How To Buy a Multifamily Investment Property in 9 Steps
Investing in multifamily real estate is a lucrative strategy for gaining cash flow and building a strong investment portfolio with one real estate transaction. To learn how to buy a multifamily property, start by determining your budget. Then, research types of properties and neighborhoods, choose a lender, and estimate profitability. Whether you choose to flip properties for faster profit or rent it to tenants, the process of researching and buying a multifamily property will heavily impact your success and potential profits.
Here’s a breakdown of how to buy a multifamily property in nine steps:
1. Decide on Your Budget
Multifamily investment offers many benefits. For instance, it can provide a more predictable income than single-family rentals and an increased cash flow. It is also generally simpler and more manageable than purchasing a large commercial property. However, it’s undeniable that the upfront costs can be pricey. Multifamily mortgage loans typically require a 20% down payment of the property price, plus there are inevitable maintenance and property management costs.
For all of these reasons, it’s absolutely vital that you sit down and determine a budget before you begin the process of buying a multifamily home. Decide what your financial goals are and how much you are willing to put into this investment. You’ll need to take many different costs into account and be prepared for unexpected costs that may arise.
As you look at all of your finances, make sure you consider the following factors:
- Closing costs: These are generally 2% to 5% of the sales price of the property and include lender fees, title insurance, property insurance, and property taxes. The higher the home’s sale price, the higher your closing costs will be.
- Carrying costs: These are the monthly recurring costs of holding onto the property, including your mortgage, taxes, insurance, and utilities.
- Renovation costs: Depending on the property’s condition, you may need minor and/or major renovations before renting it out. Consider how much you will need to spend on the property before taking further steps.
- Ongoing repair costs: These are variable costs that 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 a tenant, 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 calls for unexpected expenses like additional repairs. It’s best to overestimate your potential costs and have a larger cash reserve than you need. Make sure you have an extra cushion in your repair budget when calculating your total return on investment (ROI) to ensure you won’t be left with a costly surprise.
2. Examine the Different Types of Multifamily Property
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 different type equally before starting the investment process to see which will best fit your financial goals.
In your research, you may find that a different type of property actually fits your needs or your rental market better than you initially realized. The three main types of multifamily properties are residential multifamilies (duplexes, triplexes, and fourplexes), apartment complexes, and turnkey properties.
Duplexes, Triplexes & Fourplexes
When you’re learning how to buy a multifamily property, duplexes, triplexes, and fourplexes are most frequently the property type that investors 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 residential homes with multiple units can be located in a variety of areas and are generally less complex to purchase and manage than apartment complexes.
Pro tip: Aspiring investors spend months trying to figure out how to buy a multifamily property with no money, and often decide house hacking is the best solution. House hacking means purchasing a home as your primary residence, living in one of the units, and renting the other units to others. While this isn’t an ideal or long-term solution for many investors, it’s a great way to start your investment journey.
Apartment complexes can be powerful investments because they can generate a higher amount of cash flow which isn’t as susceptible to vacancy issues. However, buying an apartment complex is notably more complicated than buying smaller multifamily homes. Maintenance and management costs are significantly higher, and you will generally need a commercial loan.
For more specific details about the process of buying an apartment complex, read our guide.
There’s also a much higher rate of tenant turnover and more complex property management needs. However, this can be outsourced 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.
If you’d prefer to skip the hassle of finding tenants for an entire building or complex, consider looking into turnkey real estate properties. Turnkey real estate comes with existing tenants and property managers, which can mean immediate rental income upon closing. Make sure you do plenty of research on the property’s current income, tenants, and property management companies, so that you’re prepared to make any necessary adjustments.
Check out our article on the Best Turnkey Real Estate Companies to learn more about what they are and how to invest in these types of properties.
3. Research Potential Neighborhoods & Choose a Location
Experienced real estate investors know that location always has a significant impact on their financial success. Instead of simply buying a duplex for sale down the street, research potential neighborhoods in your area to find the most profitable locations. Identifying great locations for investment properties is half the battle of making a wise investment.
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:
- Average rental rates
- Average vacancy rates
- Employment rates
- Average price per rental unit
Plenty of real estate data is available online through reputable sources like the U.S. Census Bureau and the U.S. Bureau of Labor Statistics (BLS). If you don’t have access to your local MLS, reach out to a real estate agent in your area to gather data or create a rental market analysis.
