Real estate investors can choose from many property types: residential, commercial, industrial, etc. Each has its pros and cons, but multifamily properties have unique benefits that can make them an especially lucrative investment.

What is multifamily investing?

Multifamily real estate investing means investing in residential property with more than one dwelling unit-in other words, anything from a duplex to a large apartment building.

Multifamily properties are distinct from single-family homes, which are designed for one household only-whether that’s a family, individual, or group of roommates.

Types of multifamily properties

Within the multifamily property, there are many subtypes:

Apartment buildings
  • Buildings with five or more living units
  • Often include shared amenities (e.g., pools, gyms, and community rooms)
  • Often classified as low-, mid-, or high-rise
Duplex/triplex/fourplex
  • Buildings with two, three, or four living units
Townhouses
  • Multiple attached living units in a row (aka rowhouses)
  • Each has its own entrance but shares one or two walls with another unit
Condominiums (condos)
  • Individual living units that share common areas
  • Units typically stacked vertically
Student housing
  • Apartment buildings designed for college students
  • Often located near a university
Senior housing
  • Housing reserved for elderly residents (usually 55+ years old)
  • May have independent living units, assisted living facilities, and skilled nursing care
Affordable housing
  • Government-subsidized housing for lower-income tenants
  • Includes programs like Section 8
Mixed-use buildings
  • Rental properties that combine multiple living units with commercial or retail spaces
  • Can include shops, restaurants, office buildings, etc.

10 reasons to invest in multifamily real estate

Why invest in multifamily? Here are ten reasons:

1. Regular cash flow

Multifamily real estate is great at generating regular cash flow. This is partly because it offers built-in diversification against vacancies. A 20-unit building with one vacancy, for example, would only be 5% unoccupied, while a single-family rental would be 100% vacant. Consequently, multifamily properties can be more stable investments for passive rental income.

2. Easier to finance

Multifamily properties’ steady cash flow-and resulting lower foreclosure rates-tend to make them less risky investments compared to single-family homes in the eyes of lenders, leading to easier financing and better loan terms.

That said, you’ll usually still need to show your creditworthiness by having a credit score of at least 640, a debt-to-income (DTI) ratio no higher than 50%, and a down payment of 25%.

3. Less competition among buyers

With mortgage rates rising in recent years, fewer buyers may be in the market for multifamily real estate. This could set the stage for favorable buying terms and give you more negotiation power to secure multifamily real estate at a lower price.

4. Lower property management costs per unit

Managing multiple tenants and rental units under one roof is easier than managing the same number spread throughout the city. For one, multifamily units are closer together. However, they also share many building and amenity management costs.

Furthermore, outsourcing property management to a professional property manager can be a smart financial move when spreading it across many units. This frees up your time to focus on other tasks and lets you benefit from the economies of scale that your property management company has from serving many clients.

5. Rental demand is high

Current economic and demographic trends are increasing demand for multifamily rentals. For instance, many baby boomers are retiring and choosing to downsize because they no longer have kids at home. Meanwhile, many millennials are choosing to rent due to high homeownership costs.

As a result, you can expect multifamily rentals to maintain high occupancy rates, especially when strategically located.

6. Higher potential for appreciation

On top of generating rental income, multifamily property appreciates in value. According to Fannie Mae, multifamily properties in major U.S. cities appreciated anywhere from 3% to 7.5% annually between 1999 and 2022.

You can also force appreciation through renovations and upgrades. For example, you could install security cameras, add laundry facilities, or replace old hardware and appliances.

7. Tax benefits

Multifamily property owners can take advantage of many tax breaks. For example, you can write off property expenses, such as maintenance, repairs, insurance, and even mortgage interest. You can also deduct the property’s depreciation at a rate of 3.636% per year for 27.5 years.

Additionally, many local governments offer tax incentives to develop multifamily properties in certain areas. You can also conduct a 1031 exchange to defer capital gains taxes when selling. Consult a tax professional to learn more.

8. Grow your portfolio faster

Just as it’s easier to manage rental units under one roof, it’s easier to acquire rental units under one roof. Instead of dealing with multiple sellers, home inspections, and possibly even lenders across 20 addresses, you can buy a multifamily investment property with 20 units and go through the process once.

This not only reduces your acquisition costs per unit but helps grow your portfolio faster. And with financing, you can spread your capital even further.

9. Hedge against inflation and recessions

Multifamily property can be a great hedge against inflation because it lets you pass on inflationary costs to tenants by raising the rent.

Furthermore, people will always need a place to live, making multifamily property relatively resilient to economic downturns.

10. Stable long-term investment

Unlike the stock market, multifamily real estate is a relatively stable investment with minor value fluctuations. This can lead to long-term capital growth on top of regular rental income.

Getting started with multifamily investing

Ready to start investing in multifamily properties? Here’s a checklist to get started:

  • Educate yourself. Read books, watch videos, or take online courses on multifamily investing. Consider joining a group of other local real estate investors.
  • Set goals. Define your desired investing market, cash flow, appreciation, and timeline. Be sure your goals are realistic but still stretch you.
  • Prepare financially. Assess your current financial situation, including savings, income, and credit score. Determine what types of financing you can secure.
  • Build a team. Successful multifamily investing takes a team of professionals, including agents, inspectors, lawyers, and investing partners. Start building yours now.
  • Analyze the market. Consider factors such as population growth, nearby employers, and rental demand. Review your market’s average rental and occupancy rates, too.
  • Search for properties. Set search criteria for property size, location, and condition, and see what’s for sale. Hire a local agent to help.
  • Conduct due diligence. Calculate the potential ROI of properties that meet your search criteria. Then, assess their conditions and neighborhoods.
  • Make an offer. When you find a property you like, arrange financing and submit an offer. Negotiate the purchase price based on your findings during due diligence.
  • Close the deal. Once you and the seller agree on a price, close the deal. Make sure to secure appropriate property insurance and sign necessary closing documents.
  • Market and manage the property. Prepare the property’s units for leasing and then start advertising them. Arrange to outsource property management or do it on your own.
  • Monitor multifamily investment. Regularly review the property’s financial performance and make adjustments as needed. Keep up with maintenance and repairs.
  • Scale your portfolio. As your returns grow, look for opportunities to add more rental properties to your portfolio. Exit investments that no longer serve your goals.

Risks and key considerations in multifamily investing

Like any investment, multifamily investment comes with risks you should consider:

Barriers to entry

While their cost per unit is relatively low, multifamily properties are large assets that typically cost millions. This can be a barrier to entry for those with little capital.

Market fluctuations

Though they tend to appreciate over the long term, multifamily properties are subject to market fluctuations. For example, an area with a declining population may see higher vacancy rates.

Liquidity

Real estate-including multifamily property-is notoriously illiquid. This can make it harder to sell, especially during a downturn.

Tenant-related issues

High turnover rates can incur additional