How To Find Multifamily Buildings For Sale And Invest
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Summary:
Although multifamily buildings are not as common as single-family homes or individual condo units, many options are still available. The first step is deciding what type of multifamily building or structure you want and modeling it out. The second step is to find the multifamily building, and the last step is to close on the multifamily property and eventually realize an investment gain.
Multifamily is a term that some might not be familiar with (sorry, I couldn’t resist), but if you are looking at other avenues of real estate investing, then those ears should perk up. Multifamily as a real estate asset class is one of the main ways to generate income, and it can be used as a piggy bank to pull out equity in the form of cash when needed and if interest rates permit. However, multifamily buildings are generally more difficult to find than single-family homes, particularly ones that would be considered a “good deal.” So, how to find one of these and invest it? Let’s break it down below.
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How to find a multifamily building for sale and invest
The first step in finding a multifamily building for sale and investing is understanding what type of multifamily building you would like to invest in and how much you can afford. The second step is using different methods to find a suitable multifamily building. The third step is to finally close and invest in the multifamily building that fits all of your requirements.
Step 1: Understanding multifamily and cashflow
Multifamily is used to define a building with multiple units that multiple families can live in. In most cases, it can be said that there is one title and landlord for the whole building. If you live in an apartment, for example, and not a condo, chances are you are living in a multifamily building. Apartments aren’t the only things considered multifamily, however, as dictated in the table below:
Types of multifamily buildings
| Type of Multifamily Home | Summary |
|---|---|
| Apartments | Owned by a single entity with units rented out to residents. Can range from affordable to upscale with various amenities. |
| Condominiums | Units are individually owned with shared ownership of communal spaces. Often cater to specific lifestyles like working professionals or seniors. |
| Mixed-Use | Combines homes with commercial, retail, and other spaces. Offers convenience by reducing distance between home, work, and entertainment. |
| Student Housing | Modern student housing near universities with amenities like spas, game rooms, and fitness centers. Typically rental units for enrolled students. |
| Age-Restricted | For residents aged 55 and older, focusing on social engagement and lifestyle amenities. Often near universities and public transit. |
| Low-Income | Government-subsidized housing to make it affordable. Similar in construction value to market-rate units. Essential for many low-income households. |
Many people confuse condominiums with multifamily. In many cases, they look exactly the same, with one key difference. An individual owner owns each condominium, whereas, in a multifamily complex, the entire complex or building is controlled by one title or one owner.
When looking at multifamily real estate, each class has its own pros and cons.
Cash-flow
The next step is after you decide on the type of multifamily building you want to invest in, to model out the cash flow. Let’s model out a fourplex below, in which the purchase price is $1,500,000
| Fourplex Model | |||
|---|---|---|---|
| Fourplex Price | $1,500,000 | Maintenance/Upkeep | $24,000 |
| Property Taxes | $9,000 | ||
| Downpayment @ 30% | $450,000 | ||
| Mortgage @70% | $1,050,000 | Total Net Rent | $55,000 |
| Total Net Yield | 3.67% | ||
| Annual Rental Unit 1 | $24,000 | Mortgage Payment | $15,456 |
| Annual Rental Unit 2 | $24,000 | ||
| Annual Rental Unit 3 | $20,000 | ||
| Annual Rental Unit 4 | $20,000 | Net Rental After Debt Service | $39,544 |
| Total Rental | $88,000 | Net Yield After Debt Service | 2.64% |
The key here is to know exactly how your multifamily building operates, what the costs for maintenance and property tax are, and what the interest rate environment is. In this scenario, we assume that even by taking a mortgage at 5% fixed for 30 years, the investor will still be able to wash his face or have the rental income cover the mortgage. If the interest rate were to be higher, the investor might want to put more money down to ensure that they still have a buffer and don’t need to put any more money into the property.
Pro Tip
What does the land down under think of multfamily? We spoke to Goro Gupta, of Ethical Property Investmetns. “Lets be honest, we have a challenge in Australia – larger population that our housing density currently supports, its time to get out of the 80’s and work towards the future. Gone are the days of a 3 bedroom 1 bathroom being a suitable family residence. And to top it off, we have an aging population.I believe a lot of these challenges can be solved with multifamily, multi-generational style homes they have overseas. However, we have hurdles to overcome, but there is a glimmer of hope in what is already successful in certain parts of Australia.”
Step 2: Find the multifamily that you want.
Once you understand the type of multifamily building you want, according to your budget, decided returns, and specifications, it’s time to go exploring the real estate market. Remember, part of the reason you decided to do Step 1 is to understand exactly what you are looking for. Are you looking for a fourplex in the 1–3-million-dollar range, or are you looking for a student housing complex that consists of 20 units in the 10-million-dollar range?
