Multifamily investing 101: How to buy multifamily homes

Multifamily investing means buying multifamily properties, such as apartment complexes, condominiums or duplexes, that offer multiple spaces for rent. Because of their capacity to improve an investor’s cash flow and boost their net operating income (NOI), they’re a popular type of real estate investment.

Are you thinking about investing in a multifamily property? Let’s take a closer look at how multifamily real estate investing works and how to buy this type of house. We’ll also explore some of the best reasons to invest in a multifamily property.

What is a multifamily property?

A multifamily property is a residential building that contains two or more separate units, regardless of how many families live in it. These include, but are not limited to, apartment complexes, townhomes and duplexes. Multifamily properties are a popular real estate investment option. According to global data and business intelligence platform Statista, at the end of 2023, 33.7% of all investment properties were multifamily homes.

For tax purposes, the IRS classifies multifamily properties an owner lives in differently from those that an owner doesn’t use as a residence. Additional tax benefits are available for landlords who offer their multifamily properties as low-income housing.

Advantages of investing in multifamily homes

There are numerous advantages to investing in multifamily homes, though be sure to explore property values and residential trends in the area you’re looking at before taking the dive.

• Generates additional income: Managing multifamily properties is one way to increase recurring revenues and significantly boost net operating income (NOI). These properties offer more rental units that you can bring to market, which might alleviate the vacancy concerns that come with investing in single-family properties.
• Expands your investment portfolio: As a rule of thumb, expanding your real estate investment portfolio is key to real estate investing success, as it diversifies your portfolio.
• Growth compared to single-family properties: Multifamily investing differs from investing in single-family residences because it requires you to purchase and maintain properties that include numerous spaces for rent. These real estate properties hold the potential to appreciate in value over time, at a faster rate than single-family properties, providing an added windfall if you decide to sell them in the future.

Disadvantages of investing in multifamily homes

While the advantages of investing in multifamily homes are high, there are also drawbacks to consider.

• High initial investment: Multifamily properties come with larger upfront and back-end costs, and you are likely to pay higher property taxes on them. Property management needs also increase significantly when making the leap from single-family to multifamily housing.
• Market sensitivity: Due to market fluctuation, real estate investors are always facing some level of risk. Because multifamily properties cost more up front and bring in more revenue than single-family properties, it’s especially important that they are in prime locations with fair rent rates.
• Management complexity: Multifamily homes mean more tenants, which inevitably means a greater need for landlord interaction due to increased maintenance requests, rent collecting and unit viewing. If this isn’t possible due to time or distance, it’s a good idea to get a property manager. They can also assist with on-site problem-solving and are likely to better know the local laws and regulations regarding tenancy.

Financing a multifamily investment property

Before you jump into the home buying process, you’ll want to know if you qualify for a mortgage on a multiunit property. For a two- to four-unit multifamily property that you can finance with many residential mortgage lenders, including Rocket Mortgage®, you’ll need to take the following factors into consideration.

Down payment

You’ll find that multifamily investment properties may require a higher down payment than single-family homes. However, the amount you’ll pay as a down payment will depend on a variety of factors, including the loan type. Let’s take a look at how your down payment on a multifamily property can vary depending on the type of mortgage.

• Conventional loan: You can expect to make a down payment that’s 25% of the home’s purchase price. If you’re planning to live in the residence, you can make a down payment as low as 15%.
• FHA loan: Down payment requirements are the same as they would be for a single-family home. You can buy a residence up to four units with a 3.5% down payment through Rocket Mortgage as long as you live in one of the units. While you can get an investment property through the FHA, Rocket Mortgage doesn’t offer this option if you don’t live in one of the units.
• VA loan: These are offered as a real estate financing benefit for eligible veterans, active duty service members, reservists and surviving spouses. Borrowers who qualify can acquire a primary residence of up to four units without a down payment. Investment properties that you don’t live in aren’t eligible for VA loans. 

Credit score

Your lender will also consider your credit score and credit history when evaluating your mortgage application. Like other qualifying factors, the credit score you’ll need will depend on the loan type. Let’s consider the credit score needed to qualify for the following home loan options.

• Conventional loan: You’ll need a credit score of at least 620 to qualify for a conventional loan with most mortgage lenders.
• FHA loan: Most FHA lenders require a minimum credit score of 580.
• VA loan: While there isn’t an established minimum credit score requirement to qualify for a VA loan, eligible borrowers will need a score of at least 580 to qualify with Rocket Mortgage.

Keep in mind that you may need a higher credit score to take out a mortgage if you’re looking to finance multiple investment properties. In some cases, you might need a minimum credit score of 720 if you’re financing an investment property and own several other financed properties already. Talk to your lender to see what credit score you’ll need to qualify for a specific mortgage.