4. Choose Your Lender & Get a Pre-approval Letter
Finding a lender to finance your real estate investment purchase can be tedious and challenging. In many cases, financing an investment property is much different from financing a primary residence, with different requirements, interest rates, and types of loans. 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, which is why you need to be informed about each property type before shopping for homes. For example, you may be able to get a Federal Housing Administration (FHA) loan and pay a smaller down payment if you’re purchasing a triplex that you plan to live in.
On the other hand, if you’re purchasing a property that needs renovations, consider taking a hard money loan. Most hard money lenders understand that properties have more potential after repairs, so they’ll lend based on after-repair value (ARV)—unlike most banks. 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:
- Quicken Loans
Once you’ve chosen a lender, you need to get pre-approved before visiting potential investment properties. Multifamily investment can be competitive, so it’s necessary to have a pre-approval letter for the purchase amount when you make an offer on a property.
5. Find a Real Estate Agent To Work With
Although the process of purchasing a multifamily property is somewhat similar to purchasing a single-family home, there are key differences that require specialized expertise. It’s important to work with a qualified real estate agent who understands the differences between buying a family home and investment property, especially if this is your first rental property. It’s worth taking some time to search and interview a few agents with investment experience before making a choice.
6. Narrow Down Your Search to One Multifamily Property
Once you have a clear budget, an agent, and a qualified lender, start shopping for potential multifamily homes. There are many ways to find investment properties for sale, like searching online marketplaces, the local MLS, or reaching out to homes in pre-foreclosure 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. Use our Gross Rent Multiplier (GRM) Calculator to help you compare and contrast similar properties.
Pay special attention to each property’s:
- Location: Consider the local rental market and the property’s proximity to schools, hospitals, and other establishments like stores and activities.
- Maintenance history: If possible, checking out past maintenance work on the property can give you valuable information about what types of repairs and upgrades may need to be made soon or have already been attended to. In addition, take any deferred maintenance into account. Deferred maintenance can mean additional costs to you, as you’ll have to be responsible for the repair after you buy the property.
- 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 massively increase functionality and profitability.
- 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 it’s best to choose a property with a variety of appealing or unique features 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 it’s easy to manage a smaller number of tenants than a large apartment complex. It’s also quicker to renovate or sell a smaller property if the need arises. Starting small is a great way to learn the ropes with less risk.
7. 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. Since multifamilies are investment properties, figure out the current income of the property. Make sure that your potential income is higher than your monthly costs, including the multifamily mortgage, utilities, taxes, property management, repairs, and ongoing maintenance, such as lawn care or snow removal.
Don’t forget to also 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, and the final calculations should make your decision more clear.
Use the Rental Property Calculator to determine the income that a rental property can produce as well as your return on investment and cash flow.
One of the most efficient ways to gather and evaluate all the necessary data is to use Roofstock, the leading real estate marketplace for investors. It’s designed to simplify the process of finding, evaluating, and purchasing investment properties, so each listing includes valuable data like the current rent, cap rate, and appreciation rate. It even includes an inspection summary, information on the current tenants, and local market data for that location. Plus, Roofstock is completely free until you place your first offer.
8. Make an Offer on Your Multifamily Property
Even though buying investment properties can be competitive, it’s important to know all the numbers before you make an offer. With a clear budget and accurate data in hand, you can be confident in the amount that you are willing to offer for the property. Your real estate agent can also be a valuable resource during this process since they will be the one meeting with the seller’s agent and negotiating on your behalf.
An alternative way to make an offer is through Roofstock, which allows you to make a professional for a free offer. You only pay a fee of 0.5% if your offer is accepted. Make sure to include the purchase price, your pre-approval letter, any required contingencies, and closing date.
9. Get Funding & Close on the Property
After the seller has accepted your offer, you’ll start the closing process. If you are getting funding from a lender, this process can take approximately 30 to 45 days. During this time, depending on the legal requirements in your state, you’ll hire an attorney, get title insurance, and complete any home inspections specified in the offer. Finally, on the closing day, you will pay the down payment, complete all paperwork, and receive the keys to your new multifamily property.
If you’re working with an agent, they should provide you with a closing checklist. If not, you can download our free Real Estate Closing Checklist for Buyers to help you complete your transaction and start making a profit.
Buying a multi family home can be both risky and rewarding. It’s important 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 or decades. Next time you think about buying a multifamily home as an investment, make sure to use the above expert tips as your guide.