How to Make Big Money with Small Multifamily Real Estate Investing

What is multifamily real estate investing? And why is it one of the best ways for making money?

For a quick source on how to get started in small multifamily real estate investing, check out our video below:

In this article, I will explain what multifamily properties are, and how you can turn them into rental properties that make you a lot of money when done correctly!

I will also mention a few markets where investing in multifamily is a good idea, and guide you through the process of finding and investing in multifamily homes quickly and with ease.

What is Small Multifamily Real Estate Investing?

A multifamily property is a real estate property that can house two or more residents or families separately.

In other words, a multifamily property is a building that has multiple single-family properties in it.

So, owning a multifamily property is like owning multiple properties which you can then rent out separately to different tenants. Typically, multifamily properties consist of 2 to 12 housing units. This includes anything from a duplex to a small apartment building.

Small Multifamily

Small multifamily homes are multifamily properties that include 2 to 4 housing units.

While they aren’t particularly considered as their own type of property, they are a subcategory that is very relevant especially for beginner investors who are reluctant to invest in a larger multifamily property.

Small multifamily real estate investing is considered less risky due to the smaller size of the property and therefore the smaller capital which is required to invest in it.

However, small multifamily properties have the same pros of investing in bigger multifamily properties in terms of higher security – this is because, unlike with single-family homes, when a unit goes vacant in a multifamily property the property will likely still be generating rental income from the other units that are occupied.

Multifamily Rental Property

Small multifamily rental properties are a great source of steady income due to their overall higher-than-average occupancy rate.

While a multifamily rental might take a longer time to break even, its low volatility and ability to always be generating an income makes it a very safe investment to beginner investors who can afford it.

Small Multifamily Real Estate Investing: Why It’s the Best

In 2020, when the pandemic first broke out and facilitated by the social-distancing and work-from-home trends, city residents began to move out from cities and headed towards the suburbs, where the rents were lower and the houses were bigger.

When that happened, the rental market in big cities began to slow down due to a lack of demand. This also meant that the inventory was becoming more abundant for new buyers.

Multifamily projects, in particular, took a big hit, as their occupancy rates were dropping low and their value declined.

Now, however, this has become one of the greatest opportunities for investing in multifamily properties in cities and more rural areas alike.

Property prices of multifamily properties in cities have become much more affordable than they used to be. Small multifamily properties in particular have become more beginner-friendly than ever before.

Multifamily Property Prices

Since multifamily properties vary greatly in terms of their size and the number of units that they have, their price ranges vary accordingly.

When looking at a city like Atlanta, for example, you’ll find small multifamily properties for sale in Atlanta for anywhere between $171,000 to $1,000,000.

Additionally, multifamily properties can also have unique costs related to them that are more significant than single-family homes.

For example, if you’re renovating a multi-family property, it will cost you a lot more to do so than with a smaller single-family home, and this cost will be higher the bigger that the property is.

Running a multifamily property as a rental property can also have high maintenance and property management costs, especially if you’re not planning to live in or near the property and manage it yourself.

Since there are multiple units with separate tenants in them, you’ll need a dedicated property management party to handle all the nuisances of tenant turnover and other property management activities.

All of these aspects related to the cost of acquiring a multifamily property can vary greatly depending on the size and location, making them difficult to use as indicators regarding the market accessibility of these properties.

Instead, let’s take a look at the top 5 cities for investing in multifamily properties based on the cap rate and compare the median prices of multifamily properties in these cities.

Best Multifamily Markets

This list is based on Mashvisor’s data – you can find the full list of best multifamily markets in 2021 here.

These top 5 cities have the highest average cap rate for traditional rental properties, making them top picks when it comes to investing in multifamily properties and turning them into rental properties:

#1. Manchester, NJ

• Median Property Price: $113,417
• Price per Square Foot: $95
• Price to Rent Ratio: 6
• Monthly Traditional Rental Income: $1,467
• Traditional Cap Rate: 11.8%

#2. Napes, FL

• Median Property Price: $377,410
• Price per Square Foot: $193
• Price to Rent Ratio: 10
• Monthly Traditional Rental Income: $3,252
• Traditional Cap Rate: 8.6%

#3. Cincinnati, OH

• Median Property Price: $235,051
• Price per Square Foot: $260
• Price to Rent Ratio: $15
• Monthly Traditional Rental Income: $1,310
• Traditional Cap Rate: 6.3%

#4. Fort Wayne, IN

• Median Property Price: $93,100
• Price per Square Foot: $57
• Price to Rent Ratio: 10
• Monthly Traditional Rental Income: $768
• Traditional Cap Rate: 6.3%

#5. Detroit, MI

• Median Property Price: $153,275
• Price per Square Foot: $60
• Price to Rent Ratio: 14
• Monthly Traditional Rental Income: $923
• Traditional Cap Rate: 6.1%

As you can see from this list, property prices in these cities are very affordable, and rental properties there are performing exceptionally well.

