Ready to make the jump from single-family to your first multifamily investment? In this video, we’ll guide you step-by-step through the transition, breaking down the process to make it simple and achievable.
Transitioning to multifamily properties can feel daunting—after all, more units bring more responsibilities, right? But here’s the silver lining: with a strategic approach, more units also mean increased income potential, greater equity, and the chance to achieve lasting financial independence. With over 25 years of experience, I’ve helped countless investors build financial freedom, and now it’s your turn. Let’s get started!
Finding the Right Multifamily Property
When it comes to finding the perfect multifamily property, simplicity and focus are key. These practical steps will ensure you start on the right path:
Start Small
Your first multifamily investment doesn’t need to be a 100-unit building. Starting small is not just acceptable—it’s smart. Whether it’s a fourplex or a 12-unit property, choose what feels manageable for you. Starting modestly gives you the chance to learn the ropes without overextending yourself financially or operationally. In fact, many of our students started small and succeeded brilliantly. They’ve transitioned from single-family homes into fourplexes, 12-unit properties, or even jumped straight into 66-unit buildings. The path you take is uniquely yours, but the common denominator is starting where you’re comfortable.
Even with limited funds, there are ways to enter the multifamily market. With some creativity, you can still become a multifamily investor. Whether it’s learning to raise capital, diving into creative financing, or exploring wholesale opportunities, there are entry points for every budget. Remember, if you start small, a fourplex is considered residential and residential loans can require as little as 3.5% to 10% down. Commercial properties (five units or more) require a 25% down payment, but they come with the added advantage of forced appreciation, where higher rents drive property values upward.
Where to Start Looking
Once you’ve determined what’s feasible, it’s time to start looking. Here are three simple starting points:
- Online Listings: Explore your local MLS or platforms like LoopNet to scout available properties and get a feel for what’s available. Then analyze the numbers offline to gain confidence in evaluating deals.
- Work with Agents: For a single multifamily deal, working with a real estate agent may suffice. But if you’re serious about building a portfolio, consider partnering with experienced mentors or companies like ours to guide you through the process.
- Off-Market Deals: This is where the magic often happens. Some of the best opportunities come from sourcing properties directly from property owners, bypassing public listings entirely. This strategy requires more effort but often yields superior deals—especially for beginners.
Follow Proven Principles
Stick to these guiding principles when evaluating your first property:
- Cash Flow Positivity: For your first deal, steer clear of properties that have negative cash flow. Don’t gamble on potential—stick to properties that generate income right from the start.
- Potential to Raise Rents: Ensure the property allows room to increase rents, either through lease renewals or renovations. For commercial properties, this raises the NOI and property value, but it’s also key for smaller residential investments.
- Location Matters: Never underestimate the power of a great neighborhood. Look for areas with high rental demand, stable property values, low crime, good schools, and access to amenities. A property’s location is one thing you simply cannot change.
By following these guiding principles, you’re setting a solid foundation for your first multifamily investment.
Financing Options for Multifamily Properties
Financing is a critical piece of the puzzle. There are three primary paths to consider: conventional lending, creative financing, and the 1031 exchange. Here’s a breakdown of each to help you decide which works best for your situation.
1. Conventional Financing
This is the traditional approach, where you secure a loan from a bank. For residential multifamily properties (four units or fewer), down payments can range from 3.5% to 25%, depending on the program. This range depends on the loan program you qualify for, making it a great entry point if you’re starting small.
For commercial properties (five units or more), expect a 25% down payment. While the upfront cost is higher, these properties offer the potential to force appreciation. Before moving forward, I recommend checking out a helpful resource called 6 Ways to Fund Your First Commercial Deal. This video outlines multiple approaches, including ways to stretch limited funds and leverage your current resources.
2. Creative Financing
This is where flexibility meets strategy and it’s an approach we specialize in. With creative financing, you can step outside traditional bank lending to structure deals that work for you and the seller. Here are some key methods:
- Master Lease Agreements: This involves working directly with sellers and structure deals that align with their motivations—no banks, appraisals, or credit checks required. For instance, you might offer a 10% down payment, followed by interest-only payments (e.g., 5% interest) for five years.
- Seller Financing: With this strategy, sellers can act as lenders. If the property is paid off, they can carry the entire mortgage (known as a seller carry first) or part of it (seller carry second), where the seller holds a second mortgage to help cover part of the down payment—say, 10%—while you bring 15% to the table. Combined, you meet the standard 25% down requirement for commercial properties.
These flexible strategies make it possible to enter deals with less out-of-pocket expense, by leveraging the seller’s position and motivations.
3. 1031 Exchange
This is a powerful tool for building long-term wealth. If you own an investment property, such as a single-family rental, a 1031 exchange allows you to sell it and defer capital gains taxes by reinvesting in a larger multifamily property. I personally used this strategy to get started by selling single-family rentals and scaling into larger multifamily investments. By nurturing those properties, selling strategically, and reinvesting through repeated 1031 exchanges, I was able to build significant wealth.
