Is Multifamily a Good First Real Estate Investment?

by | BiggerPockets.com

In my 15 years as a real estate investor, I have been asked the question “is multifamily a good first investment” many, many times, by many different people who are in many differing circumstances. My answer has always been and continues to be the same.

It depends.

It depends on a variety of different factors. These factors include the investor’s disposition, their goals, and their experience. It depends on their financial situation and the amount of time and sweat equity they might be willing to put into an investment. It depends on the market they are trying to get into. In short, it depends on the person and where they are in their lives. It is something they have to answer for themselves.

I always tell people that the best way for them to answer this question is to compare the pros and cons of multifamily investing with the pros and cons of another type of investment they might consider, such as single-family dwellings. Put pencil to paper and make a list.

Then, think about yourself, your goals, and your financial situation to determine how the pros and cons match up to you.

To help you decide, I’ve outlined some of the basic pros and cons of multifamily investing below.  I’ve also included in these pros and cons some of the advantages and disadvantages of other types of real estate investments to give you a better overall view.

first-multifamily-deal

Multifamily Pros

More Cash Flow

Perhaps the best pro multifamily has going for it is the cash flow. Because there are multiple units, there is more cash flow. There’s not necessarily a better return on investment, but more cash flow. There is simply more cash coming into your pocket every month because you have more people paying you. A single family home, while it may offer a better return, will generally not generate as much cash.

Everything in One Place

With a multifamily property, there is only one lawn. There is only one roof. There may be only one water heater or HVAC unit. There is only one place to drive to. There is only one place to check on. In sum, almost everything is contained, which could help keep your maintenance and operating costs down. Single-family properties can be scattered all over the place. Plus, they all have the same components as multifamily properties, such as roofs and lawns; there are just more of them.

Related: Why Your Chance to Land a Big Multifamily Deal Might Be Just Around the Corner

Rarely Completely Vacant

Tenants move and create vacancies. But multifamily properties are rarely ever completely vacant. This means there is always some cash flowing in, and someone is there to help prevent theft and vandalism. This is not the case with single-family properties and commercial storefronts. When they are vacant, they are empty—sometimes for a long while.

Fairly Easy to Find Tenants

Everyone needs a place to live, and as long as you invest in a decent area and have a decent property, you should be able to find rent-paying tenants. Doing this with other types of properties, such as commercial, is not always so easy.

Live in One of the Units

Living in one of the units may actually be a great advantage, especially for a first-time investor. For one thing, you can get similar types of loans for smaller multifamily buildings (duplexes, triplexes and quadplexes) as you can for single-family dwellings. This helps keep your costs down. Further, if you live in one of the units, you can count the rental income from the other units on your loan application, helping you acquire the property.

Multifamily Cons

More Difficult to Finance

Multifamily properties, especially properties with five units or more, are very different from single-family properties when it comes to financing. They are considered commercial properties. Financing can be more difficult to secure. Larger down payments are often required.  Interest rates are higher. The loan terms are shorter and usually include a balloon payment. These items could preclude some newer investors from being able to acquire multifamily properties.

More Difficult to Sell

The number of buyers out there for multifamily properties is much smaller than the number for single-family properties. Further, almost all of the people buying multifamily properties are investors who are looking for a good deal. So unless you have somehow increased rents or otherwise added value, do not always expect to be able to reap huge gains or get out very quickly.

Related: 5 Amazing Benefits Multifamily Investments Offer (That Single Family Homes Don’t)

More People Problems

Multifamily properties come with more tenants, and all of those tenants will have one common denominator—you. Expect the amount of people problems to rise dramatically when owning a multifamily property. Also expect differing types of people problems depending on your market and class of property you buy. Higher- and lower-end tenants each come with differing sets of circumstances and problems.

Management Expertise Required

Running a multifamily real estate investment is a business. It is NOT passive. Are you ready to be an accountant, contractor, law enforcement officer, and psychologist? If not, are you ready to hire a management company and have a completely different set of headaches?

The Sum Up

Is multifamily a good first investment? Maybe. As I said in the opening to this post, it depends. It depends on the investor. It depends on their financial situation. It depends on their market. It depends a lot on their experience in dealing with people and running a business.

