It used to be the domain of investment firms and the super-wealthy to invest in multifamily real estate or huge flats. But over the last two decades, individual accredited retail investors have had greater access to these products.

A multifamily real estate is an excellent option for these investors for various reasons. The problem, however, is that many people lack a basic understanding of this asset type.

Because of this, we’ve put together this step-by-step guide to explain the ins and outs of multifamily real estate investing.

To properly give you all the information that you need to know before you invest in multifamily real estate, we’ve divided this article into specific sections: 

• What exactly is Multifamily Real Estate?
  • Multifamily Real Estate Examples
    • Apartment Complexes and Buildings 
    • Duplexes and Other Rental Properties
  • Is it an excellent idea to invest in multifamily properties?
• What Are the Advantages of Investing in Multifamily Real Estate?
  • Multifamily Real Estate Is a ‘Safe’ Investment Option
  • Generating Passive Income
  • Investments in Fractions
  • Easier Way to Finance Your Investments 
  • Consistent Monthly Cash Flow
• Things to Ponder Before Investing in Multifamily Real Estate
  • Property Location
  • Number of Units 
  • How to Evaluate Real Estate Investment Possibilities
• Key Takeaway

What Exactly Does “Multifamily Real Estate” Mean?

The term is simple if you’re a multifamily origination mortgage banker. For these experts, multifamily housing means having five or more units. Another term to describe this setup would be commercial multifamily real estate (CMRE).

If you’re not a banker, an easier way to define multifamily real estate is that it refers to any residential property that has more than one unit.

Multifamily Real Estate Examples

There are a number of different types of multifamily real estate, so it’s important to know what you’re dealing with.

Complexes And Buildings Of Apartments

Investing in huge apartment complexes is the ultimate goal if you want to engage in multifamily real estate. Larger ones tend to be more stable as well.

A non-recourse loan is one of the most excellent conditions available to investors who purchase large flats because of their economies of scale. Investors can also benefit from bulk-purchasing discounts that competent onsite property management companies can pass on to them.

There are three structure types in this category: studio, one, and two-bedroom. High-rise, mid-rise, and garden-style (low-rise) apartment complexes are all types of skyscrapers.

Multifamily buildings of ten stories or more are known as “high-rises.” They’re a popular choice for urban regions with a high population density and a limited amount of land.

There usually are 5 to 9 levels in a mid-rise apartment. Elevators and inner hallways are entirely shared, as are central heating and air conditioning.

Many garden-style apartments can be found in suburban regions with a lot of land. Individual HVAC systems and front doors that open to the outside are standard features of these buildings, which are typically no more than three stories high.

Duplexes And Other Rental Properties

Some first-time investors in multifamily real estate choose smaller buildings since they are more affordable. Although it isn’t necessarily incorrect, there are drawbacks. 

This type of property, for example, is eligible for residential mortgages. Because of this, the investor is obligated to guarantee the borrowed funds personally. The bank has the right to seize its assets if they default.

That adds a layer of risk to the investment. It affects their credit rating as well. As a result, their debt-to-income ratio is restricted because these loans appear on their personal credit report. That determines the amount of debt they can take on, limiting the number of houses they can buy.

There are duplexes (2 units), triplexes (3 units), and quads in this category (4-units). These are examples of low-rise apartment buildings for multifamily housing.

Is It An Excellent Idea To Invest in Multifamily Properties?

As soon as novice investors hear the term “multifamily real estate investing,” they generate a negative connotation, believing that their lack of experience or expertise will prohibit them from succeeding.

After all, the word itself indicates a level of complexity that only seasoned investors may undertake, but I digress. Investment in multifamily real estate is no more complicated than investing in the simplest of real estate. Most experts say that multifamily real estate investing is ideal for new investors to get their feet wet in the business.

Despite its intimidating image, multifamily real estate investing isn’t scary at all. In the bigger picture, it’s still one of the most remarkable ways for beginner investors to get their feet wet.

What Are The Advantages Of Investing in Multifamily Real Estate?

Let’s look at some of the key reasons why new investors should consider investing in multifamily properties:

Multifamily Real Estate Is A ‘Safe’ Investment Option

There is risk in every investment, but the risk is not the same for all of them. Investing involves risk, and some investments carry a higher level of risk than others. So the ideal investment would be one that maximizes returns while minimizing the risk of loss. If you’re looking for an ideal scenario, commercial multifamily real estate comes pretty close.

An apartment investment can be evaluated in three ways.

• Rates of delinquency after 60 days
• Sharpe ratio
• Unpredictability

60-day delinquency rates can be used to measure absolute failure. Due to its close relationship to the foreclosure rate, the Mortgage Bankers Association keeps tabs on multifamily mortgage delinquency rates that are 60 days or more past due. The Sharpe ratio, a risk-adjusted return metric, is another option to consider. The better the investment, the better the Sharpe ratio. 

Finally, it’s possible to track the investment’s long-term standard deviation of returns. Having a higher number indicates a more volatile asset.

Generating Passive Income

For many investors, yield investing is a hot topic. “Yield” refers to the amount of money that an investor can expect to receive from their investments on a regular basis. Interest payments, dividends, and distributions are all examples of yield investments.

Often, the only benefit from an investment is an increase in the principal. However, an investment that generates both a capital gain (appreciation) and a steady income stream is a welcome perk. As a result, the investor has a second source of income aside from their day job. Additionally, they can reap the benefits of an investment without selling it.

