Multifamily home in a city.

Multifamily Investing 101: How To Buy Multifamily Homes

February 25, 2024 10-minute read

Author: Scott Steinberg

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Multifamily investing refers to buying multifamily properties, such as apartment complexes, condominiums or duplexes, which 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.

Investing In Multifamily Properties Vs. Single-Family Properties

Multifamily investing differs from investing in single-family residences because it requires you to purchase and maintain properties that include multiple spaces for rent. While investing in multifamily properties often requires more of your time, money and overhead, it also has the potential to boost your monthly income. This type of investment offers consistent appreciation in value and significantly reduces your investment risk.

Buying multifamily residences like duplexes, apartment buildings and condos 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 units to rent out, they can also generate multiple streams of income. Likewise, having the ability to rent out several housing units versus a single unit also provides real estate investors with multiple opportunities to reduce vacancy rate, allay their expenses and offset the general risks of real estate investing.

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4 Reasons To Invest In Multifamily Real Estate

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 NOI.

Because different types of multifamily properties offer the option to rent out multiple rental properties and accrue added appreciation in value over time, there’re many benefits that come from successful multifamily investing activities.

Let’s go over the top four reasons to invest in multifamily real estate.

1. You Want To Expand Your Investment Portfolio

Real estate investing is not only rooted in picking smart investments, but also investing in well-diversified holdings as a hedge against future uncertainty and risk. That means exploring 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 real estate investing success. Note that real estate investing can be either active or passive in nature, and that purchasing multifamily property can be a form of active investing if you choose to take a more hands-on approach.

If you’re interested in buying a multifamily investment property, it’s important to know that doing so will often require more oversight and management over the property. If this is the case, consider hiring a property manager or property management company to handle these needs as an option to outsource day-to-day tasks and upkeep.

Multifamily investing also may require you to be responsible for maintaining the premises for current tenants and acquiring new ones. You’ll be responsible for paying property taxes on the building as well.

Despite these added costs and responsibilities, you may stand to gain a far better return on real estate investment (ROI) when you purchase a multifamily property compared to other passive forms of investing. Many real estate investors have made quite the career out of purchasing and operating multifamily rental units.

2. You Want To Generate Additional Income

Buying a multifamily property might be right for you if you’re looking for a manageable way to increase your recurring revenues and significantly boost your net operating income (NOI). That’s because multifamily properties offer more rental units that you can bring to market.

These real estate properties hold the potential to appreciate in value over time, providing an added windfall if you decide to sell them in the future. The revenue you generate from multifamily investment properties can outpace those made on single-family homes.

That said, it’s important to understand property values and residential trends specific to the area you’re interested in. These factors can help you determine how much profit you can expect to gain before buying a new investment property.

3. The Timing Is Right

Sometimes a great real estate investment might fall into your lap even if you’ve never really considered buying and managing a multifamily property.

Let’s say you’ve discovered a multifamily property on the real estate market for an affordable price. You think the property could generate a 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. You might also consider speaking with a knowledgeable real estate agent, investor or financial advisor. They’ll be able to review the real estate benefits and your financial situation to help you make a decision on whether to buy the property or not.

4. You Want To Reduce Your Living Costs

Many landlords who own smaller multifamily investment properties don’t just hope to generate additional monthly income. If your goal is also to save money on your own rental or mortgage costs, you might consider moving into one of your rental units.

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 enjoy.

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How To Qualify For A Mortgage On A Multifamily Investment Property

Are you ready to add multifamily properties to your real estate investment portfolio? 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

If you’re looking to take out a conventional loan to finance your multifamily investment property, 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 for multifamily properties financed with an FHA loan 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

VA loans 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 to get a mortgage on a multifamily investment property will depend on the loan type.

Let’s consider the credit score you’ll need 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. 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 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.

A good general guideline 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.

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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 Home

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

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 house, 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. You might find you’re able to attract more tenants or even increase your rental 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.

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.

Multifamily Investing FAQs

Are you ready to invest in multifamily properties, but have further questions about the process ahead? We address some of your frequently asked questions below.

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 do I find multifamily properties for sale?

There are several ways to find investment properties for sale, including multifamily homes. Some of the methods for locating investment opportunities in your area include working with a real estate agent, attending online auctions and using a multiple listing service (MLS). You might also consider speaking with local real estate investors.

Are multifamily properties a good investment?

Multifamily investment properties can provide numerous benefits to investors, like the opportunity to expand your investment portfolio and generate additional streams of active or passive income. Investing in multifamily homes can also be a jumping-off point toward commercial real estate investing.

Owning multiple rental units can also present challenges involving the property’s management, upkeep, occupancy and finances. Be sure to weigh all of the benefits and drawbacks of multifamily investing before deciding whether it’s the right move for you.

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.

Take the first step toward the right mortgage.

Apply online for expert recommendations with real interest rates and payments.

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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.