How To Invest in Multifamily Real Estate?- The Millionaire`s Blueprint
While most investors look greatly upon single-family homes as their strategy for passive real estate income. You should also consider investing in multifamily real estate. Why struggle with prolonged vacancies and unstable cash flow from Single Family rentals, when the multifamily property can offer stability and tremendous other benefits? Tap into Multifamily real estate and get rewarded with 2x cash flow with multi-family investing.
Only about 31.4% of housing in the US today represents multi-family homes. Inventories are low and Demands are soaring. More and more people are wanting to reside in multi-family homes, be it due to community living, tech-enabled services, and on top, an overall affordability factor for renters compared to single-family homes.
Investing in multi-family real estate is a lucrative investment strategy to boost your rental income while having a stable cash flow with an overall low vacancy rate. Multi Family properties also have a great potential for appreciation, giving good returns on your equity and increasing your overall revenue potential.
What are Multi-Family Real Estate Homes?
Multi-Family Real Estate homes are generally real estate properties that consist of more than one dwelling contained within a single building. Or, several buildings contained in one complex where more than one family can reside.
A multi-family property comprising four or fewer multiple individual units is known as residential multi-family property. And, multi-family property with more than four units is tagged under commercial multi-family real estate.
Types of Multi-Family Housing
The multi-family housing provides subsidized and affordable housing where resources like land and infrastructure are utilized more efficiently, thus creating more spaces in less area. The various types of multi-family housing can include
- Multistorey Apartment Building
- Condominiums and High Rise Building Apartments
- Row houses that share the walls, boundaries, and common areas
Multi Family Housing can further be classified into Class A, Class B, and Class C depending upon the locality of the real estate, the condition of the property, and the income group of residents.
An investor who is just starting into multi-family real estate should focus on the multi-family property having four or lesser units, preferably a Class-B property. The Class-B multi-family property will have less risk compared to Class-C property, a higher cap rate compared to class-A property, and scope for further improvement thus leaving some extra ground for forced appreciation.
Why You Should Consider Investing in Multifamily Real Estate?
Buying rental properties is a great way to earn passive income. And when you add multifamily real estate into your rental investment strategy, the potential reward gets even higher. Briefly, why as an investor you should consider adding multifamily property into your portfolio is divided among these three factors.
Buying Multi Family Home is a Good Investment
The Current trends set the perfect stage for deploying your multifamily real estate investment strategy. Interest rates are at an all-time high. Inventories are low. Builders are not constructing new homes. Homeownership has declined. People who intend to buy houses have postponed their plans. More and more renters are looking to rent affordable homes.
Furthermore, the entry barrier with multifamily real estate is high when compared to a single-family home. And, only some investors are comfortable investing millions to buy multi-family real estate, which gives you an edge. Buying a multifamily property is expensive but a lot easier to finance. Originating loans for multifamily real estate is considered less risky for banks as you are expected to have a constant cash flow. Thus making a multi-family purchase a good investment your money can make.
Bigger Portfolio With Multi-Family Real Estate is Possible in Less Time
It is unlikely that you can become financially free from income from one single-family property. You need cash flow from multiple properties when your sole income is from rental real estate. Imagine the time and effort required to buy multiple single-family properties. From narrowing down from multiple deals to working with different sellers, and whatnot?
Doing the same thing with multifamily real estate is much easier. By just vetting one property, you can add multiple units to your portfolio. Multifamily real estate allows you to build your portfolio faster and more efficiently.
Investing in Multi-Family Real Estate Makes Better Financial Sense
What as an investor do you need from your rental property? Constant cash flow and appreciation. These are the two major crucial elements for a successful property rental business. And. when you own multi-family real estate, you can churn both these benefits in a better way from your property.
A multifamily property allows you to have a constant cash flow from multiple renters as opposed to a single tenant paying in a single-family property. You will have a better risk aversion.
The appreciation aspect is also better with the multifamily property as your monthly rental income increases more, every time you will increase rent on multiple units. Compare it with a 3% annual rent increase on a single-family property. With each extra dollar you earn from your property, your property value increases and appreciates with time faster.
