Buying multifamily properties offers investors the opportunity to recoup their investment much faster by generating more rental income from having multiple tenants in a building. You can even decide to stay in one unit and rent out the other five or more units to enjoy a steady cash flow and monthly income.
If you’re interested in learning more about multifamily investing you’re in the right place! We’ve composed this investor’s guide on how to buy a multifamily property for new and experienced investors. Let’s dive in!
A Quick Word on Multifamily Crowdfunding
Suppose you don’t have money to buy a multifamily property directly. One investment strategy that can enable you to enjoy the benefits that come with buying a multifamily home, like earning a steady income, is crowdfunding from Holdfolio.
The World Bank has estimated that global crowdfunding for real estate will reach a whopping $93 billion by 2025. Crowdfunding with Holdfolio enables small investors to pool their money as a group and invest in a large real estate investment vehicle that would have been beyond their reach as an individual investor due to capital constraints.
Holdfolio will source the investment opportunity, place the money, and manage the investment. This real estate investing option is perfect for investors that are seeking alternative investments to diversify their portfolio. Crowdfunding with Holdfolio presents an opportunity to mezzanine debt, or first-lien debt, as well as provide joint venture equity, and preferred equity for a regular or newbie investor with $20,000.
Holdfolio provides all the benefits of crowdfunding real estate properties like making bids on multi-family homes, no tenant management, and high returns without the negatives of buying multifamily properties alone or starting your own fund (options which we will explore more in detail throughout this article).
Learn more about crowdfunding with Holdfolio here
Searching for Viable Real Estate
The first step in privately acquiring your first piece of multifamily real estate is finding viable properties which will recoup your investment whilst also appreciating in value over time.
The following are ways to find viable real estate investment properties.
Off-Market Deals
Sometimes, multi-family home sellers might not want to list the building for various reasons. The problem lies with discovering where to find those properties. That’s why you need to network and connect with people who deal in multifamily properties.
You can meet those people when you attend real estate workshops, conferences, meetups, and real estate masters’ summits. The National Association of Realtors (NAR) often organizes meetings about a range of real estate topics.
Work With a Real Estate Agent
It’s often hard finding a great multifamily investment deal in Class B and C real estate categories in large metropolitan areas, especially as a new investor.
The reason is that these multifamily property deals mostly pass through referrals and networking and don’t often get listed publicly. Investors with great relationships with a real estate agent are often lucky enough to hear about these deals.
Real estate brokers usually list multifamily properties that are overpriced and competitive in MLS sites so interested persons can see them.
Suppose you contacted a broker to help you find a multifamily property, and they start sending you deals, ensure you follow them up promptly and respond to their calls and emails.
Contact Owners Directly
One way to contact a seller directly is by driving for dollars which entails going around in a neighborhood where you intend to buy a multifamily property to see if you can find an unlisted multifamily property you can buy directly from the owner.
These kinds of deals are usually great and will help you save money.
Valuing The Property & Negotiating on Price
A property valuation is vital when buying a commercial real estate investment, whether single-family or multifamily properties.
The valuation is essential for several reasons, including investment analysis, taxation, financing, property insurance, and sales listing.
However, most people opt for a real estate valuation to determine the asking price when purchasing a multifamily property.
The following are some of the approaches to property evaluations you can use before making a multifamily real estate investment.
Income Approach
This is the most popular commercial real estate investment valuation technique. Here, the appraiser employs regular investing calculations, like cap rate and NOI (Net Operating Income), to determine the property’s potential income generation in the current market.
The income approach formula is:
NOI / cap rate = property value.
However, while evaluating the property, the NOI on the pro forma should be accurate. An inaccurate NOI will lead to an incorrect valuation. Investors will also need to find comparable sales cap rates to enable them to come up with the valuation’s cap rate.
It is hard to determine an ideal cap rate if there are limited comparable sales available and this can throw off the valuation’s accuracy.
Cost Approach
Although not a popular approach, the cost method is best for new buildings. The cost method estimates a property’s value by checking the cost to construct the building from scratch.
This approach considers the land cost, labor, and materials to determine the amount it’ll take to build the same property in the current market. That way, you won’t pay more than it takes to construct a new dwelling.
Appraisers often use the following formula to evaluate multifamily properties.
New building cost + land cost – accumulated depreciation = property value
Gross Rent Multiplier Approach
Another common real estate investment valuation method individual investors use is the gross rent multiplier. This method isn’t the best for commercial valuations. It works by looking at comparables to enable the investor to find the property location’s average gross rent multiplier.