If you truly want to get into multifamily investing for the first time, with little or no experience, perhaps it is best to start small.  Start with a duplex or quadplex. With these types of properties, an investor can give multifamily real estate a try and determine if it is the right fit for them. These properties are generally easier to get into, easier to finance, and easier to manage. They are also easier to get out of just in case things do not work out.

Is multifamily a good first time investment? Yes. But it depends.

We’re republishing this article to help out our newer readers.

Are you considering multifamily as a first investment? Why or why not?

Weigh in below!

About Author

Kevin Perk

Kevin Perk is co-founder of Kevron Properties, LLC with his wife Terron and has been involved in real estate investing for 10 years. Kevin invests in and manages rental properties in Memphis, TN and is a past president and vice-president of the local REIA group, the Memphis Investors Group.

22 Comments

  1. James Kobzeff

    You did a good job covering this issue, Kevin. Thank you. Perhaps the only point I would add is for the new investor to thoroughly crunch the numbers. The investor wants to use realistic income and expenses to compute the property’s cash flow but doesn’t want to ignore upside potential in rents if that is a reality.

    • Kevin Perk

      James,

      Thanks for the kind words and your insight. You are so right about the numbers. They do not lie

      First time (and experienced) investors have to be careful when looking at a seller’s numbers. They really have to understand their market to know if what the seller is telling them is correct and if there is any upside potential. Frankly, that is a lot to know for a first timer. But I have seen people do it. Unfortunately, I have also seen people crash and burn because they were mislead, had unreasonable expectations or lacked proper experience and knowledge. You can trust the seller, your realtor, wholesaler, lawyer or whomever to a point, but they don’t get paid until the deal goes through. That has to be kept in mind.

      There is a lot of exuberance these days and in times of exuberance investors begin to ignore the numbers because they have to get in on the deal making. Or they think they can keep pushing the envelope for ever. The crash in 2008 showed us that is not always the case and that some deals are best left undone.

      Thanks again,

      Kevin

    • Kevin Perk

      Kim,

      Well….at least I am consistent. 🙂

      You have a point and I thank you for raising it.

      In response I’ll say that I am not sure how I could honestly tell a first time multi-family investor that a particular property is a good investment for him or her without knowing a lot about the property and a quite a bit about the investor. As I’m sure you know, the numbers in multi-family can get really big really quickly. That can be great if everything is going well, but it can also lead to financial ruin. Other problems in multi-family can also get really big really quickly and I have seen experienced investors take years to recover. I want to be honest with people about that and get them to think about what they are doing. We both know multi-family is a great investment. But it may not be for everyone.

      So I will still have to tell folks, especially first timers, that “It depends.” I think that is the best answer I can give in a short blog post. When talking with folks face to face, I can always ask them to tell me more and dive into some of the details I discussed. I’m often happy to do that.

      Thanks for reading and taking the time to comment,

      Kevin

    • Jean-Marc Francois

      Your point is valid, Kim. I can only add by saying that as a marketing and retail consultant (not a real estate expert) I can empathize with Kevin: there are no magical solutions (or else we would all be filthy rich). Having said that, there is more than one path to Nirvana. I’ve seen many clients be successful following different paths and strategies. Kevin, is just trying to highlight the main dilemmas a multi-unit investor must deal with, not tell you which is the best option for you (huge responsibility for a consultant!).

  2. jorge vazquez

    Investing in multifamily real estate is one of the best ways to generate cash flow and build wealth.

    So in this article, we want to share 5 important reasons for real estate investors to invest in multifamily real estate as part of their overall investing plan.

    #1 Easier to Finance
    Although multifamily investment properties are more expensive than single-family properties, they’re generally easier to finance, all things considered.

    While this may sound counterintuitive, investors need to understand that multifamily properties pose less risk for a lender, because multiple families are living under one roof.

    Vacancies relating to multifamily and single-family properties is just one example of how multifamily properties are less risky for lenders. A vacancy with a multifamily property has less of a negative impact than with a single-family property, because it continues to generate cash flow from rents collected from the remaining families.

    #2 Quickly Grow Your Portfolio
    Investors can grow their rental property portfolio more quickly with multifamily investment properties than single-family homes.

