Multi-family real estate investing: how to get started

There are several reasons why multi-family real estate investing is so popular.

Not only can you grow your portfolio in a short amount of time, but you can also hire an outside property manager without cutting too deeply into your margins. That means you can essentially increase your revenue potential while remaining hands-off when it comes to day-to-day operations.

While there are many benefits to multi-family real estate investing, there are points to consider when you’re starting out. In this article, we will show you how to get started, what the major benefits are, and the sort of ROI you can expect.

Here is everything you need to know about multi-family real estate investing

What is multi-family real estate investing?

When investing in real estate, you want to get the most bang for your buck.

With multi-family real estate investing, let’s start with a definition. A multi-family property is a residential property that has multiple housing units, as opposed to single-family properties that offer just one unit.

What is a multi-family property?

Common examples of multi-family properties include:

• apartment complexes
• condos
• duplexes
• townhomes

In other words, any type of property that contains more than one unit in the same property (even if the owner lives there) is considered a multi-family property. If, for instance, you live in half of a duplex and another person or family lives in the other half, that is considered a multi-family property.

Multi-family properties offer a great entry point for new investors looking for great investment opportunities.

Now that we have the definition, let’s look at how to get started with multi-family real estate investing.

What to look for when investing in multi-family properties

If you have decided that multi-family investment is right for you, you will need to figure out how to purchase a multi-family property to rent out. There are six steps to buying multi-family real estate:

1. Qualifying for a multi-family property
2. Finding a multi-family property
3. Selecting a loan
4. Making an offer
5. Repairing and renovating the property
6. Creating a property management plan

Here is a breakdown of each of the steps in multi-family real estate investing:

1. Qualifying for a multi-family property

The first step is finding out whether you qualify for a multi-family property mortgage. Keep in mind that down payments for multi-family properties are significantly higher than single-family properties.

Depending on the market, as well as the building size, you are looking at a down payment of 20%. (This is common practice, but there are other options when making a down payment.) Costs for multi-family properties can range from hundreds of thousands to millions of dollars.

The good news is that lenders are more likely to approve loans with favorable interest rates to multi-family investors. Why? Because multi-family properties generate consistent cash flow each month.

At this stage, you should also determine your debt-to-income (DTI) ratio, which should be below 40%. To calculate your DTI, you must compare your monthly debts to your gross monthly income. The lower your DTI, the more likely you are to get approved.

2. Finding a multi-family property

When searching for a multi-family property to invest in, you have options. Here are the more common:

• garden-style apartments
• gated communities
• mid- to high-rise apartments
• senior housing
• student housing

Next, consider location, which is one of the more important parts of choosing a multi-family property to invest in. Think of the real estate market, neighborhood, school districts, and local attractions.

You should also consider the best city to invest in. Factors here include local median property price, job growth, population growth, and median rent.

3. Selecting a loan

When selecting a loan, you should consider your cash flow, interest rates, and how your assets work with your investment portfolio.

For multi-family properties with more than two units, conventional mortgages are the more popular option. If, however, if you decide to live in one of the units, you might qualify for a Veterans Affairs (VA) loan or a Federal Housing Administration (FHA) loan.

4. Making an offer

When making an offer, you will want to work with a local real estate agent. Before meeting with the selling agent, you should decide on a budget. Your real estate agent and the selling agent will go over specifics.

After your offer is accepted, you then buy insurance, make arrangements for property inspection, and deal with closing costs.

5. Repairing and renovating the property

This next step is about preparing the property for tenants. You may or may not need to renovate. However, you will have to ensure the building adheres to local building codes. Remember that even cosmetic upgrades, while not totally necessary, will likely attract new tenants. That will also help you increase your net operating income.

6. Creating a property management plan

Finally, you will have to create a property management plan. The plan you choose depends on how involved you want to be in the daily operations.

Next, you can create a property management budget. That money will go toward hiring property staff, covering property operating costs, and managing your multi-family investment.

What is the 1% rule in multi-family real estate investing?

The 1% rule in multi-family real estate investing looks at the price of the property versus the monthly rental revenue the property will generate. To follow the 1% rule, the monthly rent must be at least 1% of the purchase price.

To calculate the 1% rule, you multiply the purchase price of the multi-family investment property by 1% (or 0.01). To make it even easier, just move the comma of the purchase price two spaces to the left. The result from either method should be the minimum amount that you charge in rent each month.

If the multi-family investment property needs repairs, make sure you add those costs to the purchase price first and then multiply that figure by 1%.

For instance, let’s use a multi-family property with a purchase price of $150,000. To follow the 1% rule, you would use the following equation to determine the minimum amount you should charge in monthly rent:

$150,000 x 0.01 = $1,500/month

If, however, you need to spend about $10,000 on repairs, you would add that to the cost to get a figure of $160,000. To follow the 1% rule, you should multiply that figure by 0.01 or move the comma two spaces to the left to get a monthly rent of $1,600.

