Interested in investing in multifamily real estate? A multifamily real estate property can increase your return on investment (ROI) because you collect multiple rents. But buying a multifamily property takes knowledge to do it right. Keep reading to learn about the types of multifamily investments available, how to earn a solid return and ways to get started in multifamily real estate investing today with virtually any budget.
Investing in the multifamily real estate market can be a great way to earn passive income. It’s a popular market, as there are options for every price point. While searching for the best investment, be sure to consider the financing for the type of multifamily property you are pursuing as well as finding the best interest rate. With the proper cash flow coming from your rental properties, your monthly income can ultimately set you up to live in luxury — and make money while you sleep. But do your research first. What kind of multifamily property do you want to invest in?
Types of Multifamily Properties
There are multiple types of multifamily properties available to invest in. These are broken down by property class, size and style.
Multifamily Property Classes
This type of property falls into specific property classes, including:
Class A is the highest class of multifamily properties and is found in highly desirable locations. These are typically newer buildings built within the last 10 years or, if older, that have had a major renovation. A variety of upscale amenities may be offered in these deluxe accommodations. These could include a swimming pool, gym or tennis court, depending on other competing Class A buildings in the area. This type of housing also is known to have high-end interiors as well as exteriors, built with quality and attractive materials.
Class B multifamily real estate is older but still of good quality and condition. These buildings are typically about 20 years old and may be in need of some updating or a little maintenance. They still offer several nice amenities, just not with the same expectations as the high-end Class A offerings. This type of real estate is more affordable.
Class C has been built within the last 30 years, usually with original work and systems. Generally, these properties are in need of maintenance and repair as well as updating. They are however usually kept clean and in good enough condition for their tenants. They may offer one or two amenities but nothing extravagant or impressive. Here the renters are getting what they pay for. It’s less expensive housing but livable and comfortable.
It’s worth mentioning the financing side of these classes as well. For Class A and some Class B multifamily real estate properties, you can usually get a lower interest rate, and more financing options are available. Longer fixed-rate terms and higher leverage make these classes good considerations for a strong investment opportunity. Agency lenders and real estate investment trusts (REITs) generally go after Class A assets, making them a viable option for investors.
Some of Class B and most of Class C properties have higher interest rates and fewer financing options. Your fixed rate may have balloon terms as well as less leverage. Financing for these classes is mostly from banks or REITs and agencies. Know what you’re getting into and your best options for the highest return.
Multifamily Property Styles
Within these classes of multifamily real estate properties is the style of the buildings. How many floors and apartments will help determine what kind of investment property you are interested in working with.
- Low-rise and garden-style are typically three or fewer floors with anywhere from 5-50 apartments. These usually do not have elevators and are considered a “walk-up”, though some may accommodate an elevator.
- Mid-rise range from 4 to 10 floors with some as high as 12, with elevator access. There can be 50 to 200 apartments in these buildings, with amenities offered.
- High-rise buildings range in size depending on zoning laws. They are more than 12 floors and up to 40 stories. There may be a mix of apartment sizes and layouts as well as up to 20 apartments per floor. Many amenities are offered at these buildings because the sheer size allows the space for extras, and the amenities draw tenants.
Multifamily vs. Single-Family Properties
Multifamily Investment Properties
- When committing to an investment opportunity, you think about the time and effort that you need to put in. Investing in a multifamily property means just one property to manage, service and care for. If you have 10 apartments versus 10 single-family homes, your 10 apartments are in one place. You replace one roof and hire one landscaper for one yard. Your drive to take care of business takes maybe one hour instead of 10. Even better, you can live in one of the apartments and potentially live rent-free while staying on top of maintenance.
- Cash flow — the reason you are in this business — has a higher likelihood with a multifamily residence. Multifamily means multiple checks coming in each month. Even with a vacancy or two, you are earning money. If you have only a single-family home and it’s vacant, you’re getting nothing at all.
- Your portfolio will be more impressive. Growing your investment portfolio can be faster if dealing with a multifamily property. The number of units you obtain per transaction will increase much faster than with purchasing single-family properties. It’s also easier to sell them when the time comes because multifamily properties have many eager and willing investors ready to take over when you’re done.
- Multifamily investments may not be for everyone. Dealing with many tenants and the upkeep of a multifamily building can be stressful, expensive and hard and sometimes should be reserved for seasoned investors. A single-family investment may make it easier to get your feet wet and see how you like it, while not putting too much money into it right away. It’s expensive to invest in multifamily properties.
