Purchasing a multifamily property is a great investment. It’s also an excellent way to expand your portfolio and generate extra income. The appeal of a multifamily property versus several single-family homes is in the management and maintenance expenses. Understanding the basics of this arrangement is easy. For instance, each unit must have a functioning kitchen and bathroom with bedrooms and living space. You can also expect to collect monthly rent and utilize either an annual or month-to-month lease. If you’re interested in purchasing a multifamily property, here’s all you need to know.

What Is a Multifamily Property?

white multifamily duplex with trees in front and a green lawn
Image via Flickr by Sightline Institute

Any property with more than one livable unit is considered a multifamily property. Duplexes are two-unit properties, but you can also find three and four unit properties as well. These multifamily properties are financed in the same manner as single home units — through the banks. Multifamily properties with five or more units will fall under the commercial real estate category and are financed as such. The financing on commercial properties is typically more expensive than smaller multifamily units.

One way to invest in a multifamily property is to do an owner-occupied property. You live in one of the units while renting out the remaining unit(s) to other families. This situation allows you to manage the property better and can save you money on property management fees. It’s also more attractive to a lender because you will have eyes on the property at all times, protecting your investment. This often allows you to qualify for lower down payments or better interest rates.

What Are the Advantages to Multifamily Property Investing?

Investing in a multifamily property offers several advantages, such as:

  • Passive income. You can hire a property manager to take care of the day-to-day responsibilities at the property and just sit back and earn money without lifting a finger
  • Increased cash flow. Monthly rent is a predictable income, and rental units are a strong market, allowing you to rely on a steady cash flow.
  • Scalability. You can easily grow your portfolio by purchasing one or two multifamily units at a time versus investing in hotels or strip malls.
  • Value appreciation. For long-term investors, multifamily properties will usually appreciate in value over time and tend to be more resilient when it comes to economic downturns.
  • Low risk. In the real estate investing industry, multifamily properties are generally considered safe investments because people will always need a place to live.
  • Fewer loans. If you choose to purchase a multifamily property over several single-family properties, you would have fewer loans to manage.
  • Simple insurance. As with financing, one multifamily property means one insurance policy versus ten single-family properties and the ten insurance policies that go along with them.
  • Tax benefits. Multifamily properties offer plenty of tax deduction options, including mortgage interest and depreciation.
  • Diversity. You can invest in different types of multifamily properties in various neighborhoods and cities. You can rent those properties out by the month or by night or week using Airbnb or Vrbo.
  • Investment options. Multifamily properties can be purchased individually or with a partner or with a real estate investment trust (REIT).

What Are the Disadvantages of Multifamily Property Investments?

While many advantages exist for investing in multifamily properties, you also need to consider a few disadvantages, such as:

  • Management. You can outsource property management, but no matter who manages it, you still deal with multiple leases, various maintenance and repair requests, different payment options utilized, and communicating with tenants.
  • Initial cost. Multifamily property can be expensive, depending on location and type of property. Most banks will require a 20% down payment, so the higher the price tag, the more the initial investment.
  • Competition. Many investors are interested in multifamily properties because of the many advantages associated with the investment. Therefore you may have lots of competition when it comes to purchasing your property.

How Can I Finance a Multifamily Property Investment?

If you think that purchasing a multifamily property investment is out of your reach because you don’t have huge reserves of cash, think again. While you may be deprived of the more significant cash flow if you don’t have a desirable down payment available, there are still several ways that you can purchase a multifamily property investment. These include:

  • Real estate crowdfunding. Consider raising money through platforms like Kickstarter or GoFundMe to get you on the road to owning multifamily properties. You don’t need any money to get started, just a strong pitch and reliable network.
  • Private money lenders. Find people to loan you the money privately. You may be able to get your family, friends, or colleagues to buy in and invest in you based on the prospect of a good return.
  • Equity shares. Giving an equity share investor a portion of the equity in the property in exchange for cash needed for a down payment is another way to start investing in multifamily properties without the requisite cash on hand.
  • Home loans. There are several options when it comes to taking out a loan for a multifamily property, including:
    • Conventional mortgage. Much like a mortgage on a single-family home, traditional lenders will provide you with a loan for a multifamily property.
    • Federal financing. Freddie Mac, Fannie Mae, and the Federal Housing Administration (FHA) may have loan options available to you to use on a multifamily property purchase.
    • Short-term financing. A hard money loan or bridge loan can be used to provide you with a short-term solution to investing in multifamily property purchases. These types of loans can carry you over until you’re able to meet more long-term loan requirements.
    • Portfolio loan. If you’re looking to invest in up to 10 properties simultaneously, you may want to consider a portfolio loan.

Deciding whether or not to invest in a multifamily property requires you to weigh the advantages and disadvantages, consider your obstacles and objectives, and strategize how best to invest your money. Once you’ve decided that a multifamily property investment fits your needs, you’ll need to procure funding, find a property, and then take the plunge.

If you’d like more information on hard money or bridge loans, or multifamily real estate investing in general, reach out to the knowledgeable team at Titan Funding. We can be reached at 855-731-0737, or you can complete our contact us form online 24 hours a day, seven days a week, and we will be happy to address any questions or concerns you may have in regards to investing.