Looking for your next big investment? You’re on the right page! Buying multifamily real estate is a smart way to build cash flow and a solid investment portfolio in a single transaction. In this “How to Buy a Multifamily Property” guide, I’ll walk you through deciding which type of multifamily property you want to purchase, picking the right lender, and running the numbers to ensure profitability. By the end, you’ll be confident and ready to dive into the multifamily market.

What Is Multifamily Property? 

Before diving into the steps, let’s review a multifamily property. Simply put, it’s a residential building with more than one unit designed to house multiple families. Think duplexes, triplexes, quadplexes, townhomes, or even larger apartment complexes. These multifamily units often share walls, floors, and communal spaces. Purchasing a multifamily property is an excellent way for investors to generate steady income.

Steps to Buy a Multifamily Property

From determining your budget to estimating profits and losses, here’s how to navigate through a successful multifamily property investment.

1. Decide if You’re Ready to Purchase

Multifamily investment property offers many benefits. For instance, it provides a more predictable income than single-family rentals and an increased cash flow. It is generally more straightforward and manageable than purchasing a large commercial property. However, it’s undeniable that the upfront costs can be pricey. Multifamily mortgage loans typically require 20% of the property price for a down payment, and there are inevitable maintenance and property management costs.

Before investing your money and time in a multifamily, consider the pros and cons of buying this type of property:

Pros
Cons
  • You have more potential cash flow
  • Upfront cost is higher
  • It can expand your portfolio quickly
  • Competition for multifamily homes may be fierce
  • Your risk is diversified and/or reduced since you have multiple units and a larger pool of tenants
  • There is the possibility of vacancies and late rental payments
  • You could earn tax benefits and write off the mortgage interest and the repairs, maintenance, and advertising costs as business expenses
  • Because not everyone is interested in or able to afford to acquire a multifamily home, it might be more difficult to sel
Baselane's rent collection system on mobile
Baselane’s rent collection system on mobile (Source: Baselane)

Landlords must ensure all rents are paid on time and transferred into their bank accounts. To automate rent collection, use an online rent payment system like Baselane. This system gives real estate investors a completely automated rent payment system, including security and pet deposits and late fees. It also provides customizable lease templates to ensure your contracts adhere to state and local standards and regulations.

Visit Baselane

2. Determine Your Budget

Establish your financial goals and decide how much you will put into this investment. You’ll need to take many different costs into account and be prepared for unexpected expenses. When looking into your finances, consider the following factors:

  • Closing costs: These are generally 2% to 5% of the property’s sales price and include lender fees, title insurance, property insurance, and property taxes. The higher the home’s sale price, the higher your closing costs.
  • Carrying costs: These are the monthly recurring costs of holding the property, including your mortgage, taxes, insurance, and utilities.
  • Renovation costs: Depending on the property’s condition, you may need minor and/or significant renovations before renting it out. Consider how much you will need to spend on the property and the potential return on investment (ROI) before taking further steps.
  • Ongoing repair costs: These variable costs can pop up anytime, like a clogged pipe, broken water heater, or roof leak. Therefore, you need a planned profit margin to cover unexpected expenses.
  • Timeline: Your timeline involves the time it takes to make repairs or renovations, find tenants, and start accepting payments. The longer renovations take, the higher your carrying costs will be.

Pro Tip: Overestimate your expenses. Multifamily real estate investing almost always involves unexpected expenses. It’s best to overestimate your potential costs and have a larger cash reserve than you need. Ensure you have an extra cushion in your repair budget when calculating your total return on investment (ROI) to avoid a costly surprise.

3. Examine the Different Types of Multifamily Property

Side-by-side photos of a duplex, a triplex, and a fourplex
Different multifamily property sizes (Source: ARLnow)

Although multifamily properties are viewed the same way from an investment or financial point of view, the term includes a variety of building types. Research each type equally before starting the investment process to see which will best fit your financial goals:

