Beginner real estate investors are often warned against investing in the multi-family sector. The typical advice is that they should go for single-family homes. That’s because it’s generally accepted that large apartment buildings and complexes should be acquired further down the line in your real estate career when you have more experience and even more capital to invest in property. However, buying a multi-family home shouldn’t be viewed as completely off-limits for new investors. In fact, with these 6 real estate tips for beginners, investing in multi-family homes can make for a very profitable first investment.
Related: Single-Family Rentals vs Multi-Family Rentals: Which Is the Right Real Estate Investment for You?
Tip #1: Start with Small Residential Properties
When you think of a multi-family investor, you probably imagine someone who has a real estate investment portfolio packed with 80-unit buildings. However, there is another overlooked type of property in the multi-family rental market: small residential properties. These are investment properties with 2-4 units (duplexes, triplexes, and quadruplexes) and they can be found in many of the best places to invest in real estate.
You see, when you start with a small multi-family property, you make things easier for yourself from the start. For one, these multi-family properties are classified as residential real estate in the eyes of mortgage lenders. Larger buildings (typically with 5 units or more) are classified as commercial real estate. Mortgage lenders have more requirements for these types of investment properties- requirements that may be hard for a newbie to meet. Not only will the investment property financing be easier to obtain, but naturally, this type of real estate property will also be cheaper.
Another reason this is one of the best real estate tips for beginners interested in starting their career with multi-family homes is that you’ll be dealing with significantly fewer tenants. This means that you may be able to forgo hiring professional property management. Of course, it’s recommended that as a beginner multi-family investor, you do. And if you take the time to follow some of our other real estate tips for beginners down below, you’ll find that your multi-family rental produces enough cash flow to cover the management fees, even if it only produces rental income from a few units.
Tip #2: Try House Hacking
As a first-time real estate investor who’s buying a multi-family home, you open up the doors for a unique investment strategy. And that’s house hacking. House hacking is when you purchase a multi-unit property, live in one of the units, and rent out the rest. With this real estate investment strategy, you get to live for free. Your housing costs of rent or a mortgage are technically covered by the rental income from the other tenant-occupied units. This way, you can save up money for a down payment on another real estate investment property and slowly but surely start building your portfolio.
Better yet, if you choose to invest in multi-family homes with this strategy, you can qualify for an FHA loan. Because the investment property will technically be your primary residence, you can end up paying around 3.5% for a down payment. It’s one of the best hacks for how to buy a multi-family property with no money (well, practically no money).
Within a year of living in the rental property, typically the FHA loan requirements will allow you to move out and rent out the vacant unit. You can choose to use the money you saved up for your dream home or use it to buy another small multi-family home. The fact that you get to live for free while making money makes this one of the best real estate tips for beginners jumping into multi-family investing.
Related: The Ultimate Guide to House Hacking
Tip #3: Research the Market
This is more of a general tip for beginners, but it is really crucial when it comes to multi-family real estate investing. It’s commonly stated that one benefit of owning a multi-family real estate investment is that it comes with lower risk. With more units, it’s less likely you’ll end up with a 0% occupancy rate and negative cash flow. However, this greatly depends on the housing market.
For example, if we look at a 4 unit investment property in an up-and-coming neighborhood, it’s likely we’ll find that all 4 units are occupied as businesses move to the area and rental property demand increases.
If we look at a similar multi-family investment property in a neighborhood with a high crime rate and poorly rated school district, it’s possible that most units are empty and you’ll be seeing that “For Rent” sign displayed prominently- maybe even a “For Sale” sign.
So it’s key to follow these real estate tips for beginners about researching a potential multi-family real estate market:
- Research economic and job trends– make sure things are stable or growing in the area
- Find out if the population is growing– more people can mean higher demand
- Look at the demographic makeup– what type of rental property do they prefer? Will they be renting or buying a home (the price-to-rent ratio can help you figure this out)
- Check on other factors like cost of living, crime rates, public transportation, walk score– all of these things will help you determine if the market is a place people would like to live
- Get access to multi-family real estate data and analytics on the neighborhoods to narrow down your options– check the multi-family cap rate, average rental income, the median listing price of this type of property, etc.
You can get this kind of data at Mashvisor using our heatmap analysis tool. Check it out here.
Just be sure to analyze the real estate market for the type of property you have in mind specifically and you’ll be taking the right first step into multi-family investing.
Tip #4: Evaluate the Investment Property
Again, this falls under the category of general real estate tips for beginners but it is so important when it comes to buying a multi-family home for investment that we couldn’t possibly leave it off this list. Sure, with more units comes more money. However, as a new real estate investor, you don’t quite have the instincts yet to determine if a rental property will succeed just because it’s a multi-family home in a good location. Here are the steps you should follow to perform a thorough multi-family real estate investment analysis:
1. Choose an investment property class:
There are different classes of multi-family homes for sale- Class A-D. Click here to view an Infographic that details property and neighborhood classes.
Typically, Class B properties (ones that are in good condition with room for improvement) located in Class B-A neighborhoods (stable to new neighborhoods) are recommended for beginner real estate investors.
2. Perform the necessary calculations:
You’ll have to calculate the cash flow, cap rate, and cash on cash return. The easiest way to do this is with a multi-family investment calculator. You can sign up to Mashvisor now to get access to ours.
Those are the two major steps of multi-family investment analysis. For more on this process, read: Learn How to Evaluate Multi-Family Investment Properties.
Tip #5: Work with Real Estate Professionals
As mentioned earlier, with more tenants, you may have to hire professional property management. As a beginner, if you can afford to do it, don’t hesitate. Professional property managers can make you extra rental income by ensuring all the day-to-day operations run smoothly in a cost-effective manner. Just be sure you ask the right questions when choosing a management company. That way, you will find one you can rely on.
You should also consider working with a real estate agent who specializes in multi-family deals. While you may take the initial steps alone of finding and analyzing an investment property, an agent can ensure you made the right calls and help you successfully negotiate and close the deal.
These real estate tips for beginners are sure to help you get off to the right start in the multi-family rental market. Follow them and soon you will have an income property producing cash flow and you’ll be ready to buy the next one!