{"id":139575,"date":"2021-08-16T15:52:36","date_gmt":"2021-08-16T21:52:36","guid":{"rendered":"https:\/\/www.biggerpockets.com\/?post_type=guides&#038;p=139575"},"modified":"2023-09-30T04:53:52","modified_gmt":"2023-09-30T10:53:52","slug":"buying-multifamily","status":"publish","type":"guides","link":"https:\/\/www.biggerpockets.com\/guides\/buying-multifamily","title":{"rendered":"Beginner\u2019s Guide To Investing In Your First Multifamily Property"},"content":{"rendered":"\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm\/?e=BIGPOC8668943461\" width=\"100%\"><\/iframe>\r\n  \n\n\n\n\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm\/?e=BIGPOC7115394315\" width=\"100%\"><\/iframe>\r\n  \n\n\n\n\n<p>Multifamily property investing diversifies your efforts in real estate investing. Right off the bat, you use an intensified and diversified investment strategy to buy multiple homes with a single purchase. Owning a multifamily real estate property means you can earn income from multiple rental units in one property versus investing in single-family properties.<\/p>\n\n\n\n<hr class=\"wp-block-separator has-css-opacity\"\/>\n\n\n\n<h2 class=\"wp-block-heading\">What Is a Multifamily Property?<\/h2>\n\n\n\n<p>Simply put, a multifamily home is any residential property with more than one housing unit.<\/p>\n\n\n\n<p>These could be duplexes, triplexes, fourplexes, apartment complexes, or really anything that involves multiple tenants living in occupied units on one property. Owners can also live in any of these units, making it an owner-occupied property\u2014something we call \u201chouse hacking,\u201d typically done with residential multifamily properties with two, three, or four total units.<\/p>\n\n\n\n<p>Properties with more than four units are deemed commercial, while four and below are deemed residential. This distinction is important for lending purposes, as residential multifamily lending rules differ from those for commercial investments.<\/p>\n\n\n\n<p>In addition to the lending distinction, larger multifamily properties may have different methods for finding, analyzing, financing, and managing the property. For this reason, most investors getting into multifamily start with small residential properties and move into larger multifamily deals once they\u2019ve gained some experience.<\/p>\n\n\n\n<p>Now, let\u2019s review how amazing these properties are and why you need them in your portfolio.<\/p>\n\n\n\n<hr class=\"wp-block-separator has-css-opacity\"\/>\n\n\n\n<h2 class=\"wp-block-heading\">Multifamily vs. Single-Family Investing<\/h2>\n\n\n\n<p>Single-family rentals are often the target of real estate investors, but they don&#8217;t realize the power of multifamily real estate investing. With single-family homes, you put all your eggs in one basket with only one tenant. You have tenants, or you don&#8217;t; the tenants are either good or bad, and there is no in-between. You don&#8217;t have ways to offset any downsides, especially in the long term.<\/p>\n\n\n\n<p>With multifamily real estate investing, you have a larger tenant mix and a lower 100% vacancy risk in your real estate investment portfolio. The chances of having all non-paying or &#8216;bad&#8217; tenants are slim. While you might have a unit with troublesome tenants, the tenants from the other units may offset it, especially if you have two to four units.<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<h2 class=\"wp-block-heading\">Benefits of Investing in Multifamily Real Estate<\/h2>\n\n\n\n<p>My first rental property was a small two-unit duplex I bought when I was 21. Later I bought another duplex, a triplex, some fourplexes, some apartments, and some mobile home parks. Now I have more than 2,000 rental units across a dozen states\u2014almost all multifamily. This allows me to live where I want, pay all my bills, give generously, and work far fewer hours than most.<\/p>\n\n\n\n<p>That\u2019s the power of multifamily real estate.<\/p>\n\n\n\n<p>Investing in multifamily properties can change your life, whether you want just a few small deals or a real estate empire. It\u2019s similar to investing in single-family houses, but you&#8217;re at Costco instead of shopping at Walmart. You\u2019re buying in bulk and can quickly scale up your passive income and net worth faster than you think possible. And hey, it\u2019s a lot of fun!<\/p>\n\n\n\n<p>Simply stated, multifamily properties are one of the easiest ways to climb your way to millions of dollars in real estate and give you the life you\u2019ve dreamed of.<\/p>\n\n\n\n<p>And the great thing is that anyone can invest in multifamily, regardless of location, income, credit, experience, or bank account\u2014if you know what you\u2019re doing.<\/p>\n\n\n\n<p>I love multifamily for a lot of reasons. But since you don\u2019t want to spend the next three hours reading while I lay them all out, let me just give you four good ones.