How to Make Big Money with Small Multifamily Real Estate Investing

What is small multifamily real estate investing, and why is it one of the best strategies for making big money in the short and long term?

Table of Contents

1. What Is Small Multifamily Real Estate Investing?
2. Small Multifamily Real Estate Investing: Why It’s the Best
3. Where to Invest in Small Multifamily Rental Properties in 2023
4. How to Start Investing in Multifamily Real Estate

We are heading toward the uncertainties of the US housing market predictions 2023. In such an unpredictable environment, many are searching for the best ways to get into real estate investing. Others are looking to further expand their investment portfolio. Small multifamily homes – like duplexes, triplexes, and quadruplexes – are one of the most profitable investing strategies in real estate and beyond.

But why? And how to start making money with the multifamily real estate investing strategy as a total beginner? Also, where exactly should you put your money?

We will answer them and many other crucial questions related to small multifamily real estate investing in this article. You will learn what properties qualify as small multifamily homes and list their pros over other rental property types. Also, we will provide a step-by-step guide on how to get started with this investing strategy.

Importantly, we will use unique data from Mashvisor to show you the absolutely best markets to buy and rent out this property type at the end of 2022 and the beginning of 2023. Find out how the real estate tools available on the Mashvisor platform can help both experienced and new rental property investors optimize their decisions.

Before we dive in, check out our video below for a quick introduction on how to get started in small multifamily real estate investing without much previous experience and a ton of cash:

What Is Small Multifamily Real Estate Investing?

To understand what investing in small multifamily properties means, we should first define multifamily real estate.

A multifamily home is a single real estate property that is divided into multiple housing units. They are designed to accommodate two or more families that live independently under the same roof. In other words, a multifamily property is a building with a number of single family homes within it.

Typically, multifamily real estate properties consist of two to dozens of housing units. They range from duplexes and triplexes to entire apartment buildings and other large residential complexes.

So what qualifies as small multifamily properties?

While they aren’t classified as their own type of real estate properties, small multifamily homes are a subcategory of the above. Usually, small multifamily properties are homes that host two to four housing units.

The most popular property types that fall under the multifamily properties category include:

• Duplexes
• Triplexes
• Quadruplexes

Then, what does it mean to invest in small multifamily real estate assets?

Investing in multifamily properties refers to buying and renting out such homes to multiple tenants. In a sense, owning a multifamily property is like managing several properties that you can lease separately to different renters.

As a hybrid between investing in single family properties and massive multifamily buildings, they combine the best of both worlds.

In theory, small multifamily real estate can be rented out on both short term – as Airbnb investments – and long term bases – as traditional rentals. However, in reality, such homes are usually rented out long term.

The main reason is that many of them are located within residential zoning districts or HOAs, which prohibit vacation rentals or at least non-owner occupied short term rentals. Nevertheless, they can bring in a solid return on investment.

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

In recent years, we’ve seen a lot of turmoil in the residential real estate market, including multifamily properties. In 2020, when the COVID-19 pandemic broke out, city residents began moving out from cities, heading toward the suburbs and rural markets.

There, rents were lower, and the houses were bigger. The higher health risk and stricter lockdowns in major cities and large metros further accelerated the migration. The adoption of remote working policies also contributed to the trend.

Related: Suburban Real Estate Market Boom Due to COVID-19

When It happened, the rental market in big cities began to slow down due to a lack of demand. It also meant that the inventory became more abundant for new buyers. Multifamily projects, in particular, took a big hit, as their occupancy rates fell significantly and their value declined.

Most Recent Multifamily Real Estate Trends

In 2021 and 2022, however, the unfavorable trends were largely reversed as the Coronavirus restrictions were loosened. Quickly, multifamily real estate once again became one of the greatest opportunities for investing, both for individual rental property investors and syndications.

Here are a few quick numbers to solidify the above statement. The US multifamily market is showing strong performance this year. In Q1 2022, investing in the multifamily real estate sector reached $63 billion, marking a 56% year-on-year growth.

The increase in investments is mostly driven by the growing profitability that investors and landlords are seeing. In the first half of 2022, multifamily rental rates rose by 4.5% as a result of growing rental demand, led by new job opportunities and rising wages. The overall rent growth is forecast at 6%-7% for 2022.

Importantly, small multifamily properties are experiencing the highest increases. In May 2022, Realtor.com reported a record-high median rent – of $1,849 – for homes with up to two rental units (including duplexes) in the top 50 US metro areas. It represents a growth of 15.5% from May 2021 and 23.2% from May 2020.

So if you’re wondering, “Is it a good time to buy multifamily?”, the answer is: Yes.

Increasing rental rates is just one benefit of investing in multifamily properties. As mentioned above, located at the crossroad of single family homes and multifamily homes, small multifamily investments are one of the best strategies you can possibly come up with. But let’s take a look at the specific pros and cons that this investing approach provides.