Manchester in particular is becoming one of the most sought-after markets when investing in multifamily homes due to the stunningly high cap rates there coupled with the relatively low price per square foot and low median property prices.

How to Start Investing in Multifamily Real Estate

So, your mind is set and you’re ready to start investing in multifamily real estate; but, where do you begin?

The first thing you want to do is deciding on a specific market or two that you want to invest in.

Picking a market is a personal choice. And while different markets perform differently and can result in varying returns, your choice of the market should take into consideration your place of residence and how much hands-on you want to be with your investment.

Once you’ve chosen a market, it’s time to find suitable locations within this market to invest in and to find multifamily properties for sale in these locations.

Market Analysis

In order to choose the best multifamily markets, investors need to do a market and neighborhood analysis for the markets they’re interested in.

A market analysis is a kind of analysis that compares the average performance of a type of property in a specific smaller market with the larger market that it’s in.

So, for example, you can analyze a neighborhood by comparing its averages with the city’s averages, or you can compare the city’s average to that of the state’s average, and so on.

This means that you will need a large amount of data for the market that you want to invest in. This is where hiring a real estate agent is a great idea, as real estate agents will have access to a large number of listings and will have connections with interested and potential sellers, giving them insights that you otherwise won’t have.

Additionally, you can use online tools and public listing sites such as Mashvisor or Zillow to see available properties for sale that are listed there.

It’s worth mentioning here that Mashvisor offers you all the tools that you need to invest in any kind of real estate property, including the ability to connect with an agent who is suitable for you and what you’re looking for.

Read: Need to Finalize a Property Deal? Hire a Real Estate Agent

Find Multi Family Homes for Sale

Once you’ve done your market analysis and have found a suitable market with affordable properties and promising rental performance, it’s time to start looking for specific properties that meet your criteria of small multifamily real estate investing.

As mentioned at the start of this blog, small multifamily properties are not considered their own type of real estate. This means that it’s difficult to separate them when looking at listings of multifamily for sale.

Usually, however, the listings will tell you what the number of units is on the property. So, all you have to do is look at the properties with 2-4 units.

Of course, you will also want to narrow down your search based on the price of the property and to avoid properties that cost more than what you have available.

Read: 2021 US Housing Market: Seller’s or Buyer’s Market?

Again, it’s worth mentioning that Mashvisor offers a powerful property finder tool that allows you to customize your search in each city not only based on the type of the property and its price range but also based on its projected cap rate and cash on cash return when used as a traditional or Airbnb rental property.

The tool also includes a heatmap function that allows you to easily analyze the market and find the best performing neighborhoods based on whichever value you prefer, such as property prices, cap rates, or occupancy rates.

Analyze & Compare

Once you have found a number of potential small multifamily properties that you can afford and that are worthy of investment, it’s time for you to analyze each property and compare them with one another to see which one has the highest potential for profit.

Analyzing the property requires you to first obtain enough information to enable you to estimate all the possible expenses that will incur before and after you own the property.

This means that you need to make sure you’re aware of any and all renovation or reparation costs, any additional closing fees that you will need to pay, and the average reoccurring expenses in the neighborhood where the property is at.

For example, you need to know what your options are when it comes to rental property management companies and how much they cost, or what the average costs are for utilities like water and electricity.

You also need to figure out the potential income that each property can generate. For example, perhaps the property has a garage space that you can rent out separately, or maybe you can do minor renovations to one of the units and rent it out at a higher rate.

Once you have all of these numbers, you will need a multifamily calculator to calculate each property’s value using metrics like the cap rate and the cash on cash return.

Once all of that is done, you can finally compare each property’s cap rate or cash on cash return to determine which one is the most profitable investment.

Yet again, I want to note that Mashvisor offers investment property analysis tools and a property calculator which allows you to easily analyze each property by modifying the values on the calculator and letting it do the work for you.

Using Mashvisor’s tool, you can access rental comps (comparisons) for each property that you’re browsing, which compares it to other similar properties in that neighborhood as well as similar properties that have sold in the past.

Combined with the property finder tool, you can even let our AI find you properties for sale in your market of choice based on the cap rate that you desire, as long as it’s within a realistic range of course.

Conclusion

Investing in a rental property is a good idea. Investing in multiple rental properties is a great idea. And that is basically what investing in a multifamily property is.

Small multifamily real estate investing is one of the safest investments that you can make, and it’s well worth the extra cash that you will need to buy one.

Want to start your journey with a simpler single-family property? Start your journey with Mashvisor and we will guide you all the way through it! Subscribe to Mashvisor and enjoy a platform that was designed with beginner investors at its core.