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">1. Cash flow<\/h3>\n\n\n\n<p>Cash flow is the name of the game in real estate investing. When trying to get the most bang for your buck, purchasing multifamily homes is a great course to take. Why? Because multifamily properties are designed for cash flow.<\/p>\n\n\n\n<p>Think about it. When someone builds a house, what\u2019s usually the purpose? For someone to live in it for themselves.<\/p>\n\n\n\n<p>A single-family home is not designed for cash flow but for comfort (yes, single-family homes can still cash flow\u2014it\u2019s just harder because they aren\u2019t designed for it). Conversely, a multifamily property is generally built and sold for investment purposes. In other words, it\u2019s designed to make cash flow.<\/p>\n\n\n\n<p>Be careful, though. Just because it\u2019s a multifamily property doesn\u2019t mean it\u2019s going to cash flow. Many different factors determine one\u2019s monthly cash flow. There\u2019s the mortgage payment, insurance costs, property taxes, utilities, repairs, management, saving up for replacing big items (which we call \u201cCapEx\u201d in the real estate world), and more.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">2. Quick portfolio expansion<\/h3>\n\n\n\n<p>Wealth is not built by purchasing a property but by building a real estate portfolio. In other words, it\u2019s not one deal that will get you the wealth and freedom you want, but the collection of many rental units.<\/p>\n\n\n\n<p>Sure, you can buy a house every year or two, but that\u2019s a slow path toward generating enough cash flow to quit your job, travel the world, buy a Tesla, or whatever your goal is. Multifamily housing, on the other hand, can automatically add numerous rental units to your portfolio at once, helping you scale fast.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">3. Reduced risk<\/h3>\n\n\n\n<p>When you own a house and that house goes vacant, you\u2019re 100% vacant, earning no money from that unit. But if you own multifamily properties, if one unit needs repairs or is vacant, you have other units that can carry its slack for the time being. That makes multifamily units a powerful asset, especially for a beginning investor.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">4. Potential for house hacking<\/h3>\n\n\n\n<p>Finally, there\u2019s the power of house hacking, the process by which you\u2019ll live in one unit and rent the others out. Multifamily makes this possible!<\/p>\n\n\n\n<p>For example, let\u2019s say you buy a triplex, and your monthly mortgage payment for the property as a whole is $1,500. You rent out two of the units for $650 and keep one for yourself. Your individual mortgage payment is $200 per month. That\u2019s a bargain!<\/p>\n\n\n\n<hr class=\"wp-block-separator has-css-opacity\"\/>\n\n\n\n<h2 class=\"wp-block-heading\">Finding Multifamily Properties<\/h2>\n\n\n\n<p>The first step in finding multifamily properties is clearly defining what type you want. In <a href=\"https:\/\/store.biggerpockets.com\/products\/the-multifamily-millionaire-volume-i\" target=\"_blank\" rel=\"noreferrer noopener\">The Multifamily Millionaire<\/a>, I break down this step into something I call your \u201ccrystal clear criteria,\u201d which includes defining the following.<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Property type:<\/strong> Is the property a small multifamily, medium-sized, or large?<\/li>\n\n\n\n<li><strong>Location:<\/strong> Where can you build expertise in an area?<\/li>\n\n\n\n<li><strong>Condition:<\/strong> Do you want a project or something already finished?<\/li>\n\n\n\n<li><strong>Price range:<\/strong> Is this a $200,000 property or a $200,000,000 property?<\/li>\n\n\n\n<li><strong>Profitability:<\/strong> What kind of financial return are you looking for?<\/li>\n<\/ul>\n\n\n\n<p>You can better hunt for those deals once you\u2019ve defined exactly what you\u2019re looking for.<\/p>\n\n\n\n<p>However, this is where we need to look at another difference between small multifamily and large multifamily.<\/p>\n\n\n\n<p>Small multifamily deals are usually sold through real estate agents. You can search for them on websites like Realtor.com or Zillow, or even better, get yourself a rock star real estate agent who understands real estate investing to help you get those leads automatically.<\/p>\n\n\n\n<p>It\u2019s also possible to find these small multifamily deals off-market, meaning you directly market to owners of multifamily properties to convince them to sell you their property before they list with an agent. There are numerous off-market deal-finding strategies, but the most common are direct mail marketing, driving for dollars, and networking with owners or wholesalers.<\/p>\n\n\n\n<p>When it comes to larger multifamily properties, while the same off-market strategies exist and can work, most sales happen through commercial real estate brokers.