Category: Multifamily Investing

Fixing and Flipping Multifamily Real Estate Investments

For any business you can think of, the end goal of the owner or investor or the entrepreneur, as it is commonly known, is to make profits. This is the same with multifamily real estate investments; every real estate investor wants to make an above average return on all the money that is invested.

This article aims to analyze all the issues relating to fixing and flipping multifamily real estate investments to make profits. Although this may not be ideal or appropriate for some real estate aficionados, those who can pull off the fixing and flipping arrangement do make substantial financial gains. The fix and the flip process can pose a significant challenge to certain real estate investors; however, to begin the process, there is a need for proper funding.

These can come in the form of loans, which is also made available in some instances for individual properties and even for more experienced investors who wants to flip more than one real estate property at once.

These loans come in a whole lot of forms which include:
Cash-out refinancing (which involves refinancing one property to fix and flip another one)
Home equity lines of credit
Bridge loans
Hard Money Loans
Permanent Loans (not typical in flipping)

It is worthy to note that the process of fixing and flipping real estate can be carried out with any property, no matter its enormity. The types of highlighted loans above are to help support the purchase of single or multifamily investments.

For fixing and flipping operations, funding is a real issue, and if you are a serious investor looking for a source of financing, hard money loans are a good source of funding. The hard money loan option may be more expensive than the other types of funding though.

The demand for fix and flip processes concerning multifamily real estate dwellings is only increasing these days. Many fix and flip professionals are choosing this path because the number of rental households has increased by more than 15%, and this upward growth is expected to continue.

This is because many teenagers are expected to leave their homes and become renters themselves, further boosting the multifamily real estate market. The need for independence from parents is real around this age, so it is not surprising.

Path to Fix and Flip Profits:

When it comes to multifamily real estate investments, fix and flip, investors have to compete with other buyers for the properties on the ground. Fixing and flipping has the sole principle of making use of a certain amount of money to make some brief renovations; in all, a general uplift to improve the valuation of a real estate property before selling it at an excellent price.

This way, an excellent profit is made. Concerning multifamily real estate, seasoned fix and flip investors still have to contend with repair and flip newbies in the industry; those who do not have the required skills and expertise.

These new entrants into the industry tend to make things difficult for experts. These newbies tend to buy existing properties for more, making it difficult for them to come across an affordable fix and flip property. On the path to fix and flip profits, you should seriously consider multifamily investments.

All you have to do at first is to be conservative enough in calculating the potential returns. The rule made is by seasoned investors is to estimate the property’s rental income, then subtract half of that amount for monthly expenses and then subtract the mortgage payment from what remains.

Then if the property cash flow does not cover these costs, you can either decide to negotiate a lower purchase price or look for a building in another area that supports higher rent payments.

Fix and Flipping MultiFamily Properties:

As mentioned earlier, projections have concluded on the path that rentals on properties are most likely to be on the increase. Many seasoned real estate investors have turned to multifamily real estate holdings, all in a bid to diversify their holdings and increase their profit.

As the demand for rental housing units continues to rise, the fix and flip experts are also noticing it is expected that with multifamily holdings, they will undoubtedly require more significant investment and more work for you to gain maximum benefits.

For a first time investor, they are seeking to make new inroads into the world of real estate investments. Getting to sell a multifamily holding can be very challenging. Even for experienced investors, the rules have to be followed. As it is the norm, the search for a buyer can be more challenging than for single family buyers.

For example, in America, property owners and investors alike are coming to terms with the fact that they can increase their profit by choosing to purchase multifamily units. This inadvertently opens up a new path for fix and flip real estate investors as there is a higher chance of success when you decide to fix and flip a multifamily property.

Funding for fixing and flipping multifamily real estate holdings, many platforms on the internet and even near you offer programs for this. Most only have programs designed for clients with strong credit scores. Also, those who have the needed experience with renovating and owning multifamily properties are given a chance.

Very strong net worth and liquidity also allow for flexibility to be exercised in the decision making. Some of the prerequisites which usually are considered include:
• The multifamily property must contain at least five (5) units of housing.
• In some instances, projects with at least 50% occupancy are also considered.
• At least a credit score of 670 is needed.
• Loans from 250,000 to $5,000,000 can be provided with no limit placed on the number of multifamily housing units you can flip.
• Finally, loans up to 80% of the purchase price with rates which are as low as 8.5% and a 24-month term.

But first this disclaimer, this is not a get rich quick method. If you are looking for a means of getting rich quickly, then real estate investing is certainly not for you.