  • Duplex, triplex, and quadplex: When learning how to buy a multifamily property, duplexes, triplexes, and quadplexes are the property types that investors most frequently start with. Plex units differ from apartment complexes because they have a separate entrance to each unit rather than one entrance to all units. These homes are located in various areas and are generally less complex to purchase and manage than apartment complexes.
  • Apartment complex: This can be a robust investment because it generates a higher cash flow, making it less susceptible to loss from vacancy issues. However, buying an apartment complex is more complicated and expensive than buying smaller multifamily homes. Maintenance and management costs are significantly higher, and you will generally need a commercial loan.
  • Turnkey properties: Generally, turnkey real estate comes with existing tenants and property managers, which can mean immediate rental income upon closing. Make sure you research the property’s current income, tenants, and property management companies so that you’re prepared to make any necessary adjustments.
Example of renter applicant profile
Example of renter applicant profile (Source: TurboTenant)

There’s a higher rate of tenant turnover and more complex property management needs when dealing with multifamily complexes. However, you can outsource this to a property management company or a top-notch software program like TurboTenant. TurboTenant is an all-in-one property management solution with tools for screening tenants, creating leases, accepting payments, tracking maintenance requests, and accounting. Learn more about how TurboTenant can be the key to successful multifamily investing.

Visit TurboTenant

4. Research Potential Neighborhoods & Choose a Location

Experienced real estate investors know what to look for when buying a multifamily property, and that location significantly impacts their financial success. Instead of buying a duplex for sale down the street, research potential neighborhoods in your area to find the most profitable locations. This means that you’ll need to gain a solid understanding of the rental market in your target area. A few of the most important factors to consider include the following:

  • Comparable rental rates
  • Local vacancy rates
  • Employment rates
  • Average price per rental unit

Much real estate data is available online through reputable sources like the US Census Bureau and the US Bureau of Labor Statistics (BLS). If you need access to your local MLS, contact a real estate agent in your area to gather data or create a rental market analysis.

5. Choose Your Lender & Get a Preapproval Letter

You need a professional who understands the ins and outs of real estate investing, especially if you’re buying your first rental property. The right loan type for your investment depends on the property you choose to buy, so you need to be informed about each property type before shopping for homes. For example, you can get a Federal Housing Administration (FHA) loan and pay a smaller down payment if you purchase a triplex where you plan to live.

On the other hand, if you’re purchasing a property that needs renovations, consider taking a hard money loan. Unlike most banks, most hard money lenders understand that properties have more potential after repairs, so they’ll lend based on after-repair value (ARV)⁠. That will get you more money to purchase and renovate a multifamily property.

Along with the type of loan, you’ll want to work with a lender specializing in investment properties. Rental property loans typically have higher interest rates because of the risk the provider is taking to lend the money to a borrower. A few of the best investment property loan providers are as follows:

  • PennyMac
  • Lendio
  • PNC
  • Quicken Loans
  • LendingOne

Options for Purchasing With No Money Down

Some investors shun multifamily properties because they can be expensive to purchase. However, these properties offer an opportunity to generate significant cash flow and provide considerable returns when handled effectively. For individuals who want to purchase with no money down, there are various options to invest in multifamily properties, like the ones listed below:

  • Partnerships: Partnerships are common in the real estate industry because numerous investors join forces to divide the costs of a deal. For instance, one investor could handle the daily labor necessary to manage and maintain a multifamily property while the other investor may serve as the primary source of financing. With this arrangement, both investors benefit from the transaction while playing different roles.
  • Equity shares: Another approach to investing without using money is giving a partner a property’s equity share in exchange for the cash necessary for a down payment on multifamily real estate. This would entail sharing a portion of your stake, which may result in a lower overall return.
  • Hard money: A hard money loan is a short loan backed by real estate rather than the buyer’s finances. Although these loans can be authorized fast and require little documentation, their interest rates are usually substantially higher than those of conventional mortgages, and the loan length is often short-term.
  • Real estate crowdfunding: Crowdfunding involves requesting a group of investors for small amounts of capital rather than one enormous contribution. Websites like GoFundMe and Kickstarter, which make it simple for people to crowdfund any project, make this method of fundraising widely used.
  • Seller financing: Seller financing involves making payments directly to the seller to purchase the property over time. These agreements can function as lease-to-own agreements or, more traditionally, standard loans, with the seller serving as the “bank.”

Once you’ve chosen a lender, you must get preapproved before visiting potential investment properties. Multifamily investment can be competitive, so it’s necessary to have a preapproval letter for the purchase amount when you make an offer on a property.

6. Find a Real Estate Agent to Work With

Although the process of buying a multifamily property is similar to buying a single-family home, there are key differences that require specialized expertise. Working with a qualified real estate agent who understands the differences between purchasing a family home and investment property is essential, especially if this is your first rental property. Take some time to search and interview a few agents with investment experience before making a choice.

Zillow Agent Finder
Zillow Agent Finder (Source: Zillow)

The Zillow Agent Finder feature allows buyers and sellers looking for agent representation to conduct searches. Buyers and sellers can quickly narrow down the list of agents on this page by neighborhood, city, or ZIP code, as well as by specialty and language. Agents should make the most of their agent profiles by having current photos, requesting client evaluations, and providing information about their previous sales to entice clients to contact them.

Visit Zillow

7. Narrow Down Your Search to One Multifamily Property

Once you have a clear budget, an agent, and a qualified lender, shop for potential multifamily homes. There are many ways to find investment properties for sale, like searching online marketplaces, the local MLS with a real estate agent, or contacting homes in preforeclosure or foreclosure.

Regardless of how you find potential properties, evaluate them with the mindset of an investor, landlord, and owner. Evaluate the potential income and return on investment based on data like the property’s price, cost of repairs, approximate rental value, and rate of appreciation. In addition to the basics like bedrooms, bathrooms, layouts, size, etc., you also need to pay special attention to other essential elements:

  • Location: Consider the local rental market and the property’s proximity to schools, hospitals, and other establishments like stores and activities.
  • Maintenance history: Checking out past maintenance work on the property can give you valuable information about what repairs and upgrades may need to be made soon or have already been attended to.
  • Remodel potential: Be creative and consider how you can remodel the space to maximize its use. For example, adding a wall and creating an additional bedroom could be a relatively simple strategy to increase functionality and profitability massively.
  • Resale value: Even if you plan to hold on to the property for a long time and rent it out, you should still consider the pros and cons of listing the home in the future. Demand for multifamily homes is typically lower, so choosing a property with appealing or unique features is best for potential resale value.

Pro Tip: If you are new to investing in real estate or this is your first multifamily property, consider starting with a smaller unit, like a duplex or triplex. Managing multiple units can be challenging, so a smaller number of tenants is easier than a large apartment complex. It’s also quicker to renovate or sell a smaller property if needed. Starting small is a great way to learn the ropes with less risk.

8. Estimate Your Profits & Losses on the Property of Interest

With a potential property in mind, it’s time to dig into the numbers and make an informed decision. Figure out the property’s current income and begin estimating your potential income. Ensure your potential income exceeds your monthly costs, including the multifamily mortgage, utilities, taxes, property management, repairs, and ongoing maintenance, such as lawn care or snow removal.

Remember also to calculate the long-term financial impact of owning this property. Decide what your primary financial goal is, whether that’s monthly cash flow or property appreciation. Measure the profits and losses according to that goal; the final calculations should clarify your decision.

9. Make an Offer on Your Multifamily Property

Since buying investment properties can be competitive, knowing all the numbers is essential before making an offer. Use a comparative market analysis (CMA) to help you choose an offer price. This report estimates a home’s worth using sales and property data from similar homes (commonly known as “comps”). 

Your real estate agent can also be a valuable resource during this process since they will be the one to create a CMA and meet with the seller’s agent to negotiate on your behalf. With a clear budget and accurate data, you can be confident in the amount you will offer for the property. 

10. Get Funding & Close on the Property

After the seller has accepted your offer, you’ll start the closing process. If you get funding from a lender, this process can take approximately 30 to 60 days. Depending on your state’s legal requirements, you’ll hire an attorney, get title insurance, and complete any home inspections or appraisals specified in the offer. Finally, on closing day, you will pay the down payment, complete all paperwork, and receive the keys to your new multifamily property.

Frequently Asked Questions (FAQs)

Bringing It All Together

Buying a multifamily home can be both risky and rewarding. It’s vital to be thorough and strategic at every step of the process and remember that an investment property that generates a high ROI can pay off for many years. Next time you consider buying a multifamily home as an investment, use the above expert tips as your guide.

Have any questions on how to buy a multifamily property? Let us know in the comments!