<\/p>\n\n\n\n<p>These brokers are constantly networking with multifamily owners. When an owner decides to sell, the brokers will put together a fancy sales packet and attempt to find a buyer for that deal through their buyer clients. If they can\u2019t find a buyer directly through their personal network, they may list the property for sale online through a commercial real estate sales portal such as Loopnet or Crexi, which you can visit to look through potential deals.<\/p>\n\n\n\n<p>The key to finding multifamily properties is creating a consistent funnel of leads to pursue and then running the numbers to determine how much you can afford to offer. But how do we \u201crun the numbers?\u201d<\/p>\n\n\n\n<hr class=\"wp-block-separator has-css-opacity\"\/>\n\n\n\n<div id=\"hero-block_62df1a82bfc88\" class=\"first:mt-0 hero-block py-4    has-background has-slate-200-background-color has-text-color has-theme-gold-color\">\n    <div\n        class=\"gap-10 lg:gap-20 flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 lg:w-2\/3 \">\n            <main class=\"py-4\">\n                \n\n<p class=\"has-slate-800-color has-text-color has-large-font-size\" style=\"font-style:normal;font-weight:800\">Build your wealth with multifamily houses<\/p>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-slate-900-color has-text-color\" style=\"font-size:16px\">Learn how to become a millionaire by investing in multifamily houses! In this two-volume set, <em><a class=\"rank-math-link\" href=\"https:\/\/store.biggerpockets.com\/products\/the-multifamily-millionaire-volume-i?utm_source=blog&amp;utm_medium=blog%20banner\" target=\"_blank\">The Multifamily Millionaire<\/a><\/em>, Brandon Turner and Brian Murray inspire and educate you into becoming a millionaire.  <\/p>\n\n\n\n<div id=button-custom-event-block_64134fe56b103 class='button-custom-event'>\n      <a\n    href=\"https:\/\/store.biggerpockets.com\/products\/the-multifamily-millionaire-volume-i?utm_source=blog&#038;utm_medium=marketing_block\"\n        x-on:click=\"window.analytics.track('Blog Block | Publishing: MFMV1 Book', {\n      referrer: 'https:\/\/www.biggerpockets.com\/guides\/buying-multifamily',\n    });\"\n    class=\" btn-shape inline-block no-underline has-background has-theme-gold-background-color has-text-color has-white-color\" target=\"_blank\">Get Your Copy<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n                <div class=\"lg:w-1\/3 first:mt-0 relative h-full lg:flex lg:items-center\">\n            <img decoding=\"async\" class=\"object-cover w-full relative z-20 my-0  rounded-md hidden lg:block\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/06\/mfm1-scaled.webp\" alt=\"\" title=\"\">\n        <\/div>\n            <\/div>\n<\/div>\n\n\n<hr class=\"wp-block-separator has-css-opacity\"\/>\n\n\n\n<h2 class=\"wp-block-heading\">What to Look for When Investing in Multifamily Properties<\/h2>\n\n\n\n<p>When investing in multifamily real estate, there are many factors to consider, including the following:<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Location<\/h3>\n\n\n\n<p>Purchase multifamily real estate in areas with a large need for rentals. Also, look for properties next to amenities, such as public transportation, retail stores, and other necessities, to attract suitable tenants.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Property condition<\/h3>\n\n\n\n<p>Know the property&#8217;s condition and any necessary work to bring it up to par to ensure you have rental properties renters want to live in.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Local rental market<\/h3>\n\n\n\n<p>Assess the area&#8217;s demand. Purchasing multifamily real estate in areas where renters don&#8217;t look won&#8217;t yield the rental income you desire.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Expenses<\/h3>\n\n\n\n<p>Assess all current property expenses, such as property taxes, insurance, utilities, and any other expenses you&#8217;ll incur as the property owner.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Property management costs<\/h3>\n\n\n\n<p>Determine if you can manage the property yourself or if hiring a property management company is best. If so, consider the costs. If this is your first property, shop around to get an idea of the different rates each property manager charges in the area.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Potential income<\/h3>\n\n\n\n<p>Look at the current market rental rates, the area&#8217;s vacancy risk, and what comparable properties get for rent, considering any differences that would increase or decrease your potential income.<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<h2 class=\"wp-block-heading\">Analyzing Multifamily Properties<\/h2>\n\n\n\n<p>I often say that deal analysis is the most important skill an investor can have. When you know how to do the math, you\u2019ll avoid buying bad deals, have an easier time using other people\u2019s money to buy those good deals, and achieve your financial goals faster with far less investment risk.<\/p>\n\n\n\n<p>But not everyone likes math, and understandably so. It can get complicated, especially with multifamily.