Use the MLS
A Multiple Listing Service, or MLS, is a listing platform that is owned by a network of real estate professionals. In the past, you needed to be a registered agent or work for a brokerage to access an MLS. Not so anymore, as there are multiple subscription model platforms that can allow you to access the MLS database without being a registered broker. Apartmenthunter.com and CreoXi are two popular platforms.
Get an agent
Real estate agents exist for a purpose, and that’s to service people like you, buyers and sellers. An agent might be able to obtain leads on suitable multifamily properties quicker if you give him the full data and picture of what you are looking for. They might even have some off-market opportunities tucked away for the right customer.
Info online
You might be able to get leads on multifamily buildings by checking real estate websites with news and articles about multifamily. Inman, is an example of a real estate website with multiple contributors that can write about a variety of topics. You might also look into contacting a property management company that has access to different multifamily properties that are for sale.
Contact owners directly
See if you can find the property owners of existing buildings and email them. If that doesn’t work, then you can always try the old-school method of knocking on doors. These days, you would be surprised how effective a door knock or a cold call is, rather than a bunch of emails or trying to contact someone through social media.
Step 3: Close the deal
You have found the multifamily building that is the apple of your eye; it’s for sale, and your offer has been put forth and will probably be accepted. In most cases, you will already have secured an agreement in principle on a loan, but that doesn’t mean you need to stick with that loan. You could also shop around for different loans. Here are some things you need to consider:
Lending options
If the multifamily property needs repairs, you might want to look into a hard money loan to finance the repairs and renovations. For a normal mortgage, you should have looked at this before searching for multifamily gold, but here are some things to consider.
FHA Backed or Non-FHA backed
Some FHA-backed loans are available to multifamily investors. The easiest way is to get an FHA-backed loan by buying a multifamily property of 4 units or less, living in one as a primary residence, and renting the others out. The HUD program also gives FHA multifamily loans if the building meets certain requirements, some of which are listed here. Mike Roberts of City Creek Mortgage, has his own advice: “I would suggest first familiarizing yourself with FHA standards, as these loans are backed by the government and come with their own set of requirements. Also, nothing is more important than maintaining a clear line of communication with your lender at all stages to ensure nothing goes amiss. Needless to say, meeting document submission deadlines, adhering to renovation guidelines, and staying informed about potential policy shifts are key factors in ensuring a smooth loan experience.”
Commercial vs. residential
Remember that multifamily, in practice, is a business, and many will need to opt for commercial loans, particularly if the complex is large. This goes for both conventional loans, as well as FHA-backed loans. However, if the multifamily is small enough, such as a duplex or fourplex, you can get a residential loan by living in one of the units. If it’s a mixed-use project, then you will almost always need to go down the commercial loan route if all the properties are on the same title.
Fixed or floating rate
If interest rates are high, there are two options: to buy with a fixed rate and hope that you can refinance when interest rates go down, or buy with a floating rate in which interest rates will float with the Fed rate. The hope of a refinance comes with the risk that if the value goes down, it will be difficult to refinance, and you might be stuck with the rate.
Property management
When real estate investors look at multifamily as an investment property, property management might be their most important item.
Company vs. individual
If you are looking at multifamily investments that have a large number of units, you might consider hiring a company or hiring a couple of people full-time to take care of the property management aspect of the buildings. If your multifamily building is a niche, such as senior housing, you might want to find one of the many property management companies that specialize in managing senior housing. If it’s just a normal apartment complex with a decent number of units, then it might make sense to hire someone full-time as a property manager.
Managing yourself
You might be inclined to manage certain multifamily buildings yourself, particularly if you have a setup in which you have less than 4 units and live in one of them. In this case, you need to make sure you know all of the minute details of the building and the procedures of how to fix things and who fixes them. For instance, to be comfortable, you want to know the best and most affordable plumbers, electricians, and fixer-upper guys in your area.
Is investing in an apartment building a good investment?
If done correctly, yes, but it also depends on who you are. According to Alli Widman, a REITS specialist who previously worked with big firms like Goldman Sachs, the yields might not make sense with REITS. Investing in multifamily REITs right now presents a challenge because cap rates remain low, rents are starting to trend down as supply has increased, and operating costs continue to ratchet higher with inflation.
How much profit do you make from an apartment building?
Multifamily investing doesn’t have a fixed amount of profit you can make, whether it’s apartment buildings or senior housing. However, you can make a profit by both the appreciation of the asset relative to its purchase price as well as income derived from renting it out.
Key takeaways
- Although multifamily homes and buildings are less common than single-family properties or individual condo units, many options are still available.
- Apartment complexes, student housing, and senior housing are just some of the types of multifamily properties available for sale and to invest.
- Investing in multifamily properties revolves around three steps: knowing what you want, finding it, and closing the deal.
- Property management and financing options are two key items to look at when looking at multifamily options.
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