Tired of watching other investors rake in passive income from multifamily deals while you watch from the sidelines? Then it’s time to break into the industry, and we’ll show you how.
At ABL, we’ve helped countless investors nationwide get into multifamily real estate with our fast, flexible loan programs. Whether you want to buy a small duplex or a large apartment building, we can help you close the deal quickly.
What Is Multifamily Real Estate?
Multifamily real estate refers to any property with two or more living units. In other words, anything but single-family homes.
Within multifamily real estate, there is also residential and commercial real estate. Properties with 2-4 living units are generally considered residential multifamily, while properties with 5 or more living units are considered commercial multifamily.
At ABL, we finance both residential single-family and multifamily, so investors don’t have to switch lenders as they scale their portfolio to include larger properties.
Pros and Cons of Multifamily Real Estate
Before investing in multifamily real estate, know the benefits and potential drawbacks.
Pros of Multifamily Real Estate
- Regular rental income. Owning multifamily real estate lets you collect regular rental income from tenants to pay off property expenses and keep the rest as cash flow.
- Diversification. With multiple living units per property, you can spread vacancy risk across tenants. If one tenant leaves, for example, you still have others paying rent while you find a replacement.
- Tax benefits. As a multifamily rental owner, you can write off mortgage interest, property expenses, and even depreciation. Plus, you can defer capital gains taxes by conducting 1031 exchanges.
- Recession resistant. Compared to other assets, multifamily real estate is relatively recession-resistant. After all, people still need places to live during an economic downturn.
Cons of Multifamily Real Estate
- Higher upfront cost. Due to their larger size, multifamily properties tend to cost more. However, you can offset these upfront costs by getting a hard money loan from a multifamily lender like ABL.
- More property management. With more tenants come more property management responsibilities. To keep your property in top condition and your tenants happy, you must invest in regular upkeep and communication.
- Problematic tenants. Multifamily tenants tend to be more transitory than single-family tenants. As a result, they may not respect your property as much, leading to potential damages and evictions.
Steps to Buying Your First Multifamily Property
Now that you know the pros and cons of investing in multifamily real estate, here are the steps to buying your first property:
1. Choose a Market
Not every rental market is equal. Before buying a multifamily property, analyze and compare markets for the highest return potential.
Look for markets with fast-growing populations, strong economies, and a high percentage of renters. This helps ensure strong rental demand.
In addition, look for high average cap rates, rental yields, and annual appreciation rates. The best markets yield a high return through rental income and equity.
2. Find a Property to Buy
Once you’ve settled on a market, it’s time to find a property to buy. Start by searching online marketplaces like Zillow (for residential multifamily) or LoopNet (for commercial multifamily). You may also want to hire a multifamily broker to connect you with active sellers.
Keep in mind that commercial multifamily properties are often classified as Class A, B, or C:
- Class A multifamily are high-end properties in ideal locations with the latest amenities.
- Class B multifamily properties are slightly older but still in good condition.
- Class C multifamily may require major repairs and be in less desirable locations.
When analyzing individual properties, run return calculations with ABL’s loan calculator. That way, you can quickly qualify (or disqualify) potential deals. Over time, create a short list of properties that meet your investment criteria.
3. Secure Financing
At this point, it’s important to secure financing. Getting pre-qualified for a loan shows sellers that you’re serious and can give you a competitive edge over other buyers. Plus, it helps you solidify your total deal costs and potential returns.
At ABL, we offer multifamily loans for fix-and-flips, new construction, and turnkey rentals. We can get you a pre-qualification letter within 24 hours and close within 30 days to help you seize opportunities quickly.
4. Make an Offer
Make an offer on your top property choice by preparing an offer letter. Include any contingencies and offer a competitive purchase price based on local comps. Your real estate agent or one of our local loan experts can help you do this if you don’t know how.
From there, the seller may accept, decline, or make a counter-offer. Most likely, you’ll need to negotiate before reaching a deal.
5. Close the Deal
Once both parties agree on a purchase price and terms, close the deal.
ABL will also meet you at the closing table to close the loan, ensuring a smooth transaction. If you borrow money for renovations, this will allow you to start collecting loan disbursements so you can begin construction.
Next: Renovate and Prepare for Tenants
Let the work begin! Start making necessary repairs and any renovations to get your multifamily property ready for tenants. Meanwhile, ABL will be there every step of the way. We’ll disburse loan funds at agreed-upon construction milestones and be there to answer any questions.
As soon as the property is renovated, you can list and market it for sale and pay off your bridge loan with the sale proceeds or refinance into a long-term rental and start advertising rental units to potential tenants.
Common Mistakes to Avoid
Finally, here are some common pitfalls to avoid when buying multifamily rental property:
- Neglecting due diligence. Skipping a detailed inspection of the property and any existing leases can come back to haunt you in the form of unexpected costs.
- Not having a property management plan. Multifamily properties can be complicated to manage. Have a thorough property management plan in place before purchasing.
- Not leveraging financing. The right financing can not only help you break into multifamily by lowering your upfront costs but boost your returns. Carefully consider your financing options and how they impact your final returns.
Your multifamily investing goals may be easier to reach than you think. At ABL, we specialize in helping beginner and seasoned investors turn their real estate visions into reality with fast loans tailored to your project. Pre-qualify today!