<\/p>\n\n\n\n<p>Unfortunately, it\u2019s hard to make good investments without crunching numbers. After all, investing is just one big equation. Rather than saying, \u201cI don\u2019t know how to do the math, so I\u2019ll just wing it,\u201d let\u2019s take the time to learn.<\/p>\n\n\n\n<p>Experienced multifamily investors typically prefer &#8220;underwriting&#8221; to \u201canalysis.\u201d They are basically the same concept, but underwriting is the industry term, so be sure to use it if you want to look smart.<\/p>\n\n\n\n<p>Underwriting involves two distinct parts.<\/p>\n\n\n\n<ol class=\"wp-block-list\">\n<li>The collection of data (income, expenses, etc.)<\/li>\n\n\n\n<li>The actual mathematical analysis<\/li>\n<\/ol>\n\n\n\n<h3 class=\"wp-block-heading\">Collecting the data<\/h3>\n\n\n\n<p>When I say \u201ccollecting the data,\u201d I mean understanding what you are dealing with.&nbsp;<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>What\u2019s the location like?<\/li>\n\n\n\n<li>How many units are on the property?<\/li>\n\n\n\n<li>What do those units rent for?<\/li>\n\n\n\n<li>Are there other sources of income, like laundry machines or rented storage?<\/li>\n\n\n\n<li>Which utilities are paid by the landlord, and which are paid by the tenants?<\/li>\n\n\n\n<li>What\u2019s the condition of the property?<\/li>\n\n\n\n<li>How much are the property taxes\u2014and how much will they be after closing?<\/li>\n\n\n\n<li>How much will insurance cost?<\/li>\n\n\n\n<li>What other expenses will the landlord be responsible for?<\/li>\n<\/ul>\n\n\n\n<p>Most of these data points can be learned by talking with the broker involved in the sale or by asking pointed questions of the seller. Additionally, at least for on-market, listed properties, the broker will assemble this data ahead of time and place it into the sales document. But be warned\u2014these sales documents are meant to sell you on the deal, so never trust them. Verify each point to be sure it\u2019s not an overly optimistic estimate or a flat-out lie.<\/p>\n\n\n\n<p>The key to data collection is wrapping your head around the entire project so you can make the best-informed underwriting. You wouldn\u2019t want to buy a multifamily property only to find out later that the city has a special monthly fee that will cost you thousands of dollars a year.<\/p>\n\n\n\n<p>In just a moment, we will analyze a hypothetical multifamily deal, so let\u2019s go ahead and create some hypothetical data points now.<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Property address<\/strong>: 123 Main Street, Anytown, USA<\/li>\n\n\n\n<li><strong>Number of units<\/strong>: 10<\/li>\n\n\n\n<li><strong>Average monthly rent<\/strong>: $750<\/li>\n\n\n\n<li><strong>Other income<\/strong>: $200\/month for coin-op laundry<\/li>\n\n\n\n<li><strong>Utilities<\/strong>: $1,000\/month for water, sewer, garbage, and electric<\/li>\n\n\n\n<li><strong>Condition<\/strong>: Okay, needs about $30,000 in signage, landscaping, and paint<\/li>\n\n\n\n<li><strong>Property taxes<\/strong>: $1,200\/month<\/li>\n\n\n\n<li><strong>Insurance<\/strong>: $2,200\/month<\/li>\n\n\n\n<li><strong>Other expenses<\/strong>: 10% of rent for property management and $200 a month for landscaping<\/li>\n\n\n\n<li><strong>Asking price<\/strong>: $1,000,000<\/li>\n<\/ul>\n\n\n\n<h3 class=\"wp-block-heading\">Mathematical analysis<\/h3>\n\n\n\n<p>Next, you\u2019ll use the data you collected to determine several key financial metrics for the property. While it\u2019s possible to do this by hand, I\u2019d highly recommend using <a href=\"https:\/\/www.biggerpockets.com\/rental-property-calculator\" target=\"_blank\" rel=\"noreferrer noopener\">the BiggerPockets Rental Property Calculator<\/a>, which allows you to accurately and efficiently analyze a property in under five minutes. Doing an analysis by hand or using some random spreadsheet from the internet is a good way to lose a lot of money by making small mistakes.<\/p>\n\n\n\n<p>(Note: The BiggerPockets calculators are ideal for properties between one and 30 units. Above 30, you\u2019ll want a more exhaustive tool like <a href=\"https:\/\/themichaelblank.com\/syndicated-deal-analyzer\/\" target=\"_blank\" rel=\"noreferrer noopener\">Michael Blank\u2019s Syndicated Deal Analyzer<\/a>.)<\/p>\n\n\n\n<p>Let\u2019s go ahead and run the numbers on the hypothetical 10-unit multifamily property I outlined above on the BiggerPockets Rental Property Calculator.<\/p>\n\n\n\n<p>First, we\u2019re going to enter the address and upload a photo:<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"595\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/08\/rental-property-calculator-1024x595.png\" alt=\"\" class=\"wp-image-139612\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/08\/rental-property-calculator-1024x595.png 1024w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/08\/rental-property-calculator-300x174.png 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/08\/rental-property-calculator-768x446.png 768w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/08\/rental-property-calculator.png 1430w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p>Next, we\u2019ll enter the proposed purchase price, closing costs, after-repair value, and repairs costs. (And hey, if you are using the BiggerPockets calculators and unsure how to fill out any form, just click on the blue help links on the right side.)