Multifamily home in a city.

Multifamily Investing 101: How To Buy Multifamily Homes

Scott Steinberg7-minute read

September 02, 2021

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Multifamily investing refers to the practice of buying multifamily properties such as apartment complexes, condo buildings, or duplexes which offer multiple spaces for rent. Because of its capacity to improve investors’ cash flows and boost net operating income, it’s a popular form of real estate investment.

Thinking of buying a multifamily home or investing in multifamily units? You’re not alone. Reasons that prospective multifamily homeowners may be wondering how to buy a multifamily property are manifold, including but not limited to the ability to increase revenue potential, reduce vacancy rates, or add new income streams.

Here, we take a closer look at how multifamily investing works, how you can set about buying a multifamily home, and what to know as you go about adding to your investment portfolio. In addition, we’ll also walk you through several of the best reasons to considering investing in a multifamily home – and how to navigate the buying process.

Investing In Multifamily Properties Vs. Single-Family Properties

Multifamily investing differs from the practice of investing in single-family residences. That’s because it requires you to purchase, maintain, and upkeep properties that include multiple spaces for rent. But while investing in multifamily properties (and their multiple rental units) often comes with added time, expense, and overhead, it also holds the potential to boost your monthly income by a large multiple and significantly reduce your investment risk.

Noting this, inevitably at some point if you’re a serious real estate investor, you’re likely to wonder how to buy a multifamily property, and if it’s worth introducing this type of investing to your portfolio. That’s because making rental investments in multifamily properties offers the potential to produce additional sources of monthly income while also offering consistent appreciation in value.

Mind you: Investing in residential properties such as duplexes, apartment complexes, and condo buildings can often come with larger upfront and back-end costs. Property management needs also increase significantly when making the leap from single-family to multifamily housing.

At the same time, because multifamily properties offer multiple rental units to rent out (and the promise of multiple streams of revenue), they can also generate several multiples’ worth of additional income in the end. Likewise, having the ability to rent out several units vs. a single unit also provides real estate investors with multiple opportunities to reduce vacancy rate, allay their expenses, and offset general risk.

4 Reasons Why Multifamily Investing May Be Right For You

Real estate investing is a major part of many investment portfolios, especially those maintained by accredited investors. Of the many types of asset classes that you can hold, multifamily properties are one of the most popular, given their ability to generate somewhat predictable and routine net operating income.

In effect, because condo buildings, apartment complexes, duplexes, and other multifamily properties offer the option to rent out multiple rental units, and accrue added appreciation in value over time, there’s much upside to be recognized from successful multifamily investing activities.

Ultimately, there are many reasons that you may wish to buy a multifamily home. But it’s also important to note that the choice to do so requires you to make additional commitments in terms of management, upkeep, and finances as well. Be sure to think through your options as you go about considering if multifamily investing is right for your real estate investment portfolio. The following four reasons to engage in the practice may offer helpful food for thought as you begin weighing your options.

1. You Want To Expand Your Portfolio

Real estate investing (like any form of investing) is not only rooted in picking smart investments, but also investing in well-diversified holdings as a hedge against future uncertainty and risk. (So that you can minimize your risk of downside in challenging economic times and maximize your upside opportunities in good ones as well.) That means having to explore holding a variety of asset classes and considering a variety of property investment options beyond single-family rental units alone.

As a rule of thumb, expanding your real estate investment portfolio is key to success if real estate investing is your passion. Note that investing is generally active or passive in nature – and that purchasing a multifamily property is a form of active investing as well.

In other words, if you’re wondering how to buy a multifamily property, you also need to know that doing so will require you to be responsible for overseeing and managing the property to boot. However, you can also hire a property management company to handle these needs if you need to outsource day-to-day tasks and upkeep.

Of course, as an active investment practice, multifamily investing also requires you to be responsible for acquiring and maintaining tenants. You’ll be responsible for paying property tax costs on the building as well. But here’s the upside: You may stand to gain a far better return on investment (ROI) when you purchase a multifamily property compared to the level of return that you might hope to get from other passive forms of investing. In fact, many real estate investment pros have made quite the career (and fortune) out of purchasing and operating multifamily rental units.

2. You Want To Generate Additional Income

Buying a multifamily property might be the right move for you if you’re looking for a manageable way to increase your recurring revenues and significantly boost your net operating income. That’s because apartment complexes, duplexes, condo buildings, and other multifamily properties offer a greater number of rental units that you can bring to market.

Likewise, over time, these real estate properties hold the potential to appreciate and grow significantly in value, provided an added windfall if you elect to sell them. Oftentimes, gains here can outpace those made on single-family residences by several orders of magnitude.

That said, it’s important to understand property values and residential trends pertaining to the area you’re interested in purchasing a property in as you work to determine how much profit that you stand to gain before acquiring a new holding. 

