How to Invest in Multi-Family Real Estate

By Michelle Clardie on 11/09/2022.
Reviewed by Dan Gatsby .
Multi-family real estate investing is a highly lucrative, tax-advantaged investment strategy for investors who are interested in generating passive rental income from multiple units while enjoying long-term appreciation. Multi-family developments are one of the quickest ways to become a millionaire through real estate investing.

But multi-family investments are a bit more complex than investing in single-family homes. This article will explain what you need to know before you invest. 

We’ll cover:
  • The pros and cons of investing in multi-family properties, 
  • How to invest in multi-family real estate step-by-step,
  • What to look for in a multi-family property, and
  • How multi-family compares to single-family.

We’ll also share an industry-insider method for investing in multi-family real estate with low upfront costs (no experience required!). Here is your beginner’s guide to multi-family investing.

What is Considered a Multi-Family Property?

A multi-family property is any piece of residential real estate that is zoned for more than one household. Multi-family properties can take several forms, including

  • Duplexes,
  • Triplexes,
  • Townhomes,
  • Small apartment buildings,
  • Large apartment communities, and
  • Condo complexes.

When investors talk about investing in multi-family properties, they are referring to owning multiple units. Buying a single condo, for example, would not be considered a multi-family investment because you would only own one housing unit. But, if you were to purchase an apartment building and rent out each unit, you would be considered a multi-family investor. 

It’s also worth noting that multi-family properties with four units or less are generally considered to be residential real estate while those with more than four units are considered commercial real estate. This distinction can make a difference in your financing options and local zoning codes. 

Pros and Cons of Investing in Multi-Family Properties 

Why should I invest in multi-family real estate? 

You should invest in multi-family real estate because the pros typically far outweigh the cons. Let’s look at the advantages and potential drawbacks of multi-family investing.

Advantages of Investing in Multi-Family Real Estate

Here are some of the key benefits of multi-family real estate investing.

  • Greater cash flow. With more units, you have greater rental income.  

  • Passive income potential. When you buy a multi-family property, it makes more sense to hire a property management company to handle the day-to-day operations. This means your rental income will be completely passive. This is one of the best ways to create passive income from real estate.

  • Tax benefits. While all rental properties offer impressive tax benefits, multi-family structures typically offer greater tax benefits because of the higher expenses.

  • Instant diversification. With a multi-family home, you have multiple renters. This diversification offers some protection. If you have one unit vacant, you have other units that are still producing income! 

  • Lower expenses per unit. Umbrella insurance policies, landscaping for just one property, one roof to cover multiple units...these all work in your favor to give you a lower cost per unit than you would get with multiple single-family rentals. 

  • Greater control over the property value. With single-family properties, the value is heavily tied to current market conditions, but with multi-family rentals, you can increase rental property value by commanding high rental rates, which are easier to manipulate than single-family sales prices.

Disadvantages of Multi-Family Properties

Since no investment is perfect, all the benefits of investing in multi-family homes have to be offset by some disadvantages. Here are the potential drawbacks of multi-family investments.

  • Less affordable than single-family homes. Purchasing a multi-family property will cost you more than a single-family property. It will also have higher operating expenses than a single-family property. But, as we mentioned in the pros section, the cost per unit will likely be less.   

  • Generally lower appreciation. Multi-family buildings don’t grow in value as fast as single-family. This is partly because there is greater wear and tear on rentals and partly because renters expect properties to be updated, so dated buildings won’t hold their value as well. 

  • Stricter requirements to qualify for financing. Multi-family projects generally require higher credit scores and larger reserve funds to qualify for a mortgage loan.

  • Harder to manage. With more units, you have more tenants. And that means more maintenance requests, more rent payment tracking, and more lease renewals. 

  • More competition. In many areas, single-family rentals are in high demand as families have been priced out of the housing market and prefer to rent homes, so they have more space to raise kids. In the multi-family rental market, on the other hand, there are many units available. And in some markets, there is enough supply to meet the demand, which means property owners have heavy competition. 

Steps for Investing in Multi-Family Homes

A numbered listed section that speaks to the process of investing in multi-family homes. These steps may need to be re-ordered, adjusted, added to or removed, etc., but to start:

1. Do the Math 

Learning how to analyze multi-family investment opportunities will help you avoid properties with poor return potential and maximize your ROI. 

You might use the one percent rule in real estate to identify good deals. This rule states that your monthly income should equal at least one percent of the total acquisition price (the purchase price plus renovation costs). While this method works in some markets, it does not apply to higher-value markets like California and New York where real estate is more expensive. 

If the one percent rule doesn't apply to your market, check the cap rate. The cap rate is an indicator of the risk/reward level for a property. To calculate the cap rate, divide the acquisition price by the net operating income (NOI is the total income minus all expenses except the mortgage payments). Then convert the result to a percentage to get your cap rate. Very generally speaking, cap rates of 4-10% indicate a good investment.