<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"654\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/08\/rental-property-calculator-2-1024x654.png\" alt=\"\" class=\"wp-image-139613\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/08\/rental-property-calculator-2-1024x654.png 1024w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/08\/rental-property-calculator-2-300x192.png 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/08\/rental-property-calculator-2-768x490.png 768w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/08\/rental-property-calculator-2.png 1430w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p>Next, we\u2019ll choose our loan amount. In this case, 70% will mean our down payment is 30% of the purchase price. We\u2019ll also include details about the loan, which you can get from your lender.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"654\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/08\/rental-property-calculator-3-1024x654.png\" alt=\"\" class=\"wp-image-139614\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/08\/rental-property-calculator-3-1024x654.png 1024w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/08\/rental-property-calculator-3-300x192.png 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/08\/rental-property-calculator-3-768x490.png 768w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/08\/rental-property-calculator-3.png 1430w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p>Now, include the rent and other monthly income.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"566\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/08\/rental-property-calculator-4-1024x566.png\" alt=\"\" class=\"wp-image-139615\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/08\/rental-property-calculator-4-1024x566.png 1024w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/08\/rental-property-calculator-4-300x166.png 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/08\/rental-property-calculator-4-768x425.png 768w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/08\/rental-property-calculator-4.png 1430w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p>And finally, include all the expenses for the property. I usually assume between 5% to 10% for repairs, but this can vary depending on the age and condition of the property, as well as other compensating factors.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"639\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/08\/rental-property-calculator-6-1-1024x639.png\" alt=\"\" class=\"wp-image-139618\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/08\/rental-property-calculator-6-1-1024x639.png 1024w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/08\/rental-property-calculator-6-1-300x187.png 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/08\/rental-property-calculator-6-1-768x479.png 768w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/08\/rental-property-calculator-6-1.png 1430w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p>That\u2019s it for inputs. Now, let\u2019s look at the results.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"781\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/08\/rental-property-calculator-7-1-1024x781.png\" alt=\"\" class=\"wp-image-139620\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/08\/rental-property-calculator-7-1-1024x781.png 1024w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/08\/rental-property-calculator-7-1-300x229.png 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/08\/rental-property-calculator-7-1-768x585.png 768w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/08\/rental-property-calculator-7-1.png 1430w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p>What are we looking at here? When investing in multifamily deals, I look for several key metrics.<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Cash flow:<\/strong> This is the profit the property produces after all the expenses, including the mortgage, have been considered. As a general rule of thumb, I like seeing $100 per month per unit on a multifamily property. But this number is not as important as\u2026<\/li>\n\n\n\n<li><strong>Cash-on-cash return (COC):<\/strong> This is the percentage your investment has made you in a given year. To determine this, simply divide annual cash flow by total capital invested. Generally, I aim for 8% to 12% <a href=\"https:\/\/www.biggerpockets.com\/blog\/cash-on-cash-return\" target=\"_blank\" rel=\"noreferrer noopener\">COC<\/a> on a real estate investment, but this can vary wildly depending on the deal. For example, I might take a smaller COC if I believe the property&#8217;s value can go way up over time, and I\u2019ll make more of my profit when I someday sell.