First, we will answer the question: Why is multifamily real estate a good investment?

Pros of Investing in Small Multifamily Properties

Here are the most beneficial advantages of owning small-scale multifamily real estate assets to rent out:

• Better affordability: Small multifamily homes are more affordable than both single family houses and large residential buildings. It’s clear how they cost less than an entire apartment complex. But they also cost less per square foot than structures housing a single family. That’s why multifamily is an excellent way to start with real estate.
• Higher rental income: Because multifamily properties comprise a few rental units, landlords end up receiving income from several tenants. Thus, monthly rental income is higher than with single family homes.
• Minimal investment risk: Having several renters makes it very unlikely that all of them simultaneously leave your property or not pay rent. So, investing in this real estate type pushes vacancy rate risk and rental income risk down.
• Portfolio diversification: Buying a small multifamily property is equivalent to investing in a few properties. It provides automatic real estate portfolio diversification.
• Different rental property management options: With small multifamily homes, you can decide whether to be a DIY landlord or hire a professional property manager. Your choice depends on your investing market (close to home or not), availability, skills, expertise, and preference.
• Passive income: If you opt to work with a rental property management company, you can earn totally passive income with this real estate investment strategy.
• Increasing rental demand: Experts expect the recent growth in multifamily rental rates to continue, so investors will keep benefiting from higher rental income. Combined with the leveling off in property prices, it also means an increase in investment returns.
• Fast appreciation: Single family homes generally experience a better real estate appreciation than multifamily properties. Small multifamily real estate, similarly, appreciates faster than large buildings.

Cons of Small Multifamily Real Estate Investments

Meanwhile, the following are the drawbacks of investing in this property type:

• Significant down payment: Buying a multifamily real estate home – even if small – requires a major initial investment. In most cases, rental property loans need a minimum down payment of 20%, which adds up to a lot when buying more than a single family home. Nevertheless, investors can resort to creative strategies like house hacking.
• Higher recurring costs: Running a few rental units means incurring more rental expenses. Property management fees, maintenance, fixes and repairs, utilities, property tax, insurance, and everything else costs more when you own a larger property. Conduct investment property analysis to ensure rental income will cover expenses.
• More complex property management: Having a few tenants can become an absolute nightmare, especially if they’re not as good as you hope for. To manage such a risk, implement strict tenant screening or hire professional property management services.
• Fewer rental strategy options: In most cases, renting out multifamily real estate on a short term basis does not work out well. In other words, investing in Airbnb for sale is not optimal with this property type. Nonetheless, you can find very profitable opportunities with the traditional rental strategy.

If, alternatively, you opt for investing in a single family property, here are the best short term rental markets.

Like every other strategy in real estate investing, renting out small multifamily properties comes with disadvantages. What matters, though, is that the pros outnumber the cons. So if you’re wondering how to start making big money with rental properties, it can be the best way forward.

Where to Invest in Small Multifamily Rental Properties in 2023

Now that you know what investing in small multifamily real estate means and what the advantages and disadvantages look like, it’s time to consider the location factor. Just like with any other real estate strategy, where you buy and rent out a multifamily home can make the difference between positive cash flow and negative cash flow.

If you’re new to this investing type and have no idea how to start, there’s nothing to worry about. We are here to help you.

To begin with, we’ve put together a list of the top five locations for investing in small multifamily real estate rental properties in the US housing market in 2023. The data for this nationwide real estate market analysis has been gathered and computed by Mashvisor, an industry-leading real estate data analytics company.

The multifamily data collection and analysis were conducted in September 2022, which means that they are the most up-to-date numbers on this property type. Our small multifamily homes include duplexes, triplexes, and quadruplexes.

In order to make your investments profitable yet affordable, we’ve focused on US residential markets with more than 100 traditional rental listings. It means that there is strong demand for multifamily rentals from tenants. From these locations, we’ve selected the ones with a median property price of less than $1 million.

Last but not least, we’d like to note that the ranking is based on cash on cash return obtained when small multifamily properties are rented out on a long term basis. In our multifamily market research, we focus on the CoC return metric as it is the most comprehensive measure of return on investment in real estate investing.

Related: What Is a Good Cash on Cash Return?