An alternative to fixing and flipping real estate holdings is to buy properties in perfect locations where you are sure after doing the necessary valuations; the value is going to increase. Having a great strategy at this point is very crucial. This strategy is key to knowing when to improve property values and also knowing when to sell and reinvest the funds in other profitable properties. One very sure way to amass wealth and reach that dream milestone is to buy real estate rental properties, then fix and flip them accordingly.

• You can decide to flip ten (10) houses that make $100,000 of profit.
• Flip 20 houses that make $50,000 of profit on average.
• Or you can also decide to flip 40 houses that make $25,000 of profit on average.

Markets also influence these profits. As if you live in a market with lower property prices, the real strategy will be to flip smaller houses with smaller profits but at an increased volume. An excellent example of this is buying $50,000 homes that you can resell for $120,000 and can net you $25,000 to $30,000 after renovations, closing costs, or commission and taxes. This you can repeat about 3 to 4 times per year. If you live in a place like Los Angeles; it is more realistic to find flips with $100,000 t0 $200,000 of profit.

At this juncture, it is only ideal to find out the real reasons investors flip multifamily real estate units. In the real estate industry, there is a big market for single family homes. It is only natural for flippers out there to cater to the needs of this large population. However, in contemporary times, there is an increase in renting.

• It is usual for more people to have a hard time believing that investing in a home is the best option they have. They are beginning to see primary residences as more of liabilities than assets.
• Some have been burned in times past as they have bought homes that sunk considerably in value after a certain period; contrary to laws of real estate investment.
• The increasing proportion of the workforce is becoming mobile to the latest advancements in technology; hence, they are beginning to like the flexibility renting provides.

These reasons are highlighted as a result of accessing the opinions of industry experts on the latest realities facing rents and mortgages in developed societies. Multifamily properties are the ideal property to flip, but why decide to flip multifamily real estate holdings?

Reasons for Flipping Multifamily Properties:

Marketability: Much has been mentioned of the fact that many areas are seeing a rise in their rental rates, and the absolute economic crisis turned many people from homeowners to renters, and this has made it more difficult for single family flippers.

The markets for single family flippers have changed and shrunk considerably over time, and only fewer people qualify for mortgages. Higher rents also mean higher selling prices for investment properties, and this is a significant factor for commercial multifamily.

• The Exit Strategy: When talking about single family units compared to multifamily housing units, any experienced single family fixers and flippers will always tell you to plan your exit strategy properly. Part of the procedure is to determine the After-Repaired Value accurately.

You need to know the amount you can sell the place for after the repairs have been made.
It is common knowledge that with single family homes, the rent will barely cover the mortgage, which includes insurance and taxes. With the inclusion of maintenance items, you might be losing money.

However, with multifamily properties, these properties are unarguably cash cows. You can choose to cover the mortgage payments with rent from one or two units and receive pure profits from the other units. And if your multifamily flipping does not work, you can simply rent it out and make some money, with no loss on your part.

Tax Advantages: This should not be mistaken as tax advice coming from a professional. But the buyers of multifamily residential properties, especially the buyers who live in one unit, can take advantage of both the homeowner and tax deductions. In addition to the edge to buyers, there are excellent incentives for flippers who get to buy multifamily residential.

Finally, it should be known that fixing and flipping are done for the sole purpose of making a profit. However, real estate industry leaders believe that it is one niche that is fraught with challenges considering the many rules and special considerations to be made. However, you need to be experienced enough to pull this off with multifamily real estate units, so you do not run at a loss.

Picture: Pixabay

Financial Independence By Investing In Multifamily Real Estate

One of the reasons for going into business, particularly the multifamily investment niche of real estate, is solely to create wealth and passive income. Current investors in this niche have made it known over and over again, how multifamily real estate investing has done that for them. However, one fundamental question to consider is how one can create wealth, satisfying a need in the process without financial independence? If you are a real estate investor, now more than ever is the time to escape the corporate rat race and become financially independent. Based on the main goals of any investor, the main aim of this content is to highlight the tips you can make use of in achieving this sole objective. However, it is only reasonable we inform that achieving financial independence is not as easy as we would be stating here. You need to be intentional about being financially independent. Learning how to create wealth and improve your business dealings can be very challenging.
If we were to conduct a poll today amidst real estate investors on why they chose the real estate sector to invest their resources, sure we would have lots of reasons to consider. Although some might treat it as a partial source of income, others commit fully to it with financial independence becoming the unifying goal. This has been the dream of many, and real estate has been one of the best ways of achieving it. Financial independence is achieved by an investor when the passive income, the returns from activities in the real estate sector, is more than their monthly expenses. In such a way that you have lots to spare. Although this might sound risky or seem like a very long process that can only be achieved in years, one uphill climb, it is achievable and very realistic, giving the factors involved. It has even been confirmed that rental property investors make cool cash, achieve financial independence through investing in real estate. As mentioned earlier, here are a few tips we advise the reader to strictly adhere to if one is so particular about achieving financial independence. These tips include:

