Multifamily Real Estate Investing | Bank Rates

So you are considering investing in real estate. Whether you dream of being the next real estate mogul or just want a duplex to help you pay your mortgage, there are plenty of compelling reasons why you might want to target a specific type of property: multifamily.

As the name suggests, multifamily houses more than one group of people in one building or complex (as opposed to single-family houses).They offer great potential for income and property appreciation, but also come with more responsibilities and risks

Let’s break down how investing in multifamily works and the pros and cons.

Multifamily housing consists of multiple individual housing units under the same roof or complex. Each unit has a unique address, and the entrance and living areas are separate from the other units. There are many different households/tenants, but only one building owner – which can be an individual or a corporate entity.

According to the latest data from the U.S. Census Bureau, multi-family dwellings account for more than 30 percent of U.S. housing, so there is significant growth potential and investment opportunities. For investors, these types of homes are income-generating, providing a steady cash flow from the rent paid by tenants. Real estate also has the potential to appreciate in value over the years.

Types of Multifamily Housing

Multifamily housing is available in a wide variety of units ranging from two to 2,000 units. The different types of multifamily housing you can invest in include:

  • Duplex, triplex and quadruple. These properties have two, three, or four units, respectively. You can “hack” this type of property by living in one unit and renting out the others. Typically, these individuals qualify for a term mortgage or owner-occupancy financing.
  • apartment. An apartment building has multiple units and is owned by one entity. Management is usually on-site. You need a business loan to finance this type of property.
  • apartment. Apartments are generally similar to condos, although they can also take the form of town or townhouses. Unlike condos, which tend to be rented out, condos are individually owned, although common spaces are shared and managed by a homeowners association (composed of condo residents).
  • Mixed use. Mixed-use multifamily units combine residences with retail, commercial, entertainment or cultural spaces.
  • student dormitory. These complexes are built near the university and are designed to meet the needs of students.
  • age limit. Typically, these types of multifamily dwellings limit occupancy to 55 and older. The buildings, amenities, features and activities are all suitable for this age group.
  • Income is restricted. Subsidized housing helps those with lower incomes afford housing. The federal government often works with developers to build these units. If you invest in such a property, you may be able to receive Federal Housing Choice vouchers.

Investing in multifamily properties — known as multifamily investing — is not for the underdog, nor is it passive. It’s a lot of work, and there are a few major things you need to consider before putting your hard-earned cash into a multifamily home.

One key thing to know first: Multifamily can be considered residential or commercial real estate. Smaller multifamily dwellings, those with four or fewer units, are classified as residential properties; commercial multifamily dwellings have five or more units. When it comes to financing, the difference can be huge.

How to Finance Multifamily Homes

Financing a multifamily property depends on how many units are in the property you are purchasing.

For four or fewer units, you can finance the property as a single-family home with a conventional loan. That means mortgage market makers Fannie Mae and Freddie Mac will back and possibly eventually buy the loans, which ultimately lowers the cost for lenders to offer. You can also fund it with an FHA loan, which means you can pay back less than the traditional 20% that most private lenders require.

However, if the property you are buying has five or more units, you will need a business loan. Commercial mortgages have different terms than residential mortgages. For one thing, they tend to run shorter. In addition, lenders will consider projected income from rent to take into account the amount they are willing to lend you and the interest rate they will offer.


Good investment property management is essential. But with multiple units comes greater responsibility. While it will cut into your profits, you may want to hire a professional property manager to oversee things and – unless you have good hands – as well as a site supervisor or maintenance staff. At the very least, you may need an accountant to keep these books.

Insurance and Taxes

Multifamily housing will cost more — this includes landlord insurance and property taxes. But while you should be prepared for a higher tax bill, there are also more opportunities to offset your taxes with multifamily housing.

“Taxes are another big reason why people should invest in multifamily,” said Ryan Pineda, a real estate investor and CEO of Tykes. “There is an opportunity for cost segregation, bonus depreciation and rezoning to add value significantly.”

Zoning regulations

Zoning regulations will determine where properties are located and what you can do with them. Zoning laws will allow multifamily dwellings in certain areas of the city but not others. You also need to keep zoning ordinances in mind if you are considering converting a property (such as a condo-to-condo or commercial-to-residential).

Multifamily properties have some distinct advantages over other types of investment properties.

generate income

Multifamily properties are designed for cash flow. The space in each unit is used as efficiently as possible to attract more tenants and more profits. They can provide more income than renting out single-family homes.

Build your real estate portfolio faster

If you want to be a serious real estate investor, multifamily properties allow you to accumulate large numbers of units more efficiently.

“You have the opportunity to invest in bigger deals and get more units quickly, making it more manageable,” Pineda said. “You don’t have to buy and fix 30 single-family homes and process 30 different loans, you buy one at a time. 30 or even 300 multifamily dwellings.”

Strategically increase the value of the property

Multifamily properties also provide an opportunity for investors to appreciate capital if they decide to sell. “Multifamily properties are a good investment because the value of the property is determined by how much net operating income you have, not the sale price of the condo next door,” Pineda said. “How much money you can make and there are strategic ways to generate income and increase the value of the property, such as reducing vacancy rates, increasing rents or upgrading properties.”

Lower your cost of living

Investors in multifamily homes with four or fewer units typically live in one of the units, which makes them eligible for owner-occupancy financing (similar to a regular residential mortgage with a lower interest rate). Of course, they don’t pay rent (or pay themselves).

less risky than other investments

Multifamily homes generally provide investors with stable cash flow and lower risk, even in a downturn. After all, people always need a place to live. Other types of real estate, such as industrial, retail and office space, are more at risk because the recession will hit them more deeply.

If you’re looking at residential real estate, the biggest option for investing in multi-family homes is investing in single-family homes. Obviously, the multi-family option is more complicated than the single-family option, but also has greater rewards. Below are the pros and cons of each property category.

single family home

advantage shortcoming
Easier for novice investors Not as much rental income potential
Fewer tenants to manage The dispersed nature of the property (if more than one house is owned)
Great appreciation potential Real estate competition intensifies
Loans are easier to get Dealing with tenant issues can be a waste of time
More buyers when you’re ready to sell Income concentrated in one tenant/property
Tenants tend to stay longer


advantage shortcoming
Greater earning potential; stable income stream Need more capital investment
A place to live and invest Higher maintenance costs/fees
You can qualify for a mortgage to build assets from the rent you collect Business loan required (property with more than 5 units)
Increase the value of your property by increasing your income May be harder to find buyers
Less competition for real estate

A Final Word on Investing in Multifamily Housing

Investing in multifamily real estate offers an interesting way to expand your investment portfolio and generate income. But it takes a lot of money and a lot of work. It’s best suited “for the experienced investor, of course,” said John Antretter, a licensed attorney at The Agency in New York City. If you’re new, “it’s best to start small and then take care of multiple tenants. For many, one tenant won’t be as overwhelming as a landlord.”

That said, if you have deep pockets and are willing to seek some professional management help, you’ll want to take multifamily housing seriously.

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