    For example, the time, energy, and expense of purchasing 300 single-family properties with 300 closings can be drastically reduced by purchasing one multifamily property with 300 units. An aggressive investor can grow his portfolio quickly with a few multifamily purchases, rather than taking years to purchase individual properties.

    #3 Easier Property Management
    Some real estate investors with single-family homes try to self-manage their properties in order to save money, especially when they only own a few properties. Of course, this usually does not bode well for the investor or tenants, and causes major stress for both parties.

    Multifamily investment properties can be easier to manage because they produce the cash flow and income to reasonably afford the staff to manage the property.

    Additionally, multifamily properties can be less expensive to manage because:

    Professional management staff work full time, and possibly live, on the premises.
    Units in a multifamily property are centrally located, and not spread out over a large geographic area.
    #4 More Options for Forced Appreciation
    Forced appreciation occurs when an investment property increases in value as a result of actions taken by the owner.

    Multifamily properties inherently have more options for owner-driven appreciation, because a small change adds value affecting multiple families, not just a single family. Also, larger multifamily properties have large common areas and community amenities that can be enhanced to add value and force appreciation.

    Finally, when breaking down the numbers on a per family basis, the cost per family for the improvements of a multifamily property are often considerably less compared to a single-family home.

    Common improvements to multifamily investment properties that force appreciation include:

    Improving curb appeal.
    Updating common areas and individual units.
    Adding and improving amenities.
    Adding security features, such as a gate, security guards, etc.
    #5 More Cash Flow
    Multifamily investment properties have a greater opportunity to generate cash flow than single-family properties, because of the reasons we’ve discussed.

    Higher profits are generated by lower expenses resulting from having multiple units under one roof, when compared to single-family homes spread great distances apart. Also, multifamily properties have centralized and consistent management teams that can generate profits by lowering expenses.

    Cash flow is also generated with multifamily properties by consistently forcing appreciation, which results in higher rents, higher profits, and a stronger balance sheet.

    • Kevin Perk

      Jorge,

      Thanks for a long and thoughtful post. You echo many of the points I made about investing in multi-family properties. A lot of what you say makes sense.

      I would add a couple of points.

      Finance folks generally do look at the property a lot more in multi-family deals than with single-family as you said. In that sense it is much similar to commercial and industrial properties. Those folks are also going to look at the experience and acumen of the person (or entity) they are lending to. If this is the first multi-family property for a particular investor, they may run into a speed bump due to that lack of experience.

      Forced appreciation or raising rents is great for the landlord if it can be done and be done without causing a cash flow disruptions. First, rents do not always rise, but can fall as the crash after 2008 demonstrated. Second, raising rents causes turnover. Turnover is a cash flow killer. An experienced investor knows how to balance that. I am not so sure a first timer does.

      In sum, some sort of business experience is going to matter, especially if the property is a larger one. Thus, depending (there is that word again) on the investor, multi-family may not be the best first time investment.

      Thanks for reading and taking so much effort with your reply. I appreciate it,

      Kevin

  3. Ugochukwu Opara

    Thank you for writing this. My 1st buy was a quad, they are not harder to finance at all.

    2-4 units are considered residential and can be purchased with the same mortgage you would use to buy a single-family home, although I will admit that there are grants and programs that will not support multies or if they do they limit it to duplexes only.

    # Management experience required? – I would have to disagree with this one as well. Technology is awesome and sites like TenantCloud or Cozy.co make my life a breeze. I would recommend 1st having an real estate attorney that can help you with the eviction process and also help draft up your lease and outline all the ways you can avoid getting in trouble as a landlord in your state and municipality but that’s about it.

    Multifamilies are an amazing thing and the only time I don’t recommend them is if your family is too big to fit in a 1 or 2 bedroom. Most multi’s have units with 1 or 2 bedrooms; at least for my city of brotherly love and super bowl champs (Philadelphia).

    In conclusion, I bought a quad as my 1st place; 4 units – 2 bedrooms 1 bath each. the thing cashflows well and is setting me up to buy my next property … which will be a multi. I’ll keep buying ONLY multies until I get a wife and we have kids and she says that she’s tired of apartment-style living.