However, make sure you ensure the values are accurate to get the correct property valuation. You also need to check the building’s pro forma to determine the property’s average gross rental income. Then use this formula to evaluate the property:
Annual income x gross rent multiplier = property valuation
Sales Comparison Approach
Investors that prefer buying single-family homes and other residential real estate prefer the sales comparison approach. This valuation method uses comparable properties’ sale prices to determine the property’s value.
A single-family home appraiser has lots of comparables to select from compared to commercial appraisers. A commercial appraiser might need to look outside the location’s current market to find a comparable property. However, the valuation might be less reliable.
Timing Offer Submission
As an investor seeking to learn how to buy a multifamily property, quickly submitting an offer might be the difference between losing the deal or securing it.
Suppose you wish to inspect different homes, your broker might contact the listing real estate agents for properties on your purchase shortlist to get an idea of how many offers they have.
The following is the process for submitting formal offers for your property of choice.
House Offer Letter
Consider writing a persuasive house offer letter – a personal, short letter that shows your appreciation of the home and willingness to buy it.
Don’t forget that a house offer letter isn’t suggested for every seller so you’ll need to decide if a personal appeal is suitable.
Starting Price
When evaluating a written offer, the seller will first look at the offered purchase price before anything else. Thus, you’ll need to state your starting price accurately to prevent the seller from discarding your offer immediately.
However, you’ll need to consider some factors before setting a competitive starting price such as does the property require many repairs and renovations? Is the building adequately valued compared to similar ones in the local market? Then consider what you can easily afford to pay for it without jeopardizing your financial security.
More so, it’d be best to check that the property is close to major schools, local entertainment hubs, companies, and shopping centers.
We advise that you do your due diligence before buying a multifamily property and work with a realtor with excellent knowledge of the local market.
Contingency Period
After submitting your offer, the property seller will either counter, decline, or accept your offer. If they decline, the seller might come with an alternative proposal, but if accepted, you’ll be invited to sign the purchase agreement.
This agreement explains the framework in the initial written offer, pushing both parties to the contingency period. As a legally binding document, the purchase agreement must include the agreed-upon price, earnest money deposit (escrow money), breakdown of closing costs, and the property’s full legal address.
During this contingency period, both parties will conduct home inspections and appraisals, set contingencies on the property sale, inform each other of any disclosures, and continue further negotiations. If the negotiation fails, the whole process will be repeated.
Most investors don’t want to go through all this stress of buying a multi-family property due to the time and money involved and prefer buying multi-family homes by crowdfunding with Holdfolio. Through crowdfunding, investors are able to combine their capital and get access to higher-value deals with greater returns that they wouldn’t otherwise be eligible for.
Heard enough and ready to invest? Get started with Holdfolio now.
Multifamily Real Estate Financing Options (Mortgages & Loans)
Besides asking how to buy a multifamily property, you need to also enquire about its financing. As a commercial real estate investor, you can access many financing options to start your investment journey.
Conventional Mortgages
This type of real estate financing is ideal for those who invest in single-family properties and residential buildings. Conventional mortgages are also perfect for house hackers and multifamily investors.
Freddie Mac and Fannie Mae have rules to qualify for these loans. Once you meet stipulated conditions, you’re on your way to getting the mortgage from Fannie Mae and Freddie Mac. The main requirements of conventional multifamily financing are a 25 percent down payment for fourplexes (four units) and buildings with more units.
Fannie Mae and Freddie Mac set their minimum multifamily lending credit score at 620. At the same time, the debt to income ratio is 50 percent.
Hard Money Loan
Also called short-term bridge mortgages and considered loans of last resort, hard money loans are issued mainly by companies or individuals, rather than banks, because of the loan’s potentially risky nature.
A hard money lender focuses on the collateral property’s value rather than the borrower’s creditworthiness. This mortgage is suitable for short-term financing, turnaround situations, and borrowers with substantial equity but poor credit.
Keep in mind that the interest rates for hard money loans tend to be higher than other types. In 2020, the average hard money mortgage interest rate was 11.25 percent, with rates from 7.5 to 15 percent across the country.
HUD Multifamily Financing
This loan type is insured by the US government and always comes with favorable terms. However, they’re exclusively designed for multifamily investors and developers.
To qualify for a HUD mortgage when investing in multi-family properties, you’ll need to go through an annual operating audit, show that you’ve got a strong financial standing, and demonstrate your experience in multifamily investing. Lastly, the minimum refinancing or purchasing loan amount is $1 million.