• Get Educated:

One of the best things one can do to improve oneself is to get educated. It does not cost a thing to stay updated with the latest developments in the real estate world. As a real estate investor with your eyes on the goal, you need to be abreast of all the back and forth going on between the bigwigs in the industry, and you need to have an idea of the latest moves to make that are sure to bring in the needed profits. In line with achieving financial independence, although there is no real need for formal education or a college degree, one still needs to dedicate lots of time to reading and to grow at the same time. Successful real estate investors have achieved financial independence by knowing how to play the right cards at the right time. Investors are constantly educating themselves about the best investment strategies and investment properties. With investment property types including either single-family homes or multifamily settings while strategies include rental properties, commercial real estate investing, with the inclusion of Airbnb rentals. They seem to be growing in value every day, and you should consider investing in them.

• Financial Planning:

How can one achieve financial independence without top-notch financial planning? For most real estate investors, there is always a template more like a written plan as to how to achieve financial independence. It was observed that having a plan makes you more likely to achieve the set-out goals and objectives. Financial planning in the real estate investment niche is said to refer to all the processes of determining all that is related to the financing of your rental property. In plain terms, it solely involves anything that settles all your real estate concerns; the acquiring of a mortgage that fully suits your real estate investment. It also supports the calculating of your expenses and the cash flow through the rental property in focus.
In terms of mortgage and mortgage payments, they are referred to as the foundations of real estate financial planning. Having debts is not bad, but continuously piling up the debts to such an extent, it starts to impede your ability to save, that is a source of concern. This development, in the long run, tends to affect your ability to achieve financial independence as early as you would have wanted. While in terms of expenses, optimum financial planning should involve defining your passive income. To determine this number, real estate investors should consider all the monthly expenses, which should include repairs, maintenance, utilities, electricity and water bills, taxes, vacancy rates, property management, etc. For a real estate investor to achieve financial independence with all that has been listed out, an estimate of the expenses must be made to determine the extent by which they affect the odds of achieving financial independence through real estate investments.

• Endeavor to Grow Your Real Estate Portfolio:

This is no rocket science, but the more your investments, the higher the passive income you can derive from it. Growing your real estate investment portfolio is one sure way of attaining financial independence. The more you invest in real estate properties, the more passive income you earn. That is not all therein, and you are likely to earn more passive income from diverse real estate holdings. This also protects the real estate property investors from the dynamic economy and real estate investing market fluctuations, which ultimately allows for financial stability regardless of the conditions around.
To achieve this talked about financial independence, we have a lot to discuss about strategies one can apply to attain it in no distant time. Some of these are discussed as follows:

• Calculate Your Freedom Number:

This is one of the first things to do; the freedom number is not a unit or a property count. It refers to the amount of income you need to cover your current expenses or the amount of passive income. Which is more or less equal to the amount you are receiving from your current active full-time job, or that which can fully afford your full lifestyle. The best way to arrive at this number is to open up an excel spreadsheet and make a list of all current expenses. If you also intend to replace the current income and become a full-time real estate investor, then your freedom number automatically becomes your pre-taxed income. If you intend to improve or keep your current lifestyle, then you need to determine how much it would cost you, and that is referred to as your freedom number. To make this clearer, imagine a scenario where you currently earn $50,000 a year at a job, and you make calculations that you would need an additional $10,000 to maintain your current lifestyle. Your freedom number is about $60,000 yearly.

• How Much do I need to invest in real estate to achieve my calculated freedom number?

The next thing on the list is to calculate how many rental properties a real estate investor needs to be involved in before you achieve the calculated freedom number. This calculation is solely based on specific investment criteria as a real estate investor. For example, if your investment specification is only to purchase certain properties that are sure to achieve a 10% cash-on-cash return. Then you will need more money to achieve your $60,000 a year freedom number, Roughly about $600,000.