It’s a goal for some people that their side income will eventually outpace the income they receive from their job. Investing in multifamily real estate has become one of the most popular ways to generate passive income over the last two decades. Neither government bonds nor dividend stocks can match their returns. Passive income from real estate is typically two to three times greater than that from other types of investments.

Investments In Fractions

Investing in multifamily real estate has many advantages compared to investing in residential real estate. Bigger is better when it comes to saving money, securing a steady income, and having your property managed by a professional. However, purchasing properties worth millions of dollars requires a million-dollar down payment.

Because of this, most people can’t afford to invest in these products. In the past, multifamily real estate was only accessible to large institutions and the extremely wealthy. Fractional real estate investing changed all of that.

Investors who share a vision pool their resources to purchase some of the world’s most impressive apartment complexes and commercial real estate properties. Accredited investors who would instead be priced out of the market can now own this investment class directly.

Most of these people invest their money in a private real estate investment company or syndicator as a passive limited partner. Some syndicators have more experience and expertise than others. As a result, due diligence on a company is critical before investing.

Easier Way to Finance Your Investments 

Commercial lending can be obtained by investing in multifamily properties. Non-recourse financing is available for these larger apartment complexes because they are so secure. That means that the owners don’t have to meet the debt’s eligibility requirements. This is a far cry from securing a mortgage for a home (single-family homes, duplexes, triplexes, and quads).

Full-recourse debt is the norm in residential mortgages. Because of that, the owner is personally responsible for the debt. If they default, the bank has the option of pursuing them and their assets. In addition, the debt appears on their credit report and is taken into account when calculating their debt-to-income ratio. In turn, this reduces their credit score, making it more difficult for them to obtain new loans.

Non-recourse commercial lending does not have any of these problems. In this case, the loan is secured by the asset. The bank’s only recourse in the event of default is to foreclose on that asset. Neither one’s credit report nor one’s credit is burdened by it. Non-recourse financing is a no-brainer for investors in multifamily real estate because it is more convenient and less risky.

Consistent Monthly Cash Flow

Investing in multifamily real estate has four distinct ways to pay you back: Cash flow, appreciation, tax advantages, and the reduction of the mortgage’s principal. The abbreviation CAT-P or CAPT is an excellent way to remember them.

A person’s monthly cash flow is what they have leftover after paying all of their monthly expenses. The more money a property generates, the more valuable it is (appreciation). The value of a property can be increased by raising rents, reducing expenses, or increasing retention.

Things To Ponder Before Investing In Multifamily Real Estate

 A common misconception among first-time multifamily real estate investors is that finding a “good deal” in your neighborhood and buying it before someone else does is the key to successful investing in this type of property. The truth is, professional investors do not approach commercial real estate in this manner.

Here are a few factors that you need to take into consideration before investing in multifamily real estate:

Property Location

Just like the rest of us, real estate investors love a good bargain. They are aware, however, that a good deal usually signifies that something is wrong with the product. They may be able to fix some of the issues, but others are beyond their abilities.

If a property can’t be fixed, it’s probably a “good deal.” These properties, despite their low price, are rarely good investments. As a result, investors should properly investigate the markets and submarkets in which they intend to invest before even beginning their search for actual properties.

Problems that no one can fix include those involving aging populations, the environment, and the labor market state. Landlord-tenant laws and long-term population growth are essential factors to consider when deciding where to invest in real estate.

There will always be submarkets to avoid, even in the best markets. Like those in high-crime areas with subpar public schools, some problems are insurmountable. It is best to invest in neighborhoods with low crime and excellent schools. It is easier to manage properties in desirable locations if you own them.

Number Of Units

Here’s another factor to consider. The property must match one’s capabilities and strategy once the right markets and submarkets have been identified. 

• How many units should be the goal? 
• Exactly how many units do you need? 
• Who are your target clients? 
• What quality do renters in that area demand in terms of fit and finish?
• Also, do they have the appropriate set of facilities?

All of these questions can be answered by doing business with their competitors. Potential renters should be within a five-mile radius of the target property. To put it another way, looking into those properties can provide a ton of helpful information.

How To Evaluate Real Estate Investment Possibilities

With this information, a business plan should be drawn up that is tailored to the company’s target market and submarket needs. It is time to begin searching for investment properties once the necessary capital is in place.

Initial analysis can be done remotely for the most part in many cases. Prospective investors can examine, among other things, crime statistics, school results, and the proximity to employment and entertainment hubs. To conduct a thorough underwriting, you’ll need access to the most recent rent rolls and financial statements going back at least two years.

The property can be insured with these numbers. Best to start with the current figures and make a long-term projection (ten years in our case) of what you expect rent to rise to be, as well as occupancy rates and other factors. Calculating the cap rate (also known as a capitalization rate) and comparing it to market norms can be done using the numbers.

While forecasting may not be precise, it isn’t a guess either. To arrive at the most accurate model, it is necessary to compare historical factors with current trends and future projections.

The number of available units, the historical vacancy rate of the target market, and a buffer to account for unexpected downturns are all critical considerations when evaluating properties for investment purposes.

Key Takeaway

Real estate investing, like stock trading, offers a variety of ways to make money. To invest in real estate, owning a portfolio of rental properties is one of the most popular options. Single-family properties, on the other hand, are referred to as multi-family properties because they have more than one residential rental unit.

You can reap many benefits from owning multi-family real property. These include the ability to quickly expand one’s rental property portfolio, as well as the luxury of employing a property manager. But before you decide, make sure to know what you’re getting yourself into. After all, any investment has its possible risks. You just have to choose which one is worth it.