FHA Multifamily Loan
FHA-approved mortgage lenders issue federal housing administration FHA loans. This mortgage is primarily for low-income Americans. However, you can qualify for this loan for properties with two to four units.
Nonetheless, these mortgages often require a small down payment and have lower closing costs. FHA multifamily mortgage loan requirements include 3.5 percent down, and you must live in one of the units for at least one year.
Furthermore, before buying a multifamily property of two units, you must have a 580 credit score and at least 620 credit score for a multifamily house of four units. The interest rates are also low.
Investing Your 401K
Most people think it isn’t easy to invest with their 401k, but that’s not true. You can take out a loan against your 401k if you decide to invest in real estate with it. Most plans allow you to take a loan out of your 401k. However, make sure you ask your plan administrator before taking that step.
You may be allowed to borrow half of your 401k, up to $50,000. Nevertheless, it’ll have to be structured as a non-recourse loan, a loan type secured by collateral, which will be the rental property under purchase.
Another option is to move the funds to your self-directed IRA from your 401k before buying multifamily real estate and earning more income. However, it’s best to check with your administrator to be sure you can transfer the funds into a self-directed IRA and what the necessary paperwork involved is, if possible.
How To Buy A Multifamily Property With No Money Down
Besides more information on how to buy a multifamily property for sale, most new investors worry about finance. If you’ve been wondering how to buy a multifamily property with no money down, we have the answer, and it includes the following options:
Equity Shares
We recommend finding an equity share investor once you find a great multifamily investment deal. An equity share investor is a real estate investor that’ll agree to provide funds for the real estate property purchase in exchange for owning a percentage of the building’s equity.
For instance, if the equity share investor provides $150,000 for the property purchase, you may agree to give them 30 to 40 percent of the multifamily real estate investment equity.
The equity share investor will be entitled to a specified monthly cash flow. Furthermore, the financier will also receive the same percentage of the profit when you sell the investment property.
Real Estate Syndication or Raise Private Money
Another way to invest in multifamily real estate is to join a real estate syndication or raise private money. Real estate syndication entails real estate investors coming together to pool funds for real estate investment financing to earn more income.
You can enter into a partnership by teaming up with another investor with more financial resources than you to buy multifamily property. On the other hand, you can also crowdfund with Holdfolio. That way, you gain an ROI from the funds invested.
Real estate partners can also share the rental property management responsibility depending on the agreement between them. In contrast, Holdfolio investors aren’t tasked with this responsibility.
Hard Money Lenders
Although most real estate investors get financing from hard money lenders as a last resort, hard money lenders don’t focus on your credit history, but rather the multifamily property’s earning potential.
More so, hard money lenders don’t usually require a down payment. However, bear in mind that the interest rates are high, and it comes with a shorter amortization period.
Therefore, while you might consider it a viable option for buying a multifamily home, keep in mind that the cons far outweigh the pros. Thus, we recommend joining a crowdfunding company like Holdfolio if you want to start your multifamily investing journey but don’t have sufficient funds.
Registering Your Property After The Sale
It’s not enough to be worried only about how to buy a multifamily property, you also need to consider the entire process, from submitting an offer, getting finance from a lender to registering your property after the sale.
Besides the deed and title, you’ll have to pay the property registration fee at your property location. The United States doesn’t have a unified property registration policy, so the cost for registering properties differs in individual states.
For instance, if you’re registering your property in Florida, you’ll be charged ten percent of the property cost payable within five to ten days of the application.
In California, it’s three percent to be paid in three days after applying. While if you’re registering your property in New York, it’s 10 to 20 percent of the total property cost to be paid within five to 10 days of application.
However, you can save yourself all this effort and money by investing through a real estate crowdfunding platform like Holdfolio.
Conclusion
Investing in a multifamily apartment complex of four units or five or more units for the first time is an incredibly exciting venture, however, it also involves lots of work and a foolproof investment strategy.
Regardless of the preparation and research, you put into it when starting out, things are likely to go awry. However, one guaranteed way to start multifamily real estate investing with little or no money and enjoy a steady cash flow is through crowdfunding.
Do you want to invest in crowdfunded commercial real estate? Consider signing up with the leading crowdfunding real estate investing platform Holdfolio. Holdfolio allows an investor with as little as $20,000 to own a multifamily property and earn monthly returns from the investment.
Visit the website today to sign up, choose a property to invest in, and the investment amount and viola! You’re on your way to earning a steady, monthly income.