Buying a multifamily home â like a duplex, triplex, or fourplex â can be a smart way to enter the housing market while generating rental income and building long-term wealth. Unlike single-family homes, these properties offer multiple units under one roof, allowing owners to live in one unit and rent out the others or manage the entire property as an investment.
Understanding the unique financing, management responsibilities, and potential cash-flow benefits is key before taking the leap into multifamily ownership.
Table of Contents
- Key Points
- • Multifamily homes allow buyers to own multiple units in one property, offering the potential to live in one unit while renting out the others.
- • Rental income from additional units can help offset mortgage payments and improve overall affordability.
- • Financing requirements may be more complex than for single-family homes, with different down payment and qualification rules depending on occupancy and loan type.
- • Owning a multifamily property comes with added responsibilities, including property management, maintenance, and tenant relationships.
- • Multifamily homes can be a long-term investment opportunity, offering potential cash flow, appreciation, and diversification within real estate ownership.
What Is a Multifamily Property?
Multifamily property consists of multiple units in a single building. This includes duplexes, triplexes, fourplexes, condominium buildings, student housing, apartment complexes, age-restricted communities, low-income housing, and townhomes. The units in a full multifamily housing property must have separate entrances, kitchens, bathrooms, and utility meters.
Individual investors may tend to gravitate toward two- to four-unit properties due to ease of management compared to other multifamily properties and residential home loan options. Residential loans of 30 years with a fixed rate are available for properties with one to four dwelling units. FHA, VA, and USDA loans are available for those properties if they are owner-occupied.
For five or more units, a commercial loan is required. Commercial loans usually come with a higher down payment requirement, higher interest rate, and a shorter term, meaning significantly higher mortgage payments.
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Why Buy a Multifamily Property?
Buying a multifamily home can jump-start your own real estate portfolio and investment portfolio. Hereâs how.
Income From Flipping
Multifamily homes can be improved and then resold for a profit, or âflipped.â Buying a multifamily property, remodeling, and then reselling can be even more profitable than flipping single-family homes because as you remodel, you can increase rents.
Once you increase rents, the property becomes more valuable, both in terms of monthly income, cash flow, and overall worth.
The âBRRRRâ Method
BRRRR stands for buy, rehab, rent, refinance, repeat. An investor buys a property, renovates it, and rents out the newly refurbished units for more money. After that, they can refinance the property to take out extra cash to buy a new property to renovate.
This method works well with larger multifamily properties because the rehabbing of multiple units can be done while other units that are not being renovated can still bring in some income.
Cash Flow
Multifamily homes were designed for cash flow. Space and amenities are optimized to bring in money for the investor. On the other hand, single-family homes are designed for comfort. The added space of a single-family home may not bring as high of a return as a multifamily property.
Quick Portfolio Expansion
Buying multifamily properties allows investors to acquire multiple units with one transaction, so they may have a favorite in the single-family vs. multifamily comparison. Additionally, investing in multifamily properties can allow an investor to quickly generate income, which could be enough to acquire more properties.
Reduced Risk
A multifamily property lessens risk exposure. When you have single-family homes, vacancies may have a bigger effect on your monthly cash flow. With one or more multifamily properties, the risk is spread across a number of properties. In other words, there may be units still rented that can help cover the costs of the units that are vacant.
Recommended: First-Time Homebuyer Guide
Analyzing the Investment Potential of a Multifamily Property
Investors can use a number of methods to determine if it makes sense to buy a multifamily property or not. Here are some of the most common calculations you can use to make that determination for yourself.
Cash Flow
In real estate investing, cash flow is money thatâs generated by the property and money spent on the property. Positive cash flow, also known as profit, means income exceeds expenses.
Investors have differing amounts that they consider acceptable. Some real estate investors bank on the appreciation of the property instead of the amount of cash flow.
The 1% Rule
The 1% rule states that the gross rents should be 1% or more of the purchase price. The 1% rule is hard to apply in high-income areas where the purchase price of a property is high relative to the rents it generates.
Gross Rent Multiplier
The gross rent multiplier (GRM) is a ratio: the fair market value of a property divided by its gross annual rents. It doesnât take expenses into consideration and is meant to be a simple calculation to determine if a property is worth exploring further. If youâre comparing two properties for purchase, the one with the lower GRM may be the better investment.
