are rowhouses with rental basements or multiple units, duplexes, triplexes and fourplexes. Possibilities include creating an income stream by renting out the entire residence, renting a portion of it while living in another portion, or renting an attached or unattached accessory dwelling, either long or short term.
Buildings with 5+ units are classified as âcommercial real estateâ and may require commercial financing, which is usually more expensive.
Why shift your DC real estate portfolio to multifamily?
Multifamily property is highly scalable, and can offer superior cash flow with only incremental added cost, and greater long-term equity build than other forms of property investment.
They are typically easier to finance, compound returns more quickly, and tend to benefit from economies of scale.
Multifamily investment can be as easy as owner-occupying a two-family property, residing in one unit and renting the other. Or purchasing a fourplex with an FHA loan, occupying one unit for a 12 month period, and renting the others. For investors wanting to build a sizable portfolio, purchase of a 10+ unit apartment building is simpler and more efficient. To do so with individual properties, the investor would need to make multiple purchases, incurring transaction costs for each, and manage multiple loans unless a blanket loan arrangement was utilized.
Financing Advantages
Although multifamily properties are usually more expensive than single family homes, itâs often easier to secure financing. This iis due to lender appreciation for consistent cash flow and income, even during periods of high inflation and rising interest rates. Lenders also consider multifamily properties more recession-proof.
Multifamily properties also offer tax benefits such as operating expense deductions, and depreciation. Read more about multifamily depreciation here.
What type of Multifamily properties can I Buy in DC?
Two-Family
Two-Family rowhouses or duplexes that offer separate legal residences.
Triplex | Fourplex
Three and four unit properties.
Qualifies as âresidential.â
Multifamily 5+
5+ units
Qualifies as âcommercialâ
Tips From Pros
When purchasing a multifamily investment property, evaluate your OpEx.
Multifamily operating expenses are the costs involved in managing and maintaining your multifamily property:
Renovation
Maintenance
Marketing
Repairs
Insurance
Legal
are just a few. All money spent on your multifamily property is considered an operating expense. Put together a spreadsheet to calculate:
Cost per unit
Operating margin (expense ratio (OpEx â Income = OM)
Once you determine yourOpEx, you can calculate NOI.
NOI represents the propertyâs revenue after operating expenses are deducted. This is not a profit calculation. Profit is whatâs left after all expenses are subtracted, from CapEx to debt and interest payments.
Before purchasing an investment property, evaluate your NOI:
NOI (net operating income), is used to determine the profitability of an income-generating property.
Start with Gross Operating Income (GOI). This includes rent, fees, etc. Subtract overhead and costs:
Insurance premiums
Utilities and services
Property taxes
Recurring maintenance/upkeep
Repairs and replacements
Personnel
NOI = Gross operating income â operating expenses
*Also consider non-recurring CapEx (capital expenditure) not included in NOI calculation. This could be a roof or HVAC system replacement, plumbing or electrical system upgrade.
NOI represents the propertyâs revenue after operating expenses are deducted. This is not a profit calculation. Profit is whatâs left after all expenses are subtracted, from CapEx to debt and interest payments.
Some investors also evaluate potential properties using the EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) metric to measure potential earnings.
EBITDA = Operating income + Depreciation + Amortization
Sources
BiggerPockets
Multifamily Beginnerâs Guide
Investopedia
Important Factors For RE Investing
Butterfly MX
Mashvisor
Small Multifamily Investing Guide
Roofstock
Rocket Mortgage
Tools
Property Analysis Spreadsheet | Roofstock
Market Analysis How To | Bigger Pockets
Permitting
The multifamily permitting process differs from other types of investment property. Read more about DC multifamily permitting.
Read More
House Hacking
Buy And Hold (can be a house hack)
BRRRR (a type of Buy And Hold)
Fix And Flip
Multifamily
The DC Real Estate Investment Compass
Zuzu Notes:
Timing and planning your house hack often involves scaling. Many property owners initially begin with a basement rental in the home they occupy, later lease the upper floor, then expand to other methods. Or simply repeat!
Start With The Basics
Whether youâre investing in DC real estate as a side hustle or full-time business, understanding the local real estate market and fundamentals is key.
How I Help
Guidance and education
Off-market opportunities
Skill, experience and resources
Assembling A Team
Having a team of professionals in place will ease acquisition and management of your investment portfolio.
Your Realtor, lenders, property manager, contractors and vendors functioning as a team can identify opportunities, speed transitions, address issues, and increase profitability.
These articles were originally published in my Tools section at realestateinthedistrict.com. Now they live hereâon DC Real Estate Channel.