Definitive Guide to Multifamily Real Estate Investing

multifamily real estate investing
Matt Carrigan

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Multifamily properties are one of the most popular types of commercial real estate buildings for investors to pursue, and for good reason. People need a place to stay regardless of the economy’s state, meaning multifamily properties are a profitable investment during both booming and turbulent times. Following the recent boom in institutional activity, investment firms now comprise a significant share of the market, compared to individuals.

Multifamily properties often facilitate low-cost housing and are integral to their communities, which is why investors view them as future-proof investments. This blog post will review multifamily real estate investing strategies, including considerations to make when purchasing, strategies, pros and cons, and much more.

Understanding Multifamily Properties Compared to Residential Single Family Homes

A multifamily property is a type of commercial real estate building that includes several residential units. Standards vary, but many consider five residential units to be the bare minimum for a property to be classified as a multifamily property.

Apartment buildings, condominium units, duplexes, highrises, and other types of properties all fit under the multifamily umbrella. It’s relatively common for individual investors to live in one owned unit, then rent out the others. This live-in method is typically uncommon with institutional investors, who work in a more systematic, process-oriented fashion.

In some ways, managing multifamily properties is similar to the process of residential upkeep and renovation. For this reason, multifamily real estate investing can feel more accessible and less daunting for new investors.

Considerations to Make When Evaluating Multifamily Properties

There are countless multifamily real estate investing opportunities on the market at any given time. How can you identify the ones that will deliver the highest ROI with minimal risk? 

Different investment firms employ unique investment strategies, so there are no straightforward answers about the ideal multifamily investment strategy. However, these are some of the factors that you or your firm should consider when evaluating new acquisition deals:

  • Location: Where is the building? Is the building centrally located within its respective city or market? To capture renters’ interest, investors should look for buildings in burgeoning areas with high future potential.
  • Number of Units: How many units can be rented to tenants? One benefit of buying a multifamily home is that a higher volume of units adds stability, while minimizing risk. As you consider new opportunities, evaluate how many units or rooms can be rented.
  • Net Income: After renting out rooms, how much income can the property generate? Consider that, depending on the tenants during and after the purchase, the total potential income may not align with the actual income generated.
  • Costs: What is the property’s listed selling price, and what costs will you incur on an ongoing basis? Before acquiring the property, verify that these costs are in line with your budget.
  • Seller: Is the seller an individual, a bank, or an institutional investment firm? The costs and process can vary depending on the seller.

Like other CRE asset classes, it’s best to evaluate multifamily properties using a deal management platform like Dealpath. By doing so, you can track every multifamily real estate investing opportunity in real time, while retaining institutional knowledge and context about the deal. Creating multifamily real estate acquisition models can also help you understand how an investment will affect cash flow over time.

Breaking Down The Three Multifamily Real Estate Investment Strategies

Multifamily real estate investing encompasses three main investment strategies: value add, opportunistic, and core. Each strategy carries a different level of risk. Depending on your investment strategy, one may be preferable over another.

  1. Value Add (BRRRR): Value-add multifamily real estate investments involve purchasing the property, improving it to yield higher rents, then renting it and refinancing. This process is often represented with the acronym BRRRR, or buy, rehab, rent, refinance, repeat. 
  2. Opportunistic: Opportunistic investments are similar to value-add investments, in that investors will take steps, often more significant, to improve the property. Following these improvements, though, opportunistic investors then sell the property. This is considered a higher-risk option, as investors aren’t benefiting from stable cash flow over time. Instead, they profit from one high-ticket disposition, normally within a tight time frame.
  3. Core: Unlike opportunistic and value-add multifamily commercial real estate investing strategies, core investments involve properties already generating ideal cash flow. Rather than seeking out underutilized properties, investors would find properties already meet current standards, then purchase and hold them to generate profits. Because these assets are already stable, core investments are considered the lowest-risk multifamily investment strategy.

Pros and Cons of Multifamily Real Estate Investing

Pros

  • Strong Cash Flow: Multifamily properties mitigate the risk taken on by investors by providing multiple income streams. Even when one tenant leaves, cash flow from other tenants will help you to endure this loss while you seek another.
  • Lower Risk: As the pandemic demonstrated, certain asset types can rise and decline in importance and value based on broader market ebbs and flows. Multifamily real estate investments, however, are generally immune to these fluctuations. Even in poor investment markets or cycles, city residents still need a place to live. In booming markets, people tend to pursue new opportunities in cities.
  • Tax Advantages: Purchasing and renovating multifamily properties benefits local communities and may present tax advantages. This means investors can profit while limiting costs, especially for opportunity zone housing. 
  • Building Options: The umbrella term multifamily encompasses many types of buildings, such as duplexes, triplexes, highrises, and more. By focusing on this property class, you can choose from many different options, depending on your resources and strategy.

Cons

  • Rigorous, Involved Management: By definition, creating a suitable living space for multiple families often requires significant bandwidth, either from you, as the investor, or a property manager. Other asset classes, like industrial or retail, tend to involve interfacing with only one individual or tenant.
  • Cost: While multifamily properties carry tremendous potential for ROI, they can be cost prohibitive. However, they are easier to finance than single family homes.
  • Competing Investors: Because multifamily properties offer stable, predictable income, investors frequently consider as many investment opportunities as possible. As a result, finalizing an acquisition can be challenging and time-sensitive.

Modernize Your Multifamily Real Estate Investing Strategy With Dealpath

Accurately tracking multifamily real estate investments in your pipeline, while comparing them with historical data to gain greater market context and strategize on investing decisions, is no easy task. When your investment management firm manages their day-to-day operations out of spreadsheets, this can cause even more separation between teams, leading to more confusion. Dealpath’s multifamily investment software, which is designed to track pipeline deals spanning every property class, enables your team to move swiftly, while retaining valuable information.

Download a free copy of our white paper, 7 Strategies to Modernize Your Real Estate Deals, to learn how you can streamline your deals, boost productivity, and minimize errors as you invest in multifamily real estate.

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Matt Carrigan

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