Debt-to-income ratio (DTI)

In addition to your down payment, it’s also important to consider your debt-to-income ratio (DTI). Your DTI effectively represents the amount of monthly debt that you have in comparison to your gross monthly income. The less money that you’re paying out each month in debt and the more that’s coming in as income, the more attractive your DTI will look to lenders.

When considering your multifamily home mortgage application, a lender will evaluate your income and cash flows. They’ll also look at your regular and recurring debts like car payments, student loans and home loans. Minimum payments on revolving lines of credit like credit cards will also be considered.

What is a good return on investment (ROI) for a multifamily property?

Whether your ROI on a multifamily investment property is favorable depends on your specific financial situation. Factors that can influence your ROI include your rental income, operating costs and the amount of your mortgage loan. To calculate your ROI for a multifamily rental property, consider using the following formula:

ROI = (Annual Rental Income − Annual Operating Costs) ? Mortgage Value

How to start investing in multifamily real estate

If you’re wondering how to buy multifamily homes, it’s important to have an idea of where to start, how to choose a loan type and what’s involved with making a strong home offer.

Below, we take a closer look at the multifamily real estate investing process. That way, you’ll know how to maximize your odds of successfully identifying and capitalizing on new investment opportunities.

Step 1. Find a multifamily property

There are many ways to find investment properties, such as browsing online auctions, using a multiple listing service (MLS), and speaking to real estate agents and other investors.

Location is one of the most important factors you’ll want to consider when looking for a multifamily home. For starters, you’ll want to find a property that’s located in an area that will be appealing to renters. Check out neighborhoods with good school districts, in close proximity to public transportation and within districts with a variety of shops, restaurants and amenities. A great location can attract high-quality tenants who will want to pay to live in the home.

You also might consider partnering with a local real estate agent who understands the housing market, industry dynamics and rental trends in the area. Real estate agents or REALTORs^® can offer quality advice on where to purchase a home and can help you determine whether a property is the right price.

Step 2. Choose a mortgage loan

After you find the right multifamily property, you’ll want to explore different types of mortgages. Successful real estate investing isn’t just about choosing the best property, it’s also about securing the best possible interest rate, managing cash flow and thinking about how different asset classes fit into your overall investment portfolio.

During the initial stage of the mortgage process, you’ll want to shop around for multifamily real estate mortgage lenders and compare interest rates and loan terms to find the best fit.

When qualifying for a mortgage, consider your qualifying factors, including your credit score, credit history, DTI, income, assets and whether you own other investment properties. You’ll likely need to provide your lender with documents like bank statements and federal tax returns to verify your sources of income.

If you’re financing multiple rental properties, you might have to follow a different mortgage loan process. Speak with your lender if you’re interested in taking out a mortgage on several real estate investments.

Once mortgage financing is arranged, you’re ready to make an offer on the multifamily property.

Step 3. Make a home offer on the multifamily property

When you’re ready to make an offer on a house, your real estate agent can provide valuable insight and advice. Together, you’ll determine the highest offer you’re willing to make based on your budget and financial circumstances.

Once you have your numbers ready, your agent will meet with the seller’s agent and negotiate the sale price. You’ll move forward if your offer to buy the multifamily property is accepted. Counteroffers are common, so don’t be discouraged if you have to go through a few rounds of negotiations.

After the seller accepts your offer, you’ll move toward the closing process. You’ll need to purchase homeowners insurance, arrange for an inspection and handle additional closing costs during this time.

Step 4. Renovate and get ready for your tenants

After closing on the multifamily property, it’s time to prepare for your new tenants. This step in the process might involve making necessary renovations and repairs, as well as creating a property management plan.

Part 1: Renovate and make repairs

Before you start renting out the units in your property, you might need to make repairs that were outlined in your inspection report to ensure that your multifamily home follows local codes.

You may also want to invest in some cosmetic upgrades, like new doorknobs, light fixtures, cabinet pulls or a fresh coat of paint. These small changes can attract more tenants and improve revenue.

Be sure you have a maintenance plan in place as well. This plan should handle any tenant repair requests and regular upkeep of the building as well as lawn care and snow removal.

Part 2: Create a property management plan

You’ll also need to decide how you want to manage your rental units as well as marketing to prospective tenants. Decide how much time you’re willing to commit to running your property before you make this decision.

As part of your considerations here, you’ll also want to map out a budget for your multifamily property. The budget can account for various operating costs, upgrades and cash flow demands that may arise as you manage your multifamily unit.

The bottom line: Is multifamily real estate investing right for you?

Investing in a multifamily property is a great way to grow your real estate portfolio and bring in additional income. Owning multifamily properties can be a small endeavor or a large undertaking, depending on the number of rental units that the property contains.

Are you thinking about investing in a multifamily property or making one your primary residence? Find the right mortgage for your situation with Rocket Mortgage.