<\/li>\n\n\n\n<li><strong>Average annual return:<\/strong> This number gives us a general look at the lifetime success of the property, knowing that over time we will pay off some of the loan, and the property will also likely increase in value. Average annual return says, \u201cIf we account for all of that, what will our investment return be, on average, each year?\u201d As a rule of thumb, I like this number to be at least 14%, preferably a lot higher, on a five-year hold.<\/li>\n<\/ul>\n\n\n\n<p>In the case of our example property at 123 Main Street, we can see that this property is projected to produce more than $200 per month per unit in cash flow (which is above my metric goal), 7.46% cash-on-cash return (which is just slightly below my minimum), and a five-year annualized annual return of 16.85%, which is above my goal.<\/p>\n\n\n\n<p>Now, if I want to achieve all three of these metrics, I have a choice: I can give up and go back to the drawing board since this property only works for two of the three, or I can simply lower my purchase price slightly to determine at what price I will achieve my goal.<\/p>\n\n\n\n<p>This is how underwriting works. You find the number that works, and you go after it. You keep out the emotion. You stick to the math. And you pursue the deal based on the metrics you\u2019ve defined as important.<\/p>\n\n\n\n<hr class=\"wp-block-separator has-css-opacity\"\/>\n\n\n\n<h2 class=\"wp-block-heading\">What Is a Good ROI for a Multifamily Property?<\/h2>\n\n\n\n<p>A good ROI for multifamily real estate depends on several factors, including the area, market value, and asset classes. A good ROI, however, is 14% to 18%. What&#8217;s good for you depends on your investment strategy. For example, some multifamily property investors may accept a lower ROI for a lower vacancy risk, while others prefer a higher risk and higher ROI, including higher monthly income.<\/p>\n\n\n\n<p>The key is to determine if you prefer higher returns or lower risk. Residential real estate isn&#8217;t always high-risk, but any investment strategy in the real estate market has risks, including a total loss in extreme situations.<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<h2 class=\"wp-block-heading\">What Is a Multifamily Property Worth?<\/h2>\n\n\n\n<p>Now this is a loaded question.<\/p>\n\n\n\n<p>First, as with all things in a capitalist society, something is worth what someone else is willing to pay for it. But that\u2019s a lame answer, so let\u2019s go deeper.<\/p>\n\n\n\n<p>What\u2019s it worth to you?<\/p>\n\n\n\n<p>In other words, what price can you pay to make your deal turn into a solid investment for you? For example, if your goal was an 8% cash-on-cash return, the deal above should pencil out above that number at a purchase price of $970,000. But is it actually worth $970,000?<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"450\" height=\"269\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/08\/property.gif\" alt=\"\" class=\"wp-image-139621\" title=\"\"><\/figure>\n\n\n\n<p>Well, let\u2019s go one step further in terms of valuing a multifamily property and look at how an appraiser would evaluate the property.<\/p>\n\n\n\n<p>First, this is another distinction point between small and large multifamily. Smaller, two- to four-unit properties are generally valued the same way single-family houses are: by looking at what similar properties have sold for. An appraiser would look at recent sales (\u201ccomps\u201d) and assume that the target property will be worth around the same amount.<\/p>\n\n\n\n<p>When we\u2019re talking about larger multifamily properties (five units or greater), appraisers have a different way of determining value.<\/p>\n\n\n\n<p>Because it\u2019s hard to find identical properties to compare one\u2019s large multifamily to, appraisers instead look at the profitability of the investment and compare that to other commercial real estate investments in the area. This concept alone is enough to write a whole chapter on, but simply stated, the value of a large multifamily property can be determined using the following formula:<\/p>\n\n\n\n<p><em>Net Operating Income (NOI) \/ Cap Rate = Value<\/em><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Net operating income (NOI) is a property&#8217;s profit in a year, not including any debt payment or capital expenditures (CapEx).<\/li>\n\n\n\n<li>The cap rate is the expected cash-on-cash return investors typically want to see in a similar investment, assuming they paid all cash.