    • Kevin Perk

      Ugochukwu Opara,

      Thanks for writing in to share your first time experience. Congratulations on a successful purchase and I hope you can get 100 more!

      I might agree with you on the word “required.” If I had the chance to write it again that would likely get changed. We all had to learn somewhere and I think you chose wisely by going into a quadplex.

      Good point about the technology too. The technology available to help now with managing properties is great and getting better. Remember though that technology fails, as do tenants :).

      Keep that lease in a word file because as your technology and tenants fail from time to time you are going to need to update and change it.

      Finally, as someone from the DC area, I was happy to see an old rival win the Superbowl.

      Thanks again for sharing and for reading,

      Kevin

  4. Jerome Kaidor

    Except for a condo I bought once, all of my investments have been multifamily, starting with that first 4-plex in 1996.

    A few points:

    * Yes, downpayments are higher. Typical requirement is 25 or even 30%. So less leverage.

    * It is not hard to get an “ordinary” 30 year loan with no balloon. When I started, 25 year loans were common; now they seem to be less so. But they’re ALL variable-rate. No 30-year-fixed on commercial.

    * Underwriting on commercial or MF properties is more about the property and less about the borrower. Or so
    I’m told. I have never had a problem getting a reasonable loan on a good property. And if the banks won’t lend on a property, maybe I don’t want it either? They’re not stupid… I like to leverage the expertise of their underwriters.

    * I live off the cash flow. Don’t know if I’d have managed that with SFRs.

  5. Ali Hashemi

    Great breakdown Kevin. I’m biased but I think starting with multi family is always a good idea! I think “it depends” only applies if someone is deliberating between SFH or MFH.

    Great article on the pros and cons!

  6. Mike hoherchak

    Great article! I plan on having my first investment property as an owner occupied MF. Though, I was under the impression that, when qualifying for a loan, I could only use the rent roll as a source of income if I already had 2 years of landlord experience. Could you elaborate on that if you could?

    • Kevin Perk

      Mike,

      Thanks for the kind words.

      It may be up to the bank you are using and the type of property you are looking to acquire.

      If you are looking at buying and living in a building with 4 units or less, they should count the income towards your loan application (less vacancy, repairs, etc.). For example, it is common in my area to bump up the price of retail properties with a back house unit because the potential owner can count the rent as income and therefore qualify for a larger loan amount.

      If you are buying commercial properties (5 units or more) then the qualifications are different. The lenders you talk with may require some experience on your part. I too have heard the
      “two years of experience” qualification before as well, but I am not sure if it will apply to all lenders. Check around with other lenders to see what you can find.

      Hope this helps you.

      Perhaps someone with more advice and experience came chime in here as well.

      Thanks again for the kind words and for reading,

      Kevin

  7. Doug Johnson

    Lots of good information here. Another answer to “Is Multifamily a Good First Real Estate Investment?” might be as a passive investor. I started by investing in an apartment syndication (partnership) where I was one of 25 truly a passive investors for the project. I provided equity for the purchase and was able to make a good return. In fact, we recently sold the property and I was able to make a 82% ROI in 25 months. A pretty good deal for doing none of the work.
    The process of being a passive investor helped me to learn about the in/outs of apartment investing. After investing in four apartments as a passively, I had the confidence to lead the purchase of an apartment.

  8. Adam Cranmer

    Hi Kevin – thank you for a well thought out post. It was very informative for someone like me trying to get into the MFH world. I thoroughly enjoy the “it depends” response, as I’ve been in management consulting for 10+ years and always love to give my clients that response!

    My wife and I are looking into the MFH world in Denver, as we have searched for SFH investments for months now, where SFH houses sell in hours, much less days. It is frustrating to utilize investment calculators, etc, to estimate rent rolls when SFH investors snatch up houses at $30k over asking – which makes no sense when estimating the current/future rent. Smells like 2008 to me. Here’s to staying the course, I guess!

    Thank you again for a great article!

  9. Nathan G.

    It does depend and I appreciate you taking a look at it from both sides. Even then, you can’t possibly address all the factors involved. Investors need to learn how to evaluate properties for themselves and their situation rather than relying on some stranger telling them what’s best for them.

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