Cash on Cash Return
The cash on cash return is the annual amount earned compared with the amount of cash invested. Itâs expressed as a formula: annual net cash flow divided by cash investment. This is helpful for investors who want to know how much cash is brought in by their cash investment each year.
Capitalization Rate
The capitalization rate, or cap rate, is the amount of net operating income divided by the purchase price. This number indicates how long it will take to get back all your money in an investment.
Recommended: Market Capitalization: Definition, What It Tells You, Formula
Internal Rate of Return
The IRR measures the rate of return over an amount of time. It takes into account both cash flow and expected appreciation.
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How to Buy a Multifamily Property
You may be able to use 75% of documented rental income to help finance mortgage interest on your loan. And again, multifamily homes with four or fewer units can be financed more traditionally, while five or more units require a commercial mortgage.
Getting preapproved for a mortgage for your multifamily investment property is one of the best things you can do to get started. After a mortgage officer has examined your finances and greenlighted an amount, you can go shopping for your multifamily investment properties.
Find a Multifamily Home
To narrow your search for a new multifamily property here, youâll want to decide what it is youâre looking for. Keep a few of these factors in mind:
• Location: Do you have an area that you have expertise in? Are you going to manage the property yourself? These are some questions youâll want to ask yourself to determine if you can buy a multifamily property near or far.
• Price range: After youâve looked at where you want to potentially invest, youâll get a good sense of what properties will cost by looking at real estate listings. Keep in mind that you can count 75% of documented rents toward the purchase price for many loan types, so the price youâll be looking at will be much different than if you were looking for a single-family home.
• Type of property: Are you looking for a fourplex or an apartment complex? Duplex or 55+ community? There are many choices to make between different property types and whether or not theyâll bring you a profit.
• Profit potential: Are you looking to invest for appreciation or cash flow? Many properties with a lower price tag in the Midwest may be better for cash flow, while properties on the West Coast may appreciate more. Take a look at both and decide on your investment strategy.
• Condition: Do you have the resources and team in place to take on a multifamily property that needs a lot of work? Or would you rather have something turnkey? Youâll want to be sure you know what resources you can commit to the project before you get in over your head.
Choose a Loan
The type of rental property used may determine what type of loan youâre able to get. If this is your first rental, you may want to consider living in one of the units so you can qualify for owner-occupied financing, which usually comes with lower rates and down payment requirements.
Choose a lender that can answer your questions about mortgages.
Make an Offer and Close
Working with a real estate agent, youâll submit a competitive offer for the property youâve chosen. Some buyers use cash to make the most competitive offer, while others need financing.
Renovate and Get Ready for Your Tenants
No matter what class of property you buy, the rental units will almost always require some work. Whether itâs a simple clean or a major renovation, these things are both tax-deductible and will improve the value, not to mention rentability, of your property.
Create a Management Plan
To make sure youâre running a business, and itâs not running you, you need to have a solid plan in place for how the rentals will be managed. How are repairs going to be taken care of? Whatâs your process when a rental turns over? How are you going to keep up with laws and ordinances?
Having a plan helps. Even so, youâll learn as you go and will need to adjust this plan.
đĄ Quick Tip: One answer to rising house prices is a jumbo loan. Apply for a jumbo loan online with SoFi, and you could finance up to $2.5 million with as little as 10% down. Get preapproved and youâll be prepared to compete in a hot market.
The Takeaway
To buy a multifamily property, do your research and choose a property that youâll have the ability to finance and manage. Investing in rental properties and multifamily investing is not easy, but it can generate cash flow and create family wealth.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.
FAQ
Is buying a multifamily property a good investment?
Finding a multifamily property that is a good investment will depend on the investorâs analysis of the property. This can include the price, condition, gross rent multiplier, capitalization rate, and a number of other factors that will make renting the units successful.
What are the different kinds of multifamily properties?
• Duplexes, triplexes, fourplexes
• Townhouses
• Apartment buildings
• Condominiums
• Bungalow courts
• Mixed-use buildings
• Student housing
• Age-restricted housing units
• Low-income housing units
What is the best way to finance a multifamily home?
Some would argue that an FHA loan with 3.5% down is one of the best ways to finance a home with up to four units. The owner must live in one of the units to qualify for this type of financing.
Photo credit: iStock/Andrey Sayfutdinov
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