• Creating a Freedom Timeline:

After calculating your freedom number and the amount, you would need to invest in real estate to get that much as passive income, which caters to all the expenses that maintains your current lifestyle. Next is to create a freedom timeline, which is all about how often you will purchase properties to achieve your freedom number. These timelines do vary with all depending on current situations, investment strategies adopted, market, etc. the best recommendation is to have a freedom date then backdate a timeline.
For example, if you already have it in mind to quit your active paying job in the next 10 (ten) years to focus on real estate investments, following from previous examples of your freedom number is $60,000. You need to purchase about 60 units for a start and a cash flow of about $100 a month. The money that would be available as a rising real estate investor to be used as down payment will be any amount of money you have saved up, which is money you have set aside from your full-time job.
After purchasing your first housing units, you will have an additional stream, which is the $100 a month; and how long can you wait before you purchase your next property? And as from that point, you will have an additional $200 a month towards the next payment. At some other point, you will ultimately have enough equity in the earlier rental unit purchases that will be able to be refinanced and, in the long run, buy more units.

• Implementing your Freedom Timeline:

The last thing to consider after calculating your freedom number, determining how many units you need to buy, is to create a timeline. As it is the time to start making high-level purchases like a new real estate entrepreneur. One of the strategies that have been adopted in recent times is the BRRRR strategy superbly coined by Brandon Turner at BiggerPockets. The named acronym stands for buy, rehab, rent, refinance and repeat. By buying, you can purchase old or distressed properties, which translates to the level of distress you are capable of managing, and this will go a long way in you achieving the financial independence you so much want. By rehab, you only need to subcontract to someone who is a great general contractor to carry out random property repairs and general renovations.

As for renting, you need to lease your newly renovated asset to great residents who, to an extent, share your ideas. Individuals who would adequately make use of your property; as their use would not make you accumulate unnecessary expenses on repairs. Then on to refinancing, you can choose to obtain a new loan on the property in a bid to pull out the equity created from the rehabilitation carried out. By repeating the entire process, by using the money from refinancing, you can achieve financial independence. Honestly, we can only outline these steps and hope they work for you. The number of obstacles you are likely to face as a real estate investor or entrepreneur varies in a lot of ways, as achieving financial independence can be very daunting without mincing words. However, this is not to discourage you. Still, with consistent effort, partnering with reliable individuals, patience and resourcefulness are one of the positive ways to work through the many obstacles you are likely to face.
Many professionals or veterans in the real estate sector have spoken on some tricks that worked in their favor. Some of these tricks have helped them to quickly navigate the many obstacles that have barred others on their way to achieving financial independence from real estate investing:

• The use of Tax Benefits.

• Appreciation:

You must have heard of the common term in real estate that units with proper management appreciate over time. It is certainly one factor that comes into play in the real estate sector. For these individuals, they have been able to do an equity strip from the properties, and they do not have to pay taxes when they borrow money against the properties. The equity that was created by the appreciation of the properties acquired can be pulled out and used as a down payment to purchase other properties.

• Leverage:

Financial independence can also be achieved by leveraging properties with debt; in this way, they were able to control virtually 100% of the property by putting less than 100% down while also compounding the benefits of inflation. There are many ways to arrive at financial independence, but one central factor is the diligence and patience to see the processes through. We can only wish you the very best on your journey.

Picture: Pixabay

Single Family vs. Multifamily Family Real Estate Investing

When the term real estate is mentioned, it is mostly linked to investment opportunities, and it is seen in financial circles as a credible means of getting legal, enduring and long-lasting value for money. In plain terms, it is said to refer to properties, lands, buildings, and anything you might think of that links land and money together. As unusual as this may seem, this term is said to even include air rights above the property and the underground rights below the land. Many legal struggles have erupted over this in contemporary times; hence, it is imperative to fully define the term which would be a recurring term in this compilation. The word means precisely its literal meaning; it is said to refer to a real entity, a physical property, something that can be seen with the eyes. Most constitutions have now restricted the term to those with legal rights to the property. There are generally four (4) types of real estate, namely;

  • Commercial real estate:
  • This comprises of shopping centers, malls, hotels, academic buildings, hotels, and office installations. Apartment buildings are regarded as commercial entities even though they are used as residential spaces. In so far, they are erected to provide income.

  • Industrial real estate:
  • This is said to include all buildings and properties used for manufacturing. It also encompasses buildings erected for purposes such as for research, the production, storage and distribution of goods.

  • Land:
  • In economic terms, this is said to refer to any vacant piece of land, a marked portion, a geographically bounded space, farms, and settlements. Categories include subdivision and site assembly plots, undeveloped and early development or reused land.

