Residential real estate investors instinctively know that having one source of income can be a problem. Many of them invest in multiple single-family properties.
Yet, an easier way to have multiple streams of income is by investing in multifamily properties. Here is what you need to know about multifamily real estate investing as a beginner, to see if it is right for you.
What are Multifamily Properties?
Any property with two or more housing units is a multifamily home. These properties include duplexes, triplexes, quadplexes, townhomes, apartments, condominiums, and semi-detached houses.
Here is a brief description of each type of property:
- Duplex, Triplex, or Quadplex
These properties have one residential building divided by one or more walls into two, three, or four separate housing units. Each unit has an entrance, and there are no common areas.
These are several houses attached at the sides. Each home has a separate entrance.
- Apartment Complex
An apartment complex can be a single structure or multiple structures. Each building has five or more units that tenants rent. There are shared amenities like a pool, playground, or parking structure.
These are like an apartment complex, except each unit is owned by a tenant.
- Semi-Detached Homes
These are similar to townhomes where a wall connects two homes.
Multifamily properties come in two categories – residential and commercial.
Residential multifamily properties have two to four units, which include duplexes, quadplexes, semi-detached homes.
Commercial multifamily properties have five or more living spaces per building. These properties include townhomes, apartments, and some semi-detached houses.
Commercial multifamily properties are in three asset classes:
- Class A
Luxury, high-end properties in excellent locations with plenty of amenities. These properties require a substantial investment, but tenets also pay high rents.
- Class B
Good properties in good locations, but these properties have few amenities. Rent payments are in the average range for the area.
- Class C
These are older properties that may need some updating or renovations. Rents can be lower than the average for the location.
You can start anywhere as a beginner in multifamily real estate investing. Yet, it is good to start with buying a duplex. A duplex is like an entry-level multifamily investment starter home.
Here are several benefits to investing in a duplex. These include:
- Many duplexes are the size of a large single-family home with reasonable property size.
- Duplexes are easier to finance because lenders view a duplex as one property. They will consider rent payments as a part of your income.
- You can live in one of the units and save money by being a property manager. Plus, you can reduce or eliminate your share of the mortgage depending on how much you charge a renter to live in the other unit.
Building a Multifamily Investment Team
Once you decide where you want to start your multifamily real estate investing career, the next step is to build a team. Members of this team will change over time as your goals change.
Yet, you want people on your team that you can trust to do repeat business. Members of your team should include:
- A mentor
You should develop a relationship with someone experienced in multifamily real estate investing. A mentor can be a family member, co-worker, or real estate professional. Many cities have real estate investing clubs that you can join where you can find a mentor.
- A real estate agent
You may need to work with multiple real estate agents. They should have experience helping investors buy and sell residential and commercial multifamily properties.
- A real estate attorney
As a real estate investor, property owner, and landlord, you will deal with different types of contracts. You may also be involved in litigation for many reasons. A real estate attorney can help structure your real estate business the right way and protect your assets.
- A mortgage broker
You will need a good mortgage broker to help finance the properties you want to buy. They can walk you through the loan process to make sure everything goes through smoothly.
- Insurance agent
Real estate investors need several types of insurance as business and property owners. Some types of insurance include property, business liability, and landlord insurance.
Other members of your team that you should be able to rely on for repeat business include contractors for repairs and renovations, accountants, a title company, and specialty lenders.
How to Choose the Right Multifamily Property As A Beginner
Choosing the right multifamily property can make the difference between turning an annual profit or losing money. Your mentor, real estate agent, or another member of your team should be able to help find profit-making multifamily properties in your area.
Here are a few things you should look for in a multifamily investment property:
A property in a desirable location will attract more than enough tenants to keep your property fully occupied. Properties in desirable locations command higher rent payments that you can use to pay the mortgage and other costs associated with owning the property.
- Number of Units
A duplex is fine if you are new to multifamily investing, but do not be discouraged from buying a property with several units if the opportunity arises. More units on a property mean higher income potential.
- Condition of the Property
Did the previous owner(s) take good care of the property? Do you have the money to make any renovations, or do you prefer a turnkey property? These are some of the questions you should ask yourself before you invest in a multifamily property.
How to Finance the Purchase of a Multifamily Property
You probably do not have several hundred thousand dollars in your bank account to finance the purchase of a multifamily investment property. OPM, or Other People’s Money, is a great way to get started in real estate investing.
There are plenty of financing options available to you.
You can qualify for a standard home loan if you are purchasing a residential multifamily property. These include:
- 30-year or 15-year fixed-rate mortgages
- Adjustable-rate, jumbo, or interest-only mortgages
- FHA, VA, or USDA mortgages
New commercial multifamily real estate investors may find it harder to obtain a conventional mortgage than experienced investors. Yet, it is not impossible.
Commercial multifamily real estate lenders include:
- Banks – Large, regional, and community banks
- Life Insurance Companies – For multifamily properties worth $20 million or more
- Agency Lenders – Government-sponsored enterprises like Fannie Mae and Freddie Mac
- Commercial Mortgage-Backed Securities – Offered by banks and life insurance companies
Many new multifamily investors obtain a hard money loan to purchase their first property. This type of loan typically has a 12-month term with an interest rate of around 12%-16%. Be sure to talk to your mentor, real estate agent, or attorney to see which loan option is best for you.
The Benefits of Multifamily Real Estate Investing
Now is the time to understand the pros and cons of multifamily real estate investing. You should understand the advantages and disadvantages of multifamily real estate investing if you decide if this is a career for you.
The advantages of multifamily real estate investing include:
Having multiple renters on one property will boost your cash flow and income much further than having one renter on the property.
- Loan and Insurance Simplicity
When you have multiple single-family investment properties, you need separate loans and insurance policies for each of the properties. When you have a multifamily property, you only need one loan and insurance policy for the property.
- Less Risk
When a renter moves out of a single-family property, your cash flow stops. When a renter moves out of a multifamily property, your cash flow will continue with the other renters.
- Less Competition
There is a lot of competition for buying and renting single-family properties. This situation creates more opportunities to purchase multifamily housing.
- Long-Term Growth Potential
Income potential determines the value of a multifamily property. A multifamily property is an income-generating investment, which gives it stable growth potential.
The disadvantages of multifamily real estate investing include:
- High Price Tag
Multifamily properties generally cost more than single-family properties.
- Management Responsibilities
Having multiple units with renters can mean you need to deal with several issues. You can hire a property management company, but this can hinder your cash flow and profitability.
- Experience Disadvantage
Multifamily properties are popular among experienced real estate investors. This experience can put a new investor at a disadvantage when starting as a new investor.
- Less Availability
There are fewer multifamily properties than single-family properties. The lack of availability makes it harder to find the best deals.
- Municipal and State Regulations
Renting and landlord regulations are stricter for multifamily properties than single-family properties. A real estate attorney on your team can help you navigate these regulations.
My Final Thoughts on Multifamily Real Estate Investing for Beginners
This information on multifamily real estate investing is just the tip of the iceberg. I would love to hear about your experiences as a new multifamily real estate investor.
Let me know what you have learned and what you could have done better in the comments section below.
Thank you and have a great day.