5 Best Multifamily Markets 2023

Without further ado, here are the top 5 US cities where you should focus your multifamily investment property search:

1. Vero Beach, FL

• Median Property Price: $732,939
• Average Price per Square Foot: $305
• Days on Market: 86
• Number of Traditional Listings: 621
• Monthly Traditional Rental Income: $2,671
• Traditional Cash on Cash Return: 4.37%
• Traditional Cap Rate: 4.48%
• Price to Rent Ratio: 23
• Walk Score: 78

2. Fountain Hills, AZ

• Median Property Price: $917,739
• Average Price per Square Foot: $363
• Days on Market: 92
• Number of Traditional Listings: 121
• Monthly Traditional Rental Income: $3,503
• Traditional Cash on Cash Return: 3.85%
• Traditional Cap Rate: 3.91%
• Price to Rent Ratio: 22
• Walk Score: 39

3. Williamsburg, VA

• Median Property Price: $550,568
• Average Price per Square Foot: $220
• Days on Market: 56
• Number of Traditional Listings: 174
• Monthly Traditional Rental Income: $2,136
• Traditional Cash on Cash Return: 3.27%
• Traditional Cap Rate: 3.35%
• Price to Rent Ratio: 21
• Walk Score: 81

4. Carmel, IN

• Median Property Price: $560,791
• Average Price per Square Foot: $200
• Days on Market: 62
• Number of Traditional Listings: 116
• Monthly Traditional Rental Income: $2,289
• Traditional Cash on Cash Return: 3.01%
• Traditional Cap Rate: 3.06%
• Price to Rent Ratio: 20
• Walk Score: 49

5. Palm Springs, CA

• Median Property Price: $973,099
• Average Price per Square Foot: $533
• Days on Market: 59
• Number of Traditional Listings: 181
• Monthly Traditional Rental Income: $3,651
• Traditional Cash on Cash Return: 2.99%
• Traditional Cap Rate: 3.03%
• Price to Rent Ratio: 22
• Walk Score: 59

So, if you’re planning how to make money with multifamily real estate investing in 2023, these are the markets you should start with.

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 how do you begin? What are the specific steps to take to start making money with small multifamily properties?

Just like investing in any other real estate property type, this strategy requires the careful execution of a few steps in order to succeed.

To help out beginner investors, we’ve put down a detailed step-by-step guide on how to invest in small multifamily homes so that you not only make money but make lots of money.

Step 1: Learn the Basics of Investing in Real Estate Properties

If you’re an absolute beginner in real estate investing, you must dedicate some time to getting educated. While it does not require specific formal education, you need to know the basics of the industry and the business.

Luckily for you, there are endless online free resources that can help you in this regard. Real estate investing blogs, YouTube channels, podcasts, and e-books are all great starting points. Of course, you need to sift through the sea of real estate knowledge out there. Make sure to ocus on the resources that bring real value to your investing journey.

We’d recommend that you take a look at the Mashvisor real estate blog, YouTube channel, and podcasts. Our team of real estate experts and consultants has spent years building a valuable library of knowledge that specifically aims to help real estate newbies. For tips on multifamily rental properties, in particular, check out this link.

It’s also a good idea to go through a few e-books or printed books written by experienced investors on small multifamily real estate. There, you will be able to learn how to get started and how to keep growing with this investing strategy.

Step 2: Choose the Top Multifamily Market and Analyze It

After you’ve learned what investing in small multifamily homes entails, it’s time to get to the exciting part – selecting a location and a property to get started.

As a beginner, don’t feel the need to be limited to your local real estate market. Indeed, many make the rookie mistake of buying a rental property close to home. They think they are familiar with the location and will be able to take on a hands-on approach.

Instead, your choice of the best place to invest in multifamily real estate should be dictated by careful analysis and accurate figures, rather than by your personal preferences.

Regarding location, your choice should be divided into two parts: choosing a city and choosing a neighborhood within your preferred city.

How to Choose the Best City

A good place to start with your selection of a city is our list of the top markets for the investing in multifamily properties. These places promise good cash on cash return and good cap rate while also offering affordable property prices.

The main factors that  should drive your selection of a city include:

• Strong economy: You want to invest in a small multifamily property to rent out in a city that is expected to grow, driven by the local economy. It means you will not only be able to generate good rental income but also benefit from long term appreciation.
• Growing job market: Renting out in a place with many job opportunities and above-average salaries means that tenants will be able to afford rent and pay on time. Moreover, you can expect demand to increase as people come from out of state to take advantage of the employment opportunities.
• Positive population growth: Stable rise in population translates into increasing rental demand over time, which also means growing rental rates and profitability.
• High proportion of renters: If more than half of the local population rent rather than own a home, you will benefit from strong demand for your multifamily property.
• Good price to rent ratio: While investing in markets with high and low price to rent ratio has pros and cons, the optimal locations have medium price to rent ratios. It means that landlords are able to strike a balance between seeing enough demand and being able to make money.

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

How to Choose the Best Neighborhood

In order to choose the best local multifamily market for investing, investors need to conduct a neighborhood analysis. This kind of real estate market analysis compares the average performance of a specific area to the performance of the bigger market it is located in.

It means that you will need a large amount of data for the market you want to analyze, and collecting this type of real estate data can take weeks, if not months.