<\/li>\n<\/ul>\n\n\n\n<p>So, if a property\u2019s NOI is $500,000 per year, and the normal cap rate in an area is 5%, then:<\/p>\n\n\n\n<p><em>$500,000 \/ .05 = $10,000,000<\/em><\/p>\n\n\n\n<p>Does that mean you should only pay $10,000,000 for this property? Not necessarily. Maybe the property needs to be improved. Maybe you can get it cheaper. Maybe you can increase rents immediately, so overpaying might make sense in the grand picture. Remember, regardless of these cap rates and NOI formulas, the property is worth what makes it a good deal for you. So, work backward, stick to the math, and buy a great small multifamily deal.<\/p>\n\n\n\n<hr class=\"wp-block-separator has-css-opacity\"\/>\n\n\n\n<h2 class=\"wp-block-heading\">Financing a Multifamily Property<\/h2>\n\n\n\n<p>There are plenty of loan types that you can get to finance your multifamily property. Here\u2019s a quick list of the most common ones.<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>HUD loans and other government-backed mortgages<\/strong> for house hackers who plan to live in a one- to four-unit property for at least one year.<\/li>\n\n\n\n<li><strong>Conventional mortgages (most common)<\/strong>, typically 20% to 30% down. Most banks or lenders can do these.<\/li>\n\n\n\n<li><strong>Portfolio loans.<\/strong> Usually, small, local community banks lend their own money, rather than the government\u2019s, and therefore can be more flexible.<\/li>\n\n\n\n<li><strong>Hard money loans.<\/strong> Granted by private individuals or firms with higher rates\/fees than traditional lenders and much shorter terms. Usually only ideal for fix-and-flip projects or buying a nasty property, repairing it, and then refinancing it with a more traditional loan.<\/li>\n<\/ul>\n\n\n\n<p>In addition, there are many creative strategies that can allow you to invest in real estate with significantly less money, even no money. Perhaps the most common no\/low money down strategy is that of utilizing partnerships, where one partner brings most (or all) of the down payment. The other partner handles the rest (such as finding the deal, negotiations, offers, due diligence, closing, and managing), and profits can be split however the two parties choose\u2014often 50\/50.<\/p>\n\n\n\n<p>This strategy can be utilized on small deals or large deals. In fact, this is how I\u2019ve grown my portfolio to more than 2,000 units in the last few years. My real estate company, <a href=\"https:\/\/www.odcfund.com\/\" target=\"_blank\" rel=\"noreferrer noopener\">Open Door Capital<\/a>, buys large apartments and mobile home parks by raising money from wealthy individuals (known as \u201climited partners\u201d) while we do the rest. This can create a real win-win for everyone, as the limited partners get completely passive income while I can scale my unit count into the thousands. This process is known as syndication and is the primary focus of Volume II of <a href=\"https:\/\/store.biggerpockets.com\/products\/the-multifamily-millionaire-volume-ii\" target=\"_blank\" rel=\"noreferrer noopener\">The Multifamily Millionaire<\/a>.<\/p>\n\n\n\n<p>In addition to partnerships, there are many other strategies that could work, such as seller financing, lease options, <a href=\"https:\/\/www.biggerpockets.com\/guides\/brrrr-method\" target=\"_blank\" rel=\"noreferrer noopener\">BRRRR investing<\/a>, and more. If you\u2019re curious about more creative strategies, don\u2019t miss my first full-length book, <a href=\"https:\/\/store.biggerpockets.com\/products\/investing-in-real-estate-with-no-and-low-money-down\" target=\"_blank\" rel=\"noreferrer noopener\">The Book on Investing in Real Estate with No (and Low) Money Down<\/a>.<\/p>\n\n\n\n<hr class=\"wp-block-separator has-css-opacity\"\/>\n\n\n\n<h2 class=\"wp-block-heading\">Making an Offer<\/h2>\n\n\n\n<p>Now that you\u2019ve figured out your financing route (it\u2019s usually a good idea to do this before making offers so that you\u2019re not wasting anyone\u2019s time), and you know exactly how much you can pay for the property to make it worth buying, it\u2019s time to make an offer and negotiate a deal.<\/p>\n\n\n\n<p>If you\u2019re using a broker, they can draw up all the legal documents and make sure all your i\u2019s are dotted and t\u2019s are crossed. If not, consider using an attorney to help make your offer.<\/p>\n\n\n\n<p>The document you\u2019ll use to make your offer is known as a purchase and sale agreement, or simply \u201cthe P&amp;S.\u201d However, when dealing with complex multifamily property transactions, it\u2019s customary first to submit a document known as a letter of intent, or LOI. The LOI is a much simpler document\u2014usually just one page\u2014that spells out the important stuff, such as who you are, the amount you are offering, the date you\u2019ll close, and how you\u2019ll finance the deal. The LOI, although not legally binding, allows both parties to negotiate before spending thousands of dollars and weeks of time on the thousands of small items found in the P&amp;S.<\/p>\n\n\n\n<p>After making your offer, you may get a yes, a no, or a negotiation.<\/p>\n\n\n\n<p>If competition is intense (which it often is), you should do whatever you can to entice the seller to pick you.