  • Residential real estate:
  • This includes both homes under construction, newly constructed homes, and even resale homes. One prevalent category is the single-family homes; Condos, duplexes, bungalows are also included in this category.

REAL ESTATE-MULTIFAMILY INVESTING:

Real estate investment is that which is said to be a viable alternative for those who are unable to stand the unpredictability of the stock market. Real estate is also one which is a better investment option for investors who wanted to take their earnings from investing a notch higher. Instead of setting their funds only to be managed by someone else. For an arrangement that was prone to many external factors. One very effective strategy utilized in real estate is rental property investing. This is adopted mostly by investors who want a steady income aside from the slow, trickling, but sudden increases in the value of their leading portfolio. This is one strategy that has been adopted by many investors, including the moguls in the investment world such as Zhang Xin and Donald Bren were said to have built up a large percentage of their fortunes by investing in a range of commercial and residential properties. Some other multimillionaires have also made incredible profits from developing various commercial and residential properties. In terms of residential real estate, one of the types of real estate investments highlighted above, there are two types of properties one can invest in; they are Single-Family and multi-family investing. Single-family apartments are those with only one available building or space to rent. They are mostly residential buildings, but they do not have that much potential for maximized returns compared to multi-family investing. Comparing to multi-family investing, they are commonly known as apartment complexes; that is residential buildings built together with more than one rentable space. Over time, some of the advantages of investing in multi-family real estate settings include;

• You should consider that growing a single portfolio takes less time: The real estate multifamily setting is very comfortable for an individual who wants to build a relatively large property. Taking control of a single 20-unit apartment building is easier than managing 20 different home settings with the possibility of working individually on each property, different realtors, separate loans, while all the back and forth can easily be made by investing in a single multi-residential property.

• Multi-family Real estate investment is more expensive, but it is a lot easier to finance:
As expected, the cost of acquiring a multi-family property would be higher than investing in a single-family setting. But this should not be a bother, as multi-family settings are way easier to handle financially. Securing a single-family proeprty can go for at least $40,000, while a multi-family environment can go up to the tune of millions. And the choice may be obvious, but you might have to reconsider. Getting loans for a multi-family proeprty is far more comfortable than for a single-family property due to the significant cash flow that multi-family properties generate every month. The possibility of foreclosure on a multi-family asset is not as high as that of a single-family property.

• The owner is in a position to make reasonable financial decisions:
This is in the case of real estate investors who do not participate in the actual management of their properties. Instead of monitoring themselves, they seek a competent property manager who does all the work and monitoring. The manager is paid an agreed percentage of the monthly cash flow the property generates. In light of this, instead of splitting percentage margins across different properties, only a single property is considered. This allows for reasonable financial decisions to be made and will enable investors to take maximum advantage of the services property managers offer.

Multi-family investment settings provide a whole lot of opportunities. With these types of investments, it is not advisable to jump into investing without a template or the needed expertise and management capabilities. It is ideal to make your findings before jumping just into any multi-family investment window. Randomly window shopping would not be enough as it requires proper planning and financial evaluation of the about to be acquired property. The natural progression for serious investments in the world of real estate is to start with local family single family properties before moving on up to large scale multifamily establishments. The possibilities with prompt investment in multifamily units are endless and the industry has continued to grow with some positive projections going into the future.

Some reasons to invest in multi-family investing:

Aside from the boundless, timeless opportunities presented by real estate multi-family investing, investors generally do not shift from single-family real estate investment to multi-family investing. Some reasons precede most decisions. Some of the reasons alluded to the shift include the fact that it saves time; this is generally the biggest perk of investing in multi-family properties. Opinions have agreed on the singular point that it allows for efficiency in management and increases the possibility of making better, informed decisions.

Another primary reason is it allows for better control. Real estate investors all agree that investing in multi-family units allows for more control. Control to mean that since net operating incomes drive a lot of multi-family real estate investments, buyers tend to also look at it as a business, and as for the operator, you can effectively drive the net income which directly translates to the value one can get out of that.

