Taking on multiple rental units to generate passive income involves assuming a lot of legal and financial responsibilities. However, if you exercise a good amount of due diligence in researching the units and following smart managerial practices, you can get a fantastic return on your investment with relatively minimal risk. Compared with other investment opportunities, taking on a building that can produce more than one stream of income is more likely to be consistent in its returns. Here are some things that you should consider about this type of real estate purchase.

Rental Income

One of the first things you need to carefully analyze when you are checking out a multifamily property is what rents are like in the area. Look at rental unit listings to conduct a market analysis. Try to identify units that are in the same neighborhood, in relatively similar condition, and offering comparable features or amenities. When you have a sense of how much each unit can produce per month, you can get a sense of what your revenue should be.

Estimate Initial Costs

Your most immediate costs will include a down payment and any work that you need to do on units before renting them out. It may be possible to purchase a building with their existing tenants. If you do, you should still view the units so you can get a sense of how much work you may need to put into a unit before renting it out when the unit turns over.

Calculate Ongoing Costs

Ongoing investment expenses such as your monthly mortgage payment and real estate tax should form the foundation of your overhead estimate. In addition, you need to factor in any unitilies that you will assume responsibility. If you will be hiring a management company for administrative and maintenance matters, it can add to your overhead costs considerably. Nevertheless, professional management may be a good option for investors who will not be living in or near a multifamily property.

Add Contingency

When you’re developing a budget and analyzing profitability, you should not necessarily assume that everything will go exactly as planned. You may need to include some contingency for unexpected costs such as maintenance needs or unit turnover.

After you’ve identified how much money a property will generate from rent and any saved living expenses if you plan on moving into one of the units, you have to compare it to your initial and long term costs plus some contingency. This analysis will show whether a property is a good long-term investment.