3. The Timing Is Right

Sometimes a great real estate investment might fall into your lap even if you’ve never really considered how to buy a multifamily property, or the prospect of being a landlord to multiple tenants.

Let’s say you’ve discovered a multifamily property that’s being offered for an affordable price that you think could bring you sizable income and add significantly to your real estate investment portfolio.

If you think that the opportunity is too good to pass up, you’ll want to do some analysis surrounding the property, as well as cap rates, vacancy rates and local property market trends. In addition, it’s also important to run your idea by a knowledgeable agent, investor and financial advisor – they’ll be able to review the real estate benefits and your financial situation to help you make an educated decision here.

4. You Want To Reduce Living Costs

Many landlords who own smaller multifamily properties as a form of real estate investment (like 2- to 4-unit properties) don’t just hope to generate additional monthly income ether. Rather, they also aim to cut back significantly on rental or mortgage costs for their own home.

You can follow in their footsteps – and enjoy equally large cost savings and amounts of money put back in your pocket – by moving into one of your units and using your additional rental income to defer costs and earn a profit here.

This real estate investment strategy, which essentially leverages the income from other rental units to help pay for your own, can prove quite lucrative if you can find an affordable property in a neighborhood you like.

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Find Out Whether You Qualify For Buying A Multifamily Home

Ready to start considering adding multifamily properties to your real estate investment portfolio, and wondering how to go about buying multifamily rental unit options?

Before you jump into the buying process, you’ll want to find out if you qualify for a mortgage on a multiunit property.

For a 2- to 4-unit multifamily property of the type that you can get from many residential lenders, including Rocket Mortgage®, you need to take the following into consideration:

 

Down Payment

The first practical concern for aspiring real estate investors to be aware of is that down payments are often higher if you’re looking to buy a multifamily property. For instance: If you’re seeking to buy a 2-unit primary residence as a start to multifamily real estate investing, you’ll need a 15% down payment if you’re getting a conventional loan. However, if you’re considering investing in 3- to 4-unit primary properties as part of your multifamily real estate investing strategy, the minimum down payment is at least 20%.

Down payment requirements also differ on conventional loans for investment properties (such as multifamily properties that you are not living in) to boot. Case in point: There’s a 25% minimum down payment that you’ll need to consider when buying a multifamily home.

On the bright side, down payments for multifamily properties backed by an FHA loan are the same as they would be for a single-family home. You can buy a residence up to 4 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.

VA loans are offered as a real estate financing benefit for eligible veterans, active duty servicemembers and reservists, or surviving spouses of those who passed away in the line of duty or as a result of a service-connected disability. Those who qualify can acquire a primary residence of up to 4 units without a down payment. Investment properties aren’t eligible for VA loans.

 

Debt-To-Income Ratio (DTI)

 

If you’re contemplating buying a multifamily property and engaging in multifamily real estate investing, it’s important to consider DTI as well. Your debt-to-income ratio effectively represents the amount of monthly debt that you have in comparison to your gross monthly income. In other words, the less money that you’re paying out each month in debt and the more that’s coming in as income, the more attractive that your DTI will look to lenders.

In other words: When considering whether to extend you a multifamily home mortgage, a lender will effectively take your income and cash flows into consideration – and take an even closer at regular and recurring debts like car payments, student loans and mortgages. Minimum payments on revolving lines of credit like credit cards will also be considered. In effect, the lower your DTI, the better chance that you’ll have of being able to qualify for a multifamily property mortgage loan.

A good general guideline here if you wish to buy a multifamily home is to keep your overall DTI below 43%. However, the exact DTI requirements that you’ll need to meet will depend on the type of loan that you’re considering getting.

The two conventional investors, Fannie Mae and Freddie Mac, even have different policies surrounding DTI. For example: Fannie Mae says that you absolutely can’t spend more than 50% of your monthly income toward payment of debt. Meanwhile, Freddie Mac doesn’t set a hard and fast guideline. Instead, each case is looked at based on factors including median FICO® Score and the size of your down payment as well as other risk factors before determining the maximum DTI size.

On the VA side, maximum DTI for a fixed-rate loan is 60%. However, additional qualifying factors need to be really strong if your DTI is above 45%. This includes having a FICO® Score with a median of at least 620. To qualify with a score between 580 and 620, you’ll need to maintain a housing expense ratio – your overall mortgage payment compared to your gross monthly income – of no higher than 38% and overall DTI of no more than 45%.

FHA requirements for scores between 580 and 620 at the same as VA requirements. If your credit score is 620 or higher, qualifying DTI is decided on a case-by-case basis, but in no event will it be higher than 67%.