Strategy To Invest in Multifamily Real Estate
Investing in Multifamily real estate requires meticulous research and careful planning. You can’t just buy any multifamily property available for sale. We have prepared an exact strategy following which you can buy your first multifamily real estate.
We expect you to have some prior experience in the rental property business before investing in multifamily real estate. If not, we suggest you first read out our easy 14 Steps Easy Starter Guide to Start Into Rental Property Business.
1. Deciding the Budget For Your Multifamily Property Purchase
When buying your first multifamily property, the initial consideration is your budget to buy a multi-family real estate.
Are you going to purchase 100% cash or require to obtain a mortgage? If it’s a complete cash purchase, your budget is already sorted. Simply go out and find deals in your budget. But if you are to finance the purchase, your budget should accommodate the down payment and closing cost for the multifamily property. You should additionally also account for the property improvement costs in your budget.
Generally, obtaining a mortgage requires you to put 20% down and between 3%-6% in closing costs. Do not have a budget for putting 20% down? Consider house hacking and acquire an FHA Loan by just putting 3.5% down. FHA loan is a special type of home loan originated for owner-occupied properties.
2. Understanding The Type of Multi-Family Property To Suit Your Investment Needs
Your budget pretty much defines the type of multi-family real estate you can buy. Apart from budget, what type of multi-family property should be more suitable according to your investing needs is what you need to understand. Because in real estate, budget is not much of significance as there is always a way to fund the deal if it’s a great deal and with good numbers.
Should you consider the apartment complex or a plex, especially if it’s your first multi-family purchase? It is the duplex, triplex, or fourplex that will be much suited to you. And the reasons are pretty straightforward.
- Apartment buildings are great for cash flow but cost significantly higher and mostly require a commercial loan
- You can easily obtain a residential mortgage to buy a plex.
- More number of plexes as compared to apartment buildings. More chances of finding a good deal.
- Better Quality of Tenants in Plexes compared to Apartment Buildings and you require more sophisticated property management companies to handle the tasks.
- Lower Tenant Turnovers in Plexes Compared to Apartment Buildings
- You can easily manage up to 4 Units or can hire a qualified property manager to manage the property for you.
As an investor, you must get cash flow and appreciation from your investment property. What else is also important is an exit strategy from your investment. You necessarily not be selling your property in the coming few years. But what if you are required to sell? Your investment shall be able to get you an exit. And apartment buildings are comparatively less liquid as the prospective buyer base would be significantly less than plex multi-family properties.
3. Choosing The Right Location For Your Multi-Family Real Estate Investment
It is the location of your rental property that is of utmost importance if you are to become successful in rental investing. So what you should look for when deciding the location of your next multifamily purchase?
The Cap Rate allows you to determine whether the location you are choosing will be profitable or not. Cap Rate is simply a percentage of Annual Net Operating Income to the Average Price of the Comparable Property in that Area.
A 6%-7% cap rate is generally considered good for considering that location. Cap rates below this mean the rental yield is low compared to the price of the property in that area.
Tip: Cap Rate allows you to narrow down to the potential location for the property but your purchase should not solely be based on this calculation. Instead, you should do a proper rental cash flow analysis of the property to determine its profitability.
- Return on Investment:
A good return on investment on a multifamily property is about 8%-12%. You should get a cash-on-cash return between this range on the amount you are investing out of your pocket. Return on investment is the most important detail to understand profitability, after all, your money should work for you to generate good returns.
Average Vacancy Rate and Turn Around Time:
It is important to know the average vacancy and turnaround time of comparable properties in the area. A prolonged vacancy can hurt your bottom line and can affect the profitability of your business. Check if there are a lot of vacant units and if their average turnaround time is more than 2-3 weeks, you should maybe consider some other location.
- Understand The Proximity
It is always a sensible idea to understand the proximity of your property to places like offices, grocery stores, and restaurants. Narrowing to such a location will allow you to have tenants on your property much faster and easier.
4. Check Your Credit Health For Multi Family Home Financing
You must check your credit health before you apply for a mortgage for multi-family home financing. A minimum credit score of above 580 is required if you are to obtain an FHA Loan by putting 3.5% down. With less than a 580 credit score, you are required to come up with at least 10% down. And if you are to obtain a conventional loan, a credit score upwards of 620 is required by most lenders.