Alternatively, you can use the tools available on the Mashvisor software, which will help you analyze the investment potential of areas in any US housing market.

First, you can start your neighborhood analysis with the real estate heatmap. This software tool will help you filter out the areas with:

• The lowest median property prices
• The highest traditional rental income
• The highest traditional cash on cash return

After you’ve selected a few areas that offer profitable investment opportunities, you can deepen your research on the neighborhood analysis pages. There, you will find absolutely every single real estate and rental data point that you need to evaluate whether an area is a good choice for investing in traditional rental properties.

In particular, focus on:

• Median property price: You want to make sure that you can afford the local home values.
• Traditional rental income and cash on cash return: These numbers will ensure that you are able to generate a good return on investment.
• Optimal strategy: It’s smart to invest in an area where traditional rental properties perform better than Airbnb properties for sale.
• Optimal property type: You can check whether multifamily properties perform better than other property types like single family homes, townhouses, and condos.

Step 3: Find Multifamily Homes for Sale

After doing your real estate market analysis and finding a potentially lucrative location, it’s time to start looking for specific properties. So, how do you find listings for sale that meet your criteria for small multifamily real estate investing?

As mentioned earlier, small multifamily properties are not considered their own type of real estate. It means that it’s difficult to separate them when looking at listings of multifamily for sale. Usually, however, listings will tell you what the number of units is on the property. So, all you need to do is look at the properties with two to four housing units.

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

Again, it’s worth mentioning that the Mashvisor software offers two powerful tools that beginner investors can use in their property search.

The Property Finder tool allows you to customize your search in multiple markets based on a number of factors, including:

• Budget
• Rental strategy
• Property type
• Number of bedrooms
• Number of bathrooms

The provided multifamily real estate properties for sale will be ordered in a way that displays the most profitable opportunities first.

You can also use the Mashvisor Property Search software engine available on the homepage, as well as throughout the website. You can set up numerous filters to customize your search. They will help you focus on the listings that fit your budget and your expected outcomes.

With a few clicks of a button, you get access to all multifamily MLS listings and off market properties that match your criteria.

Step 4: Analyze the Available Opportunities

Once you’ve 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. Don’t forget to also compare them to one another. It will help you see which one has the highest potential to make you big money.

Analyzing the property requires first obtaining enough information to enable you to estimate all the possible expenses that you will incur before and after buying the property. It means that you need to make sure you’re aware of any and all renovation or repair costs. Consider any additional closing fees that you will need to pay, as well.

Knowing the average recurring rental expenses in the neighborhood where the property is located is also a must. For example, you need to learn about your options regarding rental property management companies and how much they charge. Also, check out the property tax, home insurance cost, and rental income tax.

Next, you need to figure out the potential income that each property can generate. 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 the above numbers, you need to calculate each property’s cash on cash return and cap rate.

When all of that is done, you can finally compare each property’s return on investment to determine which one is the most profitable option.

But as you can imagine, this process requires a lot of manual work and time to collect all data and do all calculations. Isn’t there a more efficient way to analyze multifamily real estate for sale in the US market?

How to Conduct Multifamily Rental Property Analysis Most Efficiently

Yet again, you can use the Mashvisor software to perform investment property analysis. Using the Mashvisor real estate investment calculator tool, you get access to all the numbers and figures you need to decide if a multifamily property is worth investing in or not.

In addition to estimates of the startup and recurring expenses and the expected rental income, you get readily available calculations of the cash flow, cash on cash return, and cap rate. You also get an investment payback balance table to see when your property will pay off and start generating pure profit.

With the Mashvisor software, you can access rental comps for each property you’re browsing. You can use the comparison data to augment the available rental property analysis and customize it to your particular situation.

Related: Mashvisor: The Ultimate Cash on Cash Return Calculator

All in all, using the Mashvisor real estate investment tools, you can turn three months of multifamily market analysis and property search into 15 minutes.

Sum-Up and Steps Forward

Investing in a rental property is a good idea, but investing in multiple rental properties is a great idea. 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. The higher rental income and attractive returns are just some of the benefits that come with this strategy.

Traditionally, investing in multifamily properties was reserved for experienced investors because of the extra work required. When you put a larger down payment, you must conduct even more careful market and property research and analysis.

But smart real estate software tools like Mashvisor have changed this reality. With the help of the Mashvisor heatmap and neighborhood analysis pages, even a beginner can locate the top markets for buying duplexes, triplexes, and quadruplexes for sale.

Using the Property Finder and investment property search engine, you can find the best real estate investment opportunities in any location. Last but not least, the AI-based rental property market calculator turns investment property analysis into an easy and straightforward process.

So, if you’re ready to start making money with small multifamily properties, sign up for a 7-day free trial of Mashvisor now.