Factors that influence multi-family investing:

Nearly everyone has the dreams of investing in a credible venture that would steadily bring in income. Real estate also affords that opportunity, but there are certain factors, qualities that an investor is expected to possess and how certain factors can influence a potential investor’s decision in the long run. These perceived factors are highly influential in the decision-making process. Some of these factors are:

As mentioned earlier, the typical progression among real estate investors is from starting with smaller, scattered single-family units then gradually easing into large scale multifamily units that can house multiple families, with a central factor still on making a stable profit. It is known that once this progression is made, there are specific ways of making a significantly higher income by looking for off-market deals. Newer and larger multifamily settings are listed with a competent broker coupled with some assured online sources. These multi-family settings typically classified from the more modern class A units to the much older class D units. In descriptive terms, a value-adding multifamily unit generally is hard to find, as they are not readily advertised or listed. However, searching for class B off-market multifamily properties are considered as viable alternatives. The more massive and more complex the property a real estate investor is looking for, the harder it is to find on the market. To identify and acquire top-notch multi-family investment opportunities, one has to be creative. Many of the deals involved in landing these properties are built on forming enduring relationships with partners or one investor to the other. Another is through extensive networking, and if you are referred from one investor to the next. As mentioned earlier, finding quality multi-family housing units remains a severe challenge. Many cites in the United States are opening up and attracting real estate investors. In real estate, plenty of programs exist for when a potential investor is searching for single-family housing units. But this is not the case with multi-family settings. It is advised that thinking outside the box is required in these instances; to locate functional multi-family units suitable for investing in.
Every investor seeks to make maximum profit on whatever venture that eyes are set upon. You would not want to dabble into an idea without considering its Dos and Don’ts. Here are a few tips that are sure to come in handy when you are looking for a multi-family real estate opportunity.

• Calculate your cash flow:

This is highly crucial, as estimated mortgage dues are part of the equation in this step. Calculating your estimated monthly income or cash flow, be sure of the money you want to invest in your chosen portfolio, then subtract the monthly NOI agreement from your potential property. The simple calculation highlighted above would help to determine your cash flow estimate, and in the long run, learning if investing at that particular point in time would be worth it.

• Know your limit rate:

Before investing in real estate, multi-family properties for that matter, be sure to calculate your limit rate. To determine your limit rate, the simple thing to do is to take the monthly NOI, multiply it by 12 which is the number of months in a year to get the annual number and then proceed to divide that amount by the total mortgage amount. The main thing to understand as regards to the limit rate is to know that increases in the amount do not readily translate into better fortunes. It may indicate risk and a higher return. One common thing brokers do is to capture a rate between 5-10% and anything smaller, the investment may not have enough income. You want to be sure you fully understand all the risks associated with investing.

• Remember to find your 50%:

One of the best ways of analyzing potential investment opportunities is to check out the numbers to determine the protenital gross income. This is done by calculating the difference between the expected rent and projected expenses in owning the setup. When one does not have to know all information about a potential property opportunity, only what one has to do is to use the 50% rule. The difference between the estimated revenue and projected monthly expenses is the net operating revenue and it is USUALLY around 50%. This is a very rough estimate.

• What to check before deciding to invest in multi-family settings:

Taking random walks or a drive through the neighbourhood is seen as means by which one can come across a property begging for an investor. This is not always the case as finding the ideal estate requires much more than random navigation. Investors need a credible groundwork to analyze and evaluate the financial consequences of investing in a property. The following checklist should be considered before investing in a real estate opportunity;
• Cost
• The seller
• Location
• The total number of units.
Be sure to do your groundwork before considering investing in a multi-family property.

Introduction to Apartment & Multifamily Investing

How many times have you seen a late-night commercial featuring some real estate guru promising to get rich quick returns with “no money down”? While most of us are smart enough to identify these ads as too good to be true, the excitement surrounding investing in real estate, specifically in multifamily investing, is well deserved. For many people, investing in multifamily properties is a pathway to create passive income and financial independence for themselves and their families.

When done properly, this unique corner of the real estate market can serve as a second career, and for the savvy investor could make them enough money to retire comfortably at a young age, kicking back and collecting checks. As with most things in investing however, winning big requires taking risks and doing your homework, so over the course of this article we will dive into the basics of apartment and multi-family investing to give you an entry point into this incredible opportunity.

Multifamily investing is exactly what it sounds like. An investor purchases an apartment building, a duplex, triplex, or quadruplex, and then rents these spaces to multiple different tenants to profit from the income.

For example, there are many kinds of properties that an investor can choose from when deciding on real estate investments. The most common types being apartments, townhomes, condos, duplex, triplex, and quadruplex units. Each of these is described briefly below.