- Credit Score 580 and above: 3.5% Down Payment With FHA Loan
- Credit Score Less Than 580 and Not Below 500: 10% Down Payment With FHA Loan
- Credit Score Above 620: Conventional Loan with 20% down
Tip: It is always advisable to go for a conventional loan if your budget allows 20% down. The FHA Loan may require to put in significantly less but has higher closing costs and requires you to pay Mortgage Insurance Premium.
The next thing in line is to know your debt-to-income ratio. The debt-to-income ratio signifies how much your current income is going towards paying for your current financial obligations. A DTI higher than 30% has fewer chances of getting approved.
5. Compare With Different Lenders
It is always a good idea to compare quotes from different lenders. Don`t hesitate to negotiate for the best offers and narrow down to the one that offers the best rates and low closing costs. The Multifamily loan rates are ranging between 4.83% to 8.30% with up to 30 Yr amortization schedule.
Furthermore, you can choose between adjustable interest-rate loans and fixed-rate loans. And for what duration do you need the loan, 10 years, 15 years, 20 years, or 30 years?
An adjustable-interest loan is often recommended if you are obtaining a loan for a longer duration. In a longer duration, the interest rates will go lower. But if you are obtaining a loan for a shorter duration and getting good rates, it’s always a good idea to close on a fixed rate.
6. Work With a Realtor and An Attorney To Close Your Multi-Family Purchase
Working with a professional realtor is critical for finding great deals and attractive multifamily opportunities. A professional realtor will be able to provide important information upfront without the need of wasting time on unwanted deals. A good realtor shall provide you with
- Rent Rolls
- Any Lien attached to the Property
- Seller Appraisal Report
- Condition and Maintenance of the Property
A professional realtor charges between 5%-7% of the deal amount out of which half amount has to be borne by the buyer and another half by the seller. Don`t hesitate to work with the realtor as they can save you from potential red flags in the deal that usually go unnoticed by the buyer`s attention. Also, stay away from working with part-time realtors.
After you narrow down to a deal, it’s now time to close on your multifamily deal and get the title in your name. For that, you need a closing attorney. A closing attorney is responsible for closing the real estate deal and overseeing that everything goes well from paper works to contracts.
It is always advisable to work with an attorney as every state has different rules when it comes to closing real estate deals. And some states necessarily require you to work with an attorney to close your real estate deal.
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What Are The Best States To Invest In Multifamily Real Estate?
As said, location plays the most important role in any real estate business’s success. A good location should have increasing population growth, a strong job market, a diverse economy, and landlord-friendly regulations. Many cities in the US provide the perfect environment to invest in multi-family real estate.
Best Places To Invest in Multi-Family Real Estate
1. Phoenix, AZ:
Phoenix is one of the good markets to consider buying your multi-family real estate. An average 2-4 unit multi-family property in Phoenix is priced between $450,000 to $1.2 M. Strong presence of major big employers like Wells Fargo, Bank of America, and American Express makes it an ideal place for people looking for good job opportunities.
About 218,000 rental units or 44% of units in Phoneix are renters occupied. The median average rent for a 2-bedroom unit is $2095 in Phoenix which is well versed with the $6700 monthly median household income. With its 1.6M population and a lot more new migrants coming; rental housing demand is strong in Phoenix making it a good place for multifamily investing.
2. Charlotte, NC
Low cost of living, and better job opportunities attract people to this largest city and financial hub of North Carolina. Good universities and outstanding schools present a prosperous environment for the economic growth of this city. A 2-4 unit multi-family property is available in the price range of $300,000 to $850,000.
The median household income in Charlotte is about $8666 a month and the rent for a 2-bedroom unit is $1839. Charlotte has a supply of about 950,000 units. About 52% of housing units are owner-occupied thus leaving 48% of units available for renters. These factors make Charlotte a perfect location for your multifamily real estate purchase.
The music city Nashville`s economy is growing steadily and is almost recession-proof. The economy is doing well because of its diverse and resilient sectors like education and healthcare. Nashville is home to about 2 million people and has seen job growth of about 3%-4% in the last few years. Every year about 13,000 new people come to Nashville for better opportunities soaring the demand for rental homes. Nashville topped the list of hottest job markets in the year 2022.
