Multifamily Dwellings - What to know before you buy

8 Replies

Hey Investors,

I have a question for all of you multifamily landlords out there. I have completed a few flips, some patch and paint and some are complete renovations. I have also bought a handful of rental properties that have been doing well. I want to move on to multifamily dwellings. In Baltimore City there are deals that range from 3 units to 20 units. I would like to start with dwellings that range from 3-5 units. Any suggestions on what to look for when doing my underwriting. IE Zoning, utilities, permits, finances, etc. I always try to look before I leap and would love to learn a trick of the trade before I take the leap of faith. Thanks everyone, cheers!

@Anthony Pace - From a commercial lender perspective Anthony I would suggest the following things to consider, if you will need financing:

1.  Get a quote from 3 commercial lenders and compare not just the rates and points, but also the terms.

2.  Be sure to have a down payment (just in case) of 30% to 35% plus closing cost and reserves.  I know there are many lenders that will tell you they can do 90% to 100% financing but just be prepared.

3.  Avoid any lenders that will require you pay a fee upfront for them to work with you.

4.  Consider the pros and cons of using a Broker vs a Direct Lender.

These fours things should help you in the financing area.  I wish you the best.  

@Anthony Pace Keep in mind that 2-4 units is considered residential, and 5+ is commercial. So you'll need to reach out to two different sets of mortgage lenders. Also, use BP calculators to do your under-writing. Don't rely on the proforma's provided by the sellers! Always ask for the actual's. Another point is, residential is valued based on the comps, and commercial is valued based on the rental income.

Hi Anthony,

Underwriting a 2-4 unit property is different than underwriting a 5 unit property because the valuation methods are different. Underwrite the 2-4 unit properties the same way you would underwrite an SFR. For the 5 unit, the value of the property is based on the net operating income and the market cap rate.

You will also need to secure a commercial loan on a 5 unit property, whereas you can get a residential loan for a 2 to 4 unit.

Insanely simple comment here, but I just want to make sure we don't miss the obvious.... After something passes your initial sniff test and you want to pursue it further, please request to see actuals for everything - rent rolls, utilities, expenses....etc. From there you can run your ow pro-forma, compare to similar properties, see where there's opportunity to decrease expenses to up the NOI, whatever. As @Alina Trigub mentioned, you can't nor shouldn't rely on the seller proformas. 

@Anthony Pace - If you're looking at turnkey multifamily properties in Baltimore City, you'll probably end up paying too high of a price. I've been looking at multifamily properties in Baltimore City and I've noticed that the cost per unit for multifamily is higher than the cost of buying a single family rental. There is limited supply of multifamily properties in Baltimore City and demand is high, so prices get bid up. If you have some renovation/rehab experience, you might be better off focusing on looking for undervalued MF properties that need work that you can buy at an attractive discount. You can then increase the value using your rehab/renovation skills and potentially refinance once the property is stabilized. 

Originally posted by @Anthony Pace :

Hey Investors,

I have a question for all of you multifamily landlords out there. I have completed a few flips, some patch and paint and some are complete renovations. I have also bought a handful of rental properties that have been doing well. I want to move on to multifamily dwellings. In Baltimore City there are deals that range from 3 units to 20 units. I would like to start with dwellings that range from 3-5 units. Any suggestions on what to look for when doing my underwriting. IE Zoning, utilities, permits, finances, etc. I always try to look before I leap and would love to learn a trick of the trade before I take the leap of faith. Thanks everyone, cheers!

 Financing is the 1st thing to pay attention to. 2, 3 & 4 unit properties will still be eligible for 30 year residential loans. 5+ will require commercial financing which has less attractive terms and is typically more complicated, especially on smaller commercial deals like you're speaking of.

@Anthony Pace especially on smaller properties make sure they are zoned for the number of units in the building. In Baltimore Many SFHs have been converted to Multi family. Some will be legal by current zoning/ Some will be legal by virtue of being grandfathered and some simply not legal at all. If a grandfathered property goes vacant long enough it can lose its grandfathering.