With these three financing options—conventional lending, creative financing, and the 1031 exchange—there are plenty of pathways to take your first step into multifamily investing. Each offers distinct advantages based on your goals and resources.
Running the Numbers with Confidence
Now that you’ve identified potential multifamily properties and explored financing options, it’s time to dive into the numbers. For any aspiring multifamily investor, understanding how to confidently run the numbers is critical. The financial analysis might seem daunting at first, but by focusing on four key components—rental income, operating expenses, mortgage, and cash flow—you can simplify the process and assess any deal effectively. Let’s break down these steps and apply real-world calculations to make it crystal clear.
1. Rental Income: Rental income is the total income generated by the property from all rental units over the course of a year. This is where your analysis begins, as it reflects the earning potential of the property.
Formula: Annual Rental Income = Monthly Rental Income x 12
2. Operating Expenses: These are the costs associated with running and maintaining the property. These include repairs, property management fees, insurance, taxes, and utilities (if paid by the landlord).
Formula: Annual Operating Expenses = Sum of all recurring costs
3. Mortgage (Debt Service): This includes your monthly loan payments (principal + interest) multiplied over a year.
Formula: Annual Mortgage Payments = Monthly Payment x 12
4. Cash Flow: Cash flow is the money left after subtracting operating expenses and mortgage payments from rental income. This is your profit—the real reason you’re in the game!
Formula: Annual Cash Flow = Rental Income – Operating Expenses – Mortgage Payments
Practice Makes Perfect
Running the numbers doesn’t have to be complicated. Let’s analyze a real deal from the MLS with the following specifics:
- Rental Income: $82,463 annually
- Operating Expenses: $38,113 annually
- Mortgage Payments: $24,894 annually
Start by calculating your rental income, subtract operating expenses, and then deduct your mortgage payments to determine cash flow.
$82,463 – $38,113 – $24,894 = $19,456
In this example, the property produces an annual cash flow of $19,456—providing a clear snapshot of its financial performance. Every successful real estate investor starts with the basics and builds from there. Take this process and apply it to other practice deals to sharpen your skills. As you gain confidence, you’ll find it becomes second nature. For an in depth and practical guide, check out 3 Simple Steps to Evaluate Any Multifamily Investment in 5 Minutes.
Common Pitfalls to Avoid
There are certain pitfalls that many aspiring investors overlook—simply because they’re beginners. To set yourself up for success, steer clear of these four common mistakes as you navigate the process; before you buy, during ownership, and when planning to sell.
Pitfall #1: Overpaying
One of the most common traps for beginners is overpaying for a property—often driven by emotions rather than logic. Falling in love with how a property looks can cloud your judgment. Don’t get emotionally attached to a property!
How to avoid this:
- Get recent sales comparables for similar multifamily properties in the same area.
- Aim to purchase at market value or, ideally, below it.
Buying based solely on emotion can lead to financial disaster, so let the numbers dictate your decision.
Pitfall #2: Poor Due Diligence
Due diligence is your homework before finalizing a deal, and skipping this step can have serious consequences. Poor inspections, overlooking financial discrepancies, or trusting sellers blindly are major red flags. Unlike residential real estate, commercial transactions don’t have consumer protection laws—it’s buyer beware.
How to avoid this:
- Verify everything—physical condition, financial records, and legal documentation. Inspect every unit, verify financial records, and ensure all legal documentation is sound. Verify rent levels with documentation to avoid surprises after closing. Sellers might exaggerate their numbers, so it’s your responsibility to fact-check.
Taking due diligence seriously can save you from being stuck with a bad deal and potential headaches.
Pitfall #3: Poor Property Management
A great property can perform poorly if it’s managed badly. The wrong property manager can drag down even the most promising multifamily investment. Every property needs a solid plan for the “4 Ms”: Management, Marketing, Money, and Maintenance.
How to avoid this:
- Hire the right property manager by checking reviews, asking for references, inspecting properties they manage, and reviewing their fees.
- Have systems in place that ensure the 4 Ms are working seamlessly.
Good management can make or break your investment, so don’t overlook this critical component.
Pitfall #4: Lack of Exit Strategy
Many beginners get so caught up in buying a property that they forget to think about how they’ll eventually sell or refinance it. An exit strategy is your plan for getting your money out of the investment—and it should be considered before purchasing your multifamily investment.
How to avoid this:
- Plan how you’ll eventually cash out or reinvest before you buy. Whether it’s long-term holding, refinancing, or a 1031 exchange, define your path early.
- Tailor your strategy to your financial goals and build it into your initial plan.
A well-thought-out exit strategy ensures you’re not just investing blindly but building towards a bigger financial goal.
By avoiding these four common pitfalls—overpaying, poor due diligence, bad property management, and lack of an exit strategy—you’ll set yourself up for success in multifamily investing.
Every Successful Commercial Real Estate Investor Has a Mentor
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