- More wear and tear is also a fact of life for multifamily investors. Sometimes in these buildings, you get tenants who are less concerned with keeping up the apartment building to your standards. So, you will be responsible for a lot of cleaning and maintenance when the property turns over, which is usually more often than with single-family rentals.
Single-Family Investment Properties
- It’s much less expensive to invest in a single-family home than multifamily real estate. With a lower loan amount, you can take on less risk and still add to your portfolio and see how you like having a rental property. Starting with one single-family rental is more manageable for someone new to real estate investing and still enables an investor to achieve passive income.
- Your buyer pool is always ready. Single-family homes can be sold to buyers or investors, leaving many people willing and able to purchase if you choose to sell. The rental market for single-family homes is also great — many people would prefer to have a whole house and yard to themselves instead of risking loud, rowdy neighbors upstairs or downstairs like in a multifamily dwelling.
- In a single-family investment, you can save time and money with the right tenant. It’s easier to feel like a single-family home is their home, so they take better care of it and stay longer. A good long-standing tenant will keep giving you a reliable monthly income from your investment property for years to come.
- If you have a vacancy in your single-family investment, you are losing money. You still have to pay the mortgage and taxes. You still have to maintain it for potential showings and renters. You are still putting money into it and getting nothing in return until you get a signed lease.
- If you have several single-family investment homes, maintenance can add up. If they all need new roofs or a new air conditioner, a furnace or anything else, it can get expensive. You are taking care of each property separately instead of just one of many things like in a multifamily property.
Multifamily vs. Commercial Properties
While multifamily real estate is considered commercial real estate because it’s an investment, there are still notable differences between multifamily properties and other types of commercial properties. For example, office, retail and industrial may have different lease terms and owner responsibilities.
As far as lease terms for multifamily real estate, they generally are one-year leases with the tenant paying for utilities and the property owner paying for the mortgage and taxes. Retail and industrial leases can be for 5 or 10 years, giving a much longer and more dependable monthly income to the owner. More options for the lease terms are available for office, retail and industrial properties. These are more commonly known as gross leases or net leases. A gross lease is similar to a residential lease, which has a base rent and the landlord covers taxes and maintenance. In a net lease, the tenant is responsible for the rent as well as a portion of the taxes, insurance, maintenance and some operating expenses.
Multifamily Real Estate Market Outlook
Multifamily real estate is expected to make a recovery in 2023, thanks to new people entering the workforce. A growing demand for affordable housing as well as a decrease in vacancy are likely in the coming years.
Ways to Invest
- Purchase a building: Purchasing a building is the most direct form of investment. It’s your money and you have the most control — and the most risk. But it can also give you a great return on your investment and lead to a great portfolio.
- Apartment REITs: With less risk, investing in a REIT can be a great way to get into the multifamily real estate market. Here, you are among a pool of numerous investors and don’t need to worry about managing or buying the properties yourself. You receive a steady stream of investment income.
- Crowdfunding: Raising money through real estate crowdfunding is a seemingly easy enough way to get into investing. You fund your investment through alternative finance — raising the money in small amounts from several different sources. You can see Benzinga picks’s of the top real estate crowdfunding platforms for multifamily real estate below.
With this information on investing in multifamily real estate, you should be well on your way to planning how you're going to invest and what type of property you’d like to invest in.
Unlocking Passive Income
Investing in multifamily real estate offers passive income and portfolio growth. Understanding property classes, styles and financing options is important. Challenges like tenant management and maintenance exist, but there is potential for reliable cash flow and portfolio expansion. Single-family investments and alternative options like apartment REITs and crowdfunding allow for diversification without direct property management. The multifamily real estate market is expected to recover and see increased demand, offering the potential for impressive returns.
With all of this information on investing in multifamily real estate, you should be well on your way to planning how you're going to invest and what type of property you’d like to invest in. Go increase that portfolio and start earning some impressive passive income now.
Frequently Asked Questions
Can I earn a lot of money investing in multifamily real estate?
If you make the right deal, you can make a lot of money investing in multifamily real estate.
What is a good ROI for multifamily?
A good ROI for multifamily is between 14 and 18 percent.
Can I put 3% down on a multifamily property?
If the property is owner-occupied, you can likely qualify for a lower down payment.
Accelerate Your Wealth
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