What is a good ROI for multi-family investment properties?

A good ROI (return on investment) for multi-family investment properties is between 14% and 18%. Factors such as asset class and the local real estate market will impact the ROI.

For instance: your initial ROI will be lower if you invest in a growth market. And your return might be on the lower end if you invest in high-asset class buildings. The reason is that they are usually low-risk investments and have less potential for appreciation.

To give you a better idea of a good ROI for multi-family investment properties, let’s break down asset classes and local real estate markets.

Asset class

There are three major asset classing: A, B, and C.

Class As are usually less than 10 years old and are found in large, desirable rental markets. Considered lower-risk investments, a Class A appeals to high-earning residents, meaning you can charge higher rent upfront. However, there is also less room for rent to appreciate long-term.

Class Bs are in steady—but not ideal—rental markets. Compared to Class As, Class Bs are considered medium-risk investments. They appeal to medium-income earners and have the potential for price appreciation.

Class Cs are higher-risk investments. In this case, rent is achievable for hourly workers and lower earners. There is also great potential for appreciation with proper modernization for investors. Class C properties are typically 20 years or older.

Local real estate market

Local real estate markets determine how easy or difficult it will be to find renters. Compared to smaller cities with limited job opportunities, major cities with consistent job growth like L.A. or New York City have more prospects.

Keep in mind, however, that most cities are considered growth markets even if, historically, they have not had booming rental markets. Steady population growth, local job growth, and new business districts make cities good markets to build wealth in the long term.

For multi-family investments, these growth market cities have the highest potential:

1. Minneapolis-St. Paul, Minnesota
2. Seattle, Washington State
3. Austin, Texas
4. San Diego, California
5. Boston, Massachusetts

Why should you invest in multi-family real estate?

Multi-family properties differ from single-family properties in that there is more than one rentable space. Multi-family properties also come in many different shapes and sizes. These include:

• apartment buildings/complexes
• condos
• duplexes/triplexes
• low-income housing
• mixed-use properties
• retirement homes

There are several advantages to investing in bigger residential buildings and complexes. Let’s explore three reasons that you might want to consider multi-family real estate investment:

It is easier to finance

While multi-family real estate investing may be more costly, it is also much easier to finance than single-family properties.

Depending on the type of property, a multi-family property can run into the millions for multi-unit complexes, especially for a good location. You also have to account for zone rules and vacancy rates, as well as costs for repairs and utilities.

Financing is, of course, another key consideration. If the multi-family property has five or more units, you have to get a commercial property loan.

The plus side, however, is that multi-family properties consistently generate solid cash flow. This is true even if some tenants are late on rent or there are a few vacancies. Look at it this way: if your 10-unit property has one vacancy, that means it is only 10% unoccupied. If, however, a tenant moves out of a single-family property, it is 100% unoccupied until rented again.

This all means that multi-family real estate is less risky for lenders. And for the property owner, it can result in more competitive interest rates.

You can grow your portfolio in less time

If you want to build a larger portfolio of rental units, multi-family real estate is a great way to start. Purchasing a 20-unit apartment building is considerably easier than buying 20 separate single-family homes.

In the second option, you would have to work with 20 different sellers and conduct 20 different home inspections. In some cases, it would also require you to take out 20 loans. Or you could simply buy one property with 20 units.

Property management makes financial sense

Property management can be a headache. You have to deal with tenants, collect rent, take care of repairs, and pay the bills. Most real estate investors hire a property management company to handle those day-to-day operations.

Property managers usually get paid a percentage of monthly income generated by the property. Their daily tasks typically include:

• collecting rent
• finding/screening tenants
• handling compliance/regulation issues
• maintaining the property (including repairs/expenses)
• taking care of evictions

Going with a property manager might not make the most sense for investors that own one or two single-family properties. However, for a multi-family real estate investment, it makes much more sense financially. The amount of cash these properties produce every month provides their owners with room to hire property management services without significantly cutting into their margins.

How to make money with multi-family real estate

You make money with multi-family real estate through rental revenues. You can also earn money through fees related to parking on the multi-family property and through storage. The main idea is that you generate more cash flow from the property than you have to pay in expenses on the same property.

The perks of multi-family real estate investing

While multi-family real estate investing may be more costly, it is also easier to finance. Not only that, but it also offers some significant perks. These include growing your portfolio in a shorter amount of time and hiring property management without cutting too deeply into your margins.

Depending on your asset class and your local real estate market, you can also expect a good ROI.

To find out more about multi-family real estate investing, get in touch with one of the mortgage professionals we highlight in our Best in Mortgage section. Here you will find the top-performing mortgage professionals across the USA.

Do you think that multi-family real estate investing could work for you? Let us know in the comment section below.