  • Apartments: Apartments are most likely the most familiar type of multi-family unit. An apartment building is a large structure made up of multiple self-contained living spaces. Each apartment has its own kitchen, bathroom, and sleeping / living areas. Apartment buildings can have anywhere from 2 to 200 “units” and costs to purchase range accordingly. An important distinction to make here is that the term “apartment” usually implies that the building owner owns each unit, and the tenant is simply a renter.
    • Condos: A condo, short for condominium, is just like an apartment in that they are complexes of self-contained units that range in size. The key differentiating factor is ownership. Typically, condos are purchased from the building owner, each tenant is purchasing the unit that they live in rather than renting.
    • Townhomes: Townhomes are like the bigger brother of condominiums. Where a condominium tends to be smaller, townhomes tend to be a series of multi-story houses, built with an adjoining wall to the townhome next to it. Like condos, these units are usually purchased by the tenant, while the communal areas like pools, lawns, and other public spaces are owned by all the tenants equally or the company who owns the complex.
    • Duplex: A duplex refers to a property that in many ways resembles a single house, but that has been split into 2 units. Many times, “duplex” describes a single structure with 2 front doors, one leading to the upstairs unit, and the other leading to the downstairs unit.
    • Triplex: After learning what a duplex is, the other “plex” types of properties are self-explanatory. A “triplex” simply refers to a single house structure with 3 units.
    • Quadruplex: As mentioned above, the “plex” property types all fall into the same category, the only difference being the number of units within the house. A “quadruplex”, as the name indicates is a single house with 4 units inside.

So, what is the purpose of multi-family investing. Why would someone want to buy one of these multi-unit properties? As you may have guessed, the primary reason is to make money! As a brief example, a successful multi-family investor would seek to buy a duplex that cost him $1,500 per month to purchase, and then rent each unit out for $1,000 per month. This generates $2,000 in income from renting that not only covers the cost of the mortgage, but it also puts an additional $500 per month into the owner’s pocket. It sounds simple enough, but there is a lot that goes into a successful real estate “deal”.

Aside from simple income, renting out a multi-family property allows an owner to capitalize on his property. Rather than simply owning the building, why not have it generating some income? Each month that you are collecting rent and paying yourself whatever you collect above the monthly cost to you, you are also having an asset purchased in your name that has real value and should appreciate in value over time. This double barrel effect of adding cash to your pocket AND “equity”, or ownership in a property, to your personal assets column has a powerful positive impact on net worth and greatly accelerates a person’s pathway to retirement if that’s something they desire to do. Renting a property, when done successfully, should contribute to your personal net worth in two different ways.

So, if all that sounds good to you, your probably curious as to how someone gets started in real estate investment. You’ve already taken the first step in reading this guide, as the more information you have, the higher your chances of making a successful investment decision. So, step one is to read as much as you can regarding the type of multi-family investing that you’d like to do. The internet is a powerful thing and you can save yourself lots of trouble simply by gathering others experiences and using them to inform your decision making.

Once you feel comfortable, and potentially have consulted with a professional or two, you need to start looking into the methods that you can use to acquire a property. There are many ways that one can go about doing this aside from simply putting down a bunch of cash to purchase a building or a complex. Let’s face it, most of us don’t have hundreds of thousands of dollars in liquid assets that we can sink into a house right now. This is where the concept of financing comes in. Just like you finance a car or take out a student loan to spread large costs out over time, using a mortgage allows you to put a small portion of the purchase price down today, and to pay in installments moving forwards.

The most common method of financing a mortgage is with a 30 year note in which you work with a bank who lends you the funds that you’ll need to complete the purchase. From there you will work with the bank to pay off the loan over time. It is critical to understand this part of the process, because your monthly payment will have a direct impact on your ability to “cash flow” a property. “Cash flowing” a property is real estate jargon for a successful deal. A property that is “cash flowing” is a property that produces an income to the owner above all the costs associate with the mortgage, renovation, and upkeep on the property.

Lets now take a more in depth look at the different methods that an investor can use to secure funding and move forward with a purchase. Aside from a simple bank loan or traditional mortgage, the government has many attractive programs for investors who are purchasing for the first time as well as for investors who are seeking to renovate properties. While this guide is not long enough to cover a comprehensive list of all the financing methods which exist, we will look at the most common and explain the costs and benefits associated with each.

While some real estate transactions are completed in full at the time of purchase, this is very rare. Obviously if someone has enough money sitting in their bank account to purchase their desired property, they are perfectly able to do so. Investors who are looking for true no money down strategies could approach what is known as a “hard money lender” someone with lots of cash who can buy a property outright. They will usually require their own method of repayment and will take a portion of the profit from your deal. This strategy is good for beginners who can find a passive partner. They put up the money, you find the deal and work out all its moving parts.