<\/p>\n\n\n\n<p>One way to do this (beyond price) is to give a shorter closing time. Instead of the standard 30-45 days, offer to have the deal done in two weeks. This may put a lot of pressure on you as a buyer since you\u2019ll have to run through inspections and more during the due diligence period, but sometimes letting a seller know that their payday is in two weeks is enough to make them bend a little. But note that quick turnarounds on closing might eliminate financing options like conventional mortgages. Be aware of the risks.<\/p>\n\n\n\n<p>You can also offer more earnest money. This is a percentage of the property\u2019s price given as a deposit to show your seriousness about the purchase. More money can indicate more commitment. Typically, earnest money is between 1% and 3% of the purchase price and is generally refundable if you back out for reasons outlined in your offer up to a certain time period defined by the offer.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Buyer\u2019s due diligence<\/h3>\n\n\n\n<p>The due diligence period is a set amount of time before closing, where the buyer can pick apart the property with inspections and tests to ensure that they want to make the purchase. It also gives time to finalize financing and ensure everything closes smoothly.<\/p>\n\n\n\n<p>One of the most important things you can do during this time is get an inspection. This will help determine whether you\u2019re making the right investment.<\/p>\n\n\n\n<p>You\u2019ll also use this time to dig into the financials of the investment, double- and triple-checking that your estimates for income and expenses are accurate. Insurance can be ordered during this time, management can be hired, financing is finalized, and lawyers or the title company will handle the legal paperwork and title searches.<\/p>\n\n\n\n<p>Whatever else you decide to do during this period, ensure you\u2019re getting it done before it ends so that you don\u2019t find something that ruins the deal later when it\u2019s too late to back out.<\/p>\n\n\n\n<p>When your due diligence period is up, there\u2019s only one thing left to do: Close on your new multifamily property!<\/p>\n\n\n\n<hr class=\"wp-block-separator has-css-opacity\"\/>\n\n\n\n<h2 class=\"wp-block-heading\">Managing Multifamily<\/h2>\n\n\n\n<p>When it comes to managing your multifamily, you have several options. With a smaller multifamily, you may choose to manage it yourself. Managing tenants is not an overly complicated process, but there are some vital legal and functional rules and processes you should follow.<\/p>\n\n\n\n<p>But landlording is not for the faint of heart or weak of will. You will need to be professional, firm, and systemized. You must learn how to advertise vacant units, screen tenants, sign leases, and handle problems when they arise (and they will). If you plan to go this route, be sure to read some good books on managing tenants, such as the book I wrote with my wife, <a href=\"https:\/\/store.biggerpockets.com\/products\/the-book-on-managing-rental-properties\" target=\"_blank\" rel=\"noreferrer noopener\">The Book on Managing Rental Properties<\/a>.<\/p>\n\n\n\n<p>If you choose not to manage the units yourself, you must engage a professional property management company. Typically, these companies charge between 5% and 10% of the rent collected as their payment, plus other leasing fees. However, this can give you a significant amount of your time back, allowing you more time to find other deals (or to lie on a beach). Remember that even if you hire a manager, you\u2019ll still need to watch over the manager and ensure they are doing a good job\u2014or you\u2019ll need to replace them.<\/p>\n\n\n\n<p>Congratulations! You\u2019ve made it to the end. At this point, you should have a property going from the seller\u2019s hands into yours, producing great monthly cash flow and making you wealthier every month.<\/p>\n\n\n\n<p>If you&#8217;re ready to start your search for investment properties, use the <a href=\"https:\/\/www.biggerpockets.com\/agent\/match\" target=\"_blank\" rel=\"noreferrer noopener\">Agent Finder tool<\/a> to get started! Get the help you deserve to find the best multifamily investments in your area, helping you make the most of the real estate market.<\/p>\n","protected":false},"author":710,"featured_media":139622,"template":"","categories":[7119],"class_list":["post-139575","guides","type-guides","status-publish","has-post-thumbnail","hentry","category-biggerpockets-daily"],"acf":[],"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/guides\/139575","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/guides"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/guides"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/710"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/139622"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=139575"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=139575"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}