Thinking of buying a multifamily home? One way to keep DTI in check with a multifamily property is to use the rental amounts that you’re anticipating receiving from tenants in order to qualify for the mortgage payment. To do this, you’ll need a firm lease agreement in place with your anticipated multifamily tenants in order to use the income to qualify. For some loans, a special type of appraisal will need to be done that includes the approximate rental value of your space, factoring in its multiple rental units.

Another really important item to note here is that you can only use rental income to qualify for the purchase of a multifamily home after a vacancy factor (or vacancy rate) is applied. The vacancy factor accounts for the fact that if a tenant gives notice, you may have a period of time during which a rental unit is unoccupied while finding a new tenant. To compensate for this, you can only use 75% of your multifamily property rental unit income to qualify for the mortgage.

It’s also important to note that because the VA requires rental income to be reported on a tax return, you won’t be able to use the anticipated income to initially buy the home with a VA loan.

How To Buy Multifamily Homes

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

Below, we take a closer look at the multifamily real estate investing process – and how you can maximize your odds of successfully identifying and capitalizing on new opportunities.

Find A Multifamily Home

From a multifamily property real estate investing standpoint, it cannot be stated enough: Location is extremely important to keep in mind as you go about considering when and how it makes the most sense to invest in a multifamily home.

For starters, when buying a multifamily home, you’ll want to seek out a property that is located in an area that will be most appealing to renters. As you set about reviewing rental units and properties, look for neighborhoods with good school districts, up-and-coming areas of town, and districts with a high number of attractions – destinations which have the potential to stand the test of time. After all, a great location attracts high-quality tenants who will want to pay to live in the home.

What’s more, you’ll also want to partner with a local real estate agent, as they understand the market, industry dynamics, and how property and rental trends are prone to fluctuating in the area. They can further offer quality advice on where to purchase and can help you determine whether a property is overpriced.

In addition though, you’ll also want to do your own research on the area as well – especially if you’re not familiar with the neighborhood or do not live nearby. This may include visiting specific neighborhoods at different times on different days to get a better sense of its character. A little upfront legwork and investigation can prevent you from investing in a property in a bad location.

Choose A Loan

When buying a multifamily property, it’s also important to be conscious of how to pick a loan program and provider. After all, successful real estate investing isn’t just about picking the right 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.

One point to be aware of as you do so is that some online lenders will finance a 2-unit property but not anything larger. This type of investment is typically ideal if you want to be a landlord and manage different multifamily properties or if you’re hoping to live in one of the units and rent out the other for additional income.

Otherwise, when it comes to multifamily real estate investing, conventional mortgages are the most popular choice. However, you may also qualify for an FHA loan or VA loan through Rocket Mortgage as long as one of the units is your primary residence.

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

Make An Offer

You’ll want to lean on your agent for insight and advice when making an offer to buy a multifamily home. Your agent will meet with the selling agent and act on your behalf, so before they do so, it’s important to determine the absolute highest offer that you’re willing to make (based on your budget and financing limits).

Once you have your numbers ready, your agent will meet with the seller’s agent and negotiate. 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 renegotiating.

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

Renovate And Get Ready For Your Tenants

After closing, you’re ready to renovate your new multifamily property (if necessary) and prepare for the arrival of tenants. There are two key components to this preparation step: Renovating/making repairs and creating a management plan.

Renovate And Make Repairs

Before you open your doors (and rental units) to the public, you’ll need to make any repairs detailed in your inspection report and 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, and a fresh coat of paint. Bear in mind that you might find you’re able to attract more tenants or even increase your rent – not to mention overall net operating income – with the help of these upgrades.

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.

Create A Management Plan

Lastly, you need to decide how you want to handle the day-to-day management of your multifamily rental units as well as any marketing for 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 that accounts for various operating costs, upgrades and cash flow demands that may arise as you operate your multifamily unit.

The Bottom Line

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 large undertaking, depending on the number of rental units that the property contains.

If you’re ready to get started with buying a multifamily home, begin by finding a local real estate agent that you trust to help you make savvy investment decisions and help you locate the perfect property to add to your real estate investment portfolio. From there, you’ll want to shop around for multifamily real estate mortgage lenders and compare interest rates and multifamily home mortgage plans to find the best fit.

Have you thought about buying a multifamily property or making a multifamily home your primary residence? Rocket Mortgage can lead you through the application process and help you find the best loan for your situation.

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Scott Steinberg

Hailed as The Master of Innovation by Fortune magazine, and World’s Leading Business Strategist, award-winning professional speaker Scott Steinberg is among today’s best-known trends experts and futurists. A strategic adviser to four-star generals and a who’s-who of Fortune 500s, he’s the bestselling author of 14 books including Make Change Work for You and FAST >> FORWARD. The CEO of BIZDEV: The Intl. Association for Business Development and Strategic Planning™, his website is www.AKeynoteSpeaker.com.