While this strategy is not totally uncommon, most of the time some sort of long-term payment is arranged at the time of sale. Most transactions involve an upfront payment of funds called the “down payment” followed by a series of monthly payments made up of some principal (the actual loan amount) as well as interest (the fee that you pay for borrowing the money).

Securing a loan will require a check of your credit history, an evaluation of your income, and your ability to make payments moving forward. If you are not able to put 20% down at the time of purchase, many institutions will require an additional monthly fee for “PMI” or mortgage insurance due to the increased risk of the loan for the bank.

For first time borrowers who may have less credit history or income, an FHA loan, short for Federal Housing Authority, can be helpful. This is very common tool used for first time buyers looking to break into investing as well. This is a special type of loan offered to first time home purchasers through the federal government that allows them to put as little as 3.5% down on a property. FHA loan standards are also lower due to the backing of the federal government, meaning lower credit scores and incomes may be eligible to receive the loan.

Once you have researched your preferred financing method and have started working with a mortgage broker to see what you qualify for its time to begin looking at properties. The research done on the front end of your real estate deal could make or break you. The more time you spend analyzing and understanding the features of the piece of property you are purchasing, the more likely you are to be successful in your first venture. Typically, investors look for a few qualities of property, although like many things in investing broadly, this comes with some risks.

Look for properties in good locations, with good schools nearby or near a downtown commercial hub. When selecting a multi-family investment property, you must put yourself in the shoes of your future tenants. When evaluating a home, imagine who might live there, this will give you a better idea of the potential challenges you might face in renting. Will you be marketing to college students each summer and trying to fill your property? Or will you be renting to families with young children. Will you be renting to long term elderly tenants? Study the demographics and behaviors in your area and use this information to inform your purchasing decision, especially if you’re a first-time buyer.

For the true rookie to real estate investing, one of the most common methods of getting started is referred to as “house hacking”. This strategy involves purchasing a duplex or other multi-family property, living in one of your units, and using the other units as rental income to offset your monthly rent costs. Many house hackers can live for next to nothing each month while having a lifetime asset purchased for them. This strategy is a great starting point as you will be able to be on site 24/7 to learn about upkeep, maintenance, and to keep an eye on tenants.

Aside from the intangible aspects of a property like location and local culture, many spreadsheets and applications are available for free online to do more concrete analysis of a property. Find one that works for you and evaluate your potential investment from a number’s perspective. How much are similar units renting for? Will you have to account for vacancy throughout the year? What about a savings fund for potential repairs? Try to factor in things like cost of garbage removal, cable, and internet. At this point you will be able to decide if you offer these services as a package with your property or if you should leave those to tenants to pay.

At this stage you can also evaluate the cost per square foot and some other metrics of your investment to see what kind of deal you may or may not be getting. While in the research stage it is important to ask lots of questions and seek guidance from others who have more experience. At the end of the day more people putting their heads together usually leads to a better result.

Done properly, multi-family investing can allow someone, with relatively little money down, to create a passive stream of income for themselves, all the while purchasing real estate that will most likely increase in value indefinitely over time if its kept up and monitored. Given the potential rewards, the risks are great. Before jumping into anything its important to understand that a bad real estate transaction can permanently hobble you financially. A purchase involving a house that needs thousands more in repairs than anticipated, or one that goes unrented for extended periods of time can send investors into bankruptcy and completely derail your financial plans. Investors should steer clear of complicated transactions their first time around and should only proceed after consulting with several professionals.

One of the most difficult aspects of multi-family investing is the family part. You occasionally will deal with tenants who do not pay on time, who destroy your property, and who can make managing your property a nightmare. Forums across the internet are full of stories of “tenants from hell” who appeared to be perfectly normal before destroying their units and worse. Carefully vet any tenants who you agree to rent to, its difficult to get someone out of their unit once an agreement has been signed, once again, careful research on the front end could save you lots of headaches. Ultimately your name is on the deed and anything your renters do while on the property will come back on you if not dealt with properly.

To summarize the article in a few lines, multi-family investing is a challenging and potentially risky endeavor. It requires time and patience to find good deals and executing them is even more challenging. For those who can navigate these challenges however, a potential life changing income source, and long-term wealth building can be attained. To learn more about investing in real estate, and to get into more detailed guides, click here for our FAQ page, or here to subscribe to our monthly newsletter.

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