The Complete Guide to Multifamily Real Estate Investing

Acquiring multifamily real estate is one of the most effective ways of securing long-term wealth and a financial future for you and your family.

According to data, the multifamily market is expanding exponentially, with multifamily lending reaching $487 billion in 2021. Data also shows that multifamily investment constitutes 42% of the total U.S. real estate market, making it bigger than the office market.

But how do you get in?

Here’s a comprehensive guide to multifamily investing, its benefits, and how you can invest in a multifamily property.

What Is A Multifamily Property? 

A multifamily property is a residential property containing more than one housing unit. These include townhomes, duplexes, condominiums, and apartment complexes.

Typically, multifamily properties are not intended for a single occupant looking for a family compound or home for private usage. Instead, they suit a property management company or investor looking for passive income as a multifamily property owner.

A multifamily property owner can also live in one of the housing units. These are often known as owner-occupied properties. The remaining units are house renters who earn the owner income and provide a steady revenue stream.

Multifamily properties offer great investment opportunities for new investors, allowing them to create steady and long-term wealth for a more secure financial future. They’re also an excellent avenue to get into real estate investing.

The Different Types of Multifamily Property 

There are various types of multifamily property you can invest in. Here are the most common ones:

Duplexes 

A duplex is a home with two housing units, one on each floor. They are often smaller than other multifamily properties but present less risk and require less capital than other multifamily properties. Therefore, they’re an excellent gateway into multifamily investing for new investors.

Most duplex owners prefer living in one unit and renting out the other.

Triplexes 

A triplex is similar to a duplex, albeit it has three units. Like duplexes, they also present less risk and require less capital to invest in, with fewer regulatory hurdles than larger buildings.

Quadplexes 

A quadplex houses four units, typically two per floor. It is often preferred by investors starting to venture into large multifamily investment properties.

Apartment Buildings 

Apartment buildings typically house more than four units. It can be fully residential or a mix of commercial and residential units. Apartment buildings can also hold other on-site facilities and amenities, such as a swimming pool, gym, and laundry area.

The Benefits of Multifamily Investing 

Investing in multifamily property is a good investment strategy for new real estate investors. Here are the top advantages of owning a multifamily property.

Bigger Cash Flow 

A multifamily property provides multiple sources of monthly income, unlike a single-family property that generates a single source of monthly income.

Scalability 

Multifamily properties allow you to expand your property portfolio quickly from a single investment since one property holds multiple housing units. Therefore, you can scale to owning ten properties within a single building in one investment compared to making ten separate purchases for different properties.

Large Pool of Tenants 

Multifamily real estate investments pose less risk due to the larger pool of tenants available. Unlike a single-family unit where your income is lost when the home is vacant, multifamily properties house multiple units that complement your income during vacancies, alleviating the risk of total income loss.

Tax Benefits 

Multifamily properties come with great tax benefits for investors. These include depreciation, cost segregation, and 1031 exchange.

How You Can Find Multifamily Property

You can use various methods to find ideal multifamily properties for sale. Most new investors hire a real estate broker to search on their behalf, much like you would do when searching for a single-family residence.

On the other hand, experienced investors often use a double-pronged approach, working with a real estate broker while sourcing their own deals based on experience.

If you choose to do it independently, here are a few ways to find the ideal multifamily property.

Searching the MLS

Properties are typically sold on-market or off-market. On-market multifamily properties are often listed on the multiple listing service (MLS). The owner of the property or their broker will list the property on the service for a fee, and the listing will be shown on hundreds of online real estate platforms such as Trulia, Zillow, and LoopNet.

Anyone can search these platforms and view the basic information about these properties. However, with a monthly subscription fee on MLS, you gain access to all important information about the property, such as disclosures and financial information.

Finding Off-Market Deals

Often, the best multifamily property investment deals are found in off-market properties. Off-market multifamily properties have less competition, meaning they command lower prices than properties on sale in the general marketplace.

You can find off-market deals on websites such as Craigslist and FSBO.com, where most sellers test the waters before listing on-market in directories such as MLS.

Direct Solicitation

You can find multifamily properties for sale through direct solicitation. This can take various forms, such as sending property owners a postcard or letter and offering to purchase the property directly.

The most successful direct solicitation is highly targeted. This means you have detailed information about the owner, why they’re selling or are considering selling the property, and other financial information.

Deals from direct solicitation can take a while to materialize. However, even if the owner is unwilling to sell today but has your contact information, they will most likely call you six months or a year later when the time is right.

What You Should Consider When Investing in Multifamily Property

Not all multifamily properties are a good investment deal. Here’s what you should be looking for to make the best score.

Location

Your multifamily property must be in a location that’s appealing to renters. This location should be high-yield, high-growth, and in a well-maintained neighborhood with a great demand for housing units.

Total Number of Units

You should carefully consider the total number of units in your multifamily investment to gauge the strength of the returns from the property and risks. Beginner investors should start with a few units, typically duplexes and triplexes, while experienced investors can go for apartment buildings.

Potential Income

You should carefully assess the income the multifamily property can accrue, considering all expenses. For conservative, beginner investors, you should stick to the 50% rule, where 50% of the investment’s income should cover expenses, not the mortgage.

The Seller

While evaluating a multifamily property, you must consider who’s selling the place and why. The purchase price will vary significantly depending on the seller and their motivation.

Get the Right Guidance in Multifamily Investing

Investing in multifamily properties is a rewarding venture. However, you need to know how to source the right deals and negotiate a worthy price to get the best returns from your investment. Contact a multifamily expert and learn how you can get started.