2. Get Pre-Qualified for a Loan

Unless you plan to pay all cash for your property, you’ll need to know how much money you’re able to borrow. It’s helpful to have a lender review your finances to pre-qualify you for a specific amount even before you start looking at properties because this will help guide your budget. 

And, when you find the right property, your offer will carry more weight because the sellers will know that you qualify for the loan needed to close the deal. 

3. Research Available Properties

Your best bet for finding a multi-family property is to partner with a local real estate agent. Agents have access to the MLS (multiple listing service), so they can access information on all available properties in the area. Even better, agents often learn of new properties before they hit the market. So a good agent can give you an inside edge over competing buyers. 

You might also find properties through auctions. Or you might reach out to local apartment owners directly to ask if they would be willing to sell.  

4. Make an Offer

Once you find a property that makes sense for you, you get to make an offer! Your offer price should be guided by market conditions. Never assume that a property is priced correctly. Check recent sales of comparable properties to make sure you’re not overpaying. Be prepared for a potential counteroffer from the seller.   

5. Do Your Due Diligence 

With your offer accepted, you can enter the contract period. This will give you time to perform your due diligence checks on the property while the property is reserved for you. Your due diligence should include

  • An inspection to confirm the condition of the property, 
  • An appraisal to get a professional confirmation of the current property value, 
  • A title search to make sure no other party has an ownership claim or lien against the property, and
  • Specialty inspections as appropriate (perhaps a fireplace inspection, pool inspection, or termite inspection would apply to your chosen property). 

6. Secure the Loan

During the contract period, you will also work with your lender to complete the loan docs and have the funds wired to the escrow officer, attorney, or seller (whichever party is designated to receive the closing payment).  
At this point, you’re officially a multi-family real estate investor! But there’s one final step to be completed…

7. Renovate and Make Repairs

Repairing and renovating can add immediate value to your new investment property and help you maximize your returns. It takes a bit of strategy to allocate funds to the renovation projects that will produce the greatest returns. Focus on adding low-maintenance amenities and features that appeal to your target market to increase rental property value.

What to Look for in Multi-Family Properties

Knowing how to spot a good real estate investment takes a deep understanding of your local market and a bit of practice. When investing in multi-family real estate, look for the following:

  • A neighborhood that is growing in value
  • An area with solid population growth
  • Easy access to transportation, including highways/freeways
  • Local amenities, including restaurants, shops, and entertainment venues
  • Outdoor spaces like parks or bike paths
  • Efficient heating and cooling
  • Lower-maintenance building amenities, like rooftop decks
  • A lack of higher-maintenance amenities, like elevators
  • Ample parking
  • Affordability
  • Good condition 
  • A manageable number of units
  • Strong rental income potential
  • A property that makes financial sense

Multi-Family Real Estate vs Single-Family Real Estate

Is it better to invest in multi-family properties or single-family rentals? There are valid arguments to be made in favor of each investment type, but it really comes down to your personal goals and preferences.

If you’re looking to maximize your ROI while minimizing your risk, multi-family rentals are likely a better fit for you. 

If you’re looking for a more affordable investment that is comparatively easy to manage without a property management company, single-family rentals might be a more comfortable investment vehicle for you.  

Before you decide between single-family and multi-family, you should know that there are newer investment models that make multi-family investing easier and more affordable than you might imagine. If you’re nervous about investing in multi-family real estate because you don’t have experience analyzing, financing, or managing rental properties (or because you aren’t comfortable with the upfront expense of multi-family apartments), read on to see how real estate syndication makes these investments more accessible. 

Multi-Family Real Estate Investing with Gatsby Investment

Real estate syndication, similar to crowdfunding, is when multiple investors join funds to finance a single real estate project. This allows investors to buy into a project with substantially less cash upfront than they would need to fund the project themselves. And the entire project is professionally managed by a syndicator, who purchases the property through a specially-created ownership entity that includes each investor, handles all renovations, and manages the day-to-day operations of the property.

Gatsby Investment is a premier real estate syndication firm with an exceptional track record of successful real estate investments in the hot Los Angeles market. We offer multiple ways to invest in multi-family real estate, including:

  • Multi-family development. Get in on the ground floor by investing in the construction phase of a new multi-family building!
  • Multi-family rentals. Enjoy passive income, tax benefits, and long-term appreciation without having to actively manage the property yourself!
  • Multi-family build-to-rent. This innovative investment model combines the development and rental phases, allowing investors to get all the benefits of both strategies!

Gatsby makes it easy to invest in multi-family real estate, even if you don’t have a large budget or prior experience. Check out our active investments or schedule a private consultation with one of our knowledgeable investment advisors today! 

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