You can find a 2-4 unit multifamily property between $350,000 to $1.5M in Nashville. About 40% of the units here are renter-occupied. A 2- bedroom unit rents on a monthly average of $1845. Nashville can be an excellent location for your multifamily purchase.
Low unemployment rates, lots of job openings, and big employers like Duke University and Duke Healthcare make Raleigh one of the best cities to invest in multi-family real estate. The Raleigh population has seen an increase of 2.84% from the last year. And the workforce in Raleigh has also increased by 4% in technology and about 9% in hospitality year on year. No wonder, Raleigh is at no. 5th when it comes to the US job market.
A 2 Bedroom unit in Raleigh rents at about $1950/ month. You can find 2-4 unit multifamily homes in Raleigh in the range of $600,000 to $1.9M. Currently, the demand for housing in Raleigh is outpacing the supply with an annual rent growth rate of 19%, the highest ever.
5. Tampa, FL
The low cost of living and no state income tax is attracting a lot of millennials to move to Tampa City. Strong job opportunities and employment in healthcare, education, and the military have kept the unemployment rate in Tampa below 3%. According to US census data, about 150 new people move to this city every day. Tampa is no. 3 on the list of US cities, where people want to migrate.
The average price for a 2-4 unit multifamily property in Tampa ranges between $250,000- $1.3M. A 2- bedroom multifamily unit here rents at $1898. The Renter-occupied units are about 50%. Tampa has seen rent growth of 3% on average year-on-year. Buying a multifamily property in Tampa is a great investment opportunity as this city will continue to see more and more rental demand in the future.
Are There Any Risks to Multifamily Investing?
In the absolute sense, investing in a multifamily property is one of the safe real estate investments you can do even in a time of recession. By nature, Multifamily investments are a perfect hedge against inflation providing stable returns even during a weakening economy.
- During a recession, people prefer renting affordable homes instead of buying. Multifamily properties are better at catering to these demands.
- The Multifamily property rents are lower when compared to single-family homes which allow renters to keep renting even in a downturn economy.
- You need not worry about raising rent as you would in a single-family property. It is easy to increase your income by raising rents for multiple tenants.
So, is it safe to assume there are no risks to Multifamily Investing?
Not actually, things can go south with multifamily real estate investing if you fail to do this one important thing correctly i.e. Multi Family Property Management.
How To Avoid Multi-Family Property Risks?
About 40% of the 50 million rental units in the US are owned by mom-and-pop investors. If you belong to this major chunk and lack any prior experience in managing a multifamily property. You need to understand the dynamics of multi-family property management. Managing a multi-family is a whole lot different from managing a single-family property.
And doing this one thing correctly, you can avoid multi-family property risks to a great extent.
When you are completely new to landlording and buying multi-family as your first investment property, you need to be really careful. You are working with multiple tenants unlike in a single-family property.
However, I do belong to the group who started his landlord from a 12 Apartment multi-family property. And I do have my fair share of horror stories about things going south. But with information and knowledge, my landlord’s journey becomes smooth. I strongly suggest working with a good property management company to manage your multi-family property. Else you are risking your investment.
Tips to Manage Your Multi-Family Investment When You Are Just Beginning
1. Follow A Systematic Approach:
You should follow a systematic approach when it comes rental property business. A rental property business is more than just having a tenant on your property and collecting rent every month. Before even putting your property on rent, have proper systems and operations in place.
2. Managing a Multifamily Property Efficiently:
Managing a multifamily property is a lot different experience than managing a single-family property. Your multifamily investing success depends a lot upon how efficiently and quickly you manage the day-to-day tasks at your multifamily property business. From marketing to screening, hosting tenants, providing resolutions on tenant maintenance requests, timely property maintenance, accounting, and whatnot?
You are at risk of losing profits if your multifamily asset is poorly managed and slowly it will deteriorate the value and attractiveness of your investment property.
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That’s it for Multi Family Property Investing in this article today. I believe, now you are well-equipped to kick-start your multi-family investing journey. Go on and buy your first multi-family real estate. Let us know how it goes.
We are excited to hear about your multi-family investing progress and the challenges you face along the way. Hit up with your queries and suggestions in the comment section down below. You can also become a part of our community on Facebook.