Complete Guide to Buying a Multifamily Property

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Contributor, Benzinga
August 5, 2024

As you’ve considered growing your real estate portfolio, you’ve had your eye on purchasing an apartment complex. But you’re just not sure whether buying a multifamily property is the right move for you.

Despite higher interest rates and a softening economy, investments in multifamily real estate remain strong as investors pursue cash flow and appreciation. A surprisingly robust national job market supports a good outlook for buying a multifamily property. Companies are hiring workers who are looking for places to live.

Are you ready to add multifamily properties to your investments? If so, check out this complete guide on how to go about buying a multifamily property.

What Is a Multifamily Property?

A multifamily property, or multifamily real estate or a multifamily home, is a building with more than one living space where residents have their own kitchen and bathroom. Builders, developers and government officials often refer to multifamily homes as multi-dwelling units.

Typically found in dense urban areas, about one-fourth of the 128.5 million housing units in the United States in 2021 – 31.8 million – were in multifamily buildings. While 81.7 million housing units were counted as detached single-family homes, another 8.2 million were classified as attached single-family homes.

That might seem confusing, but the U.S. Census Bureau classifies any attached home, including townhouses, row houses, duplexes and quadruplexes, as single-family in many cases. Specifically, a unit is considered single-family if it: 

  • Is separated by a wall from the ground to the roof
  • Has its heating system and meter for utilities
  • Has no units above or below

Still, investors in multifamily properties include apartment complexes and condominiums as well as duplexes and townhomes that don’t meet the Census Bureau's definition of a single-family home.

Types of Multifamily Properties

As an investor, you can consider any residential property with more than one housing unit with its kitchen and bathroom as a multifamily property. Here are the different types:

  • Duplexes: A house with two units, each with a separate entrance
  • Triplexes: A house with three units, each with a separate entrance
  • Quadruplexes: A house with four units, each with a separate entrance 
  • Town house: A home that shares a wall with a neighbor but is bought separately
  • Apartment complexes: Multiple housing units for rent within one building
  • Condominiums: Multiple housing units for sale within one building

The variety of multifamily homes available can seem endless, giving you many configurations to consider for your investment.

Difference Between Multifamily Properties and Single-Family Properties

The number of units is an obvious difference between a multifamily and a single-family property. Single-family homes have just one housing unit, whereas multifamily homes have more than one. But other differences could impact your investment choice as well.

For instance, a multifamily property with four or fewer units is considered residential real estate, while those with five or more units are considered commercial real estate. That distinction can determine whether you can pursue a standard housing loan or a commercial loan.

A single-family property also tends to be easier – and less expensive – to maintain. However, the potential rental income from a multifamily property can be much higher.

Pros and Cons of Buying Multifamily Properties

Buying a multifamily property has advantages and disadvantages, although these can vary based on the type of property and location you choose. Consider these pros and cons:

Pros

  • Steady income to cover your mortgage and housing costs
  • Potential tax benefits via business write-offs
  • Investment diversification opportunities
  • Can live on the property and rent out other units
  • Flexible financing due to the lower-risk investment

Cons

  • Larger upfront cost
  • Cash reserves must meet lender needs and cover vacancies and repairs
  • Requires effort and money to attract and keep tenants
  • Must put in time and effort to manage the property
  • The process of preparing, listing, marketing and showing property can be complex

Before jumping into the deep end, remember that a multifamily property can provide long-term income. However, there are also numerous federal, state and local regulations that you must follow.

How to Buy a Multifamily Property

Are you wondering how to buy a multifamily property? It may not be nearly as difficult as you imagine, but it does require time, effort, patience and research.

You must know what you’re getting into, so setting a budget is key to buying a multifamily property. It’s easy to think about the increased rental income, but your budget also should reflect unexpected costs, such as: 

  • Vacancies
  • Late rents 
  • Property damage 

It should also cover the costs of improving and maintaining your property to increase its revenue potential and reduce vacancy rates.

Factors to Consider When Buying a Multifamily Property

Like all investing, buying a multifamily property is a process. Here are some of the factors that can impact your success:

The Building

Take a look at the prospective building's number of units, its condition and the amenities available to potential tenants. It’s also helpful to research the property’s purchase history.

Location

No real estate deal avoids the scrutiny of the location. To attract good tenants who want to stay, check out the neighborhood, how close the property is to transportation and whether any environmental concerns are on the property or nearby.

Finances

When you’re looking for your property, consider what renovations might be needed to attract tenants. You also need to consider your current repair costs and any future repairs. 

As you investigate and research properties, you must evaluate the capitalization rate, or cap rate, of each one you view by dividing projected net income by what you expect to pay. All else being equal, you can predict a higher return from the one with the highest cap rate.

Buying a multifamily property isn’t generally difficult. Nonetheless, it’s imperative that you thoroughly understand the different elements to consider before making such a big investment.

Determine if Buying a Multifamily Property Is Right for You

Investing in multifamily properties can diversify your portfolio, give you a steady rental income stream and provide potential tax advantages. After reading this guide, you now understand the differences between multifamily and single-family properties and the types of multifamily properties available. 

With this knowledge, you can assess your situation and determine whether buying a multifamily property is right for you.

Frequently Asked Questions

Q

Why invest in multifamily property?

A

Consider these five reasons to invest in a multifamily property: exponentially grow your portfolio, generate income, find various financing options, capitalize on high demand and benefit from cost efficiencies.

Q

Where is the best place to invest in multifamily real estate in 2024?

A

Dallas tops the list for multifamily real estate investing, though strong rent and occupancy growth are also expected in the Northeast (New York and Boston) and Midwest (Chicago). However, declining rents in the Mountain and Sunbelt regions are expected to fuel demand through population growth.

Q

What time of the year is best to buy multifamily property?

A

You might find better pricing for multifamily properties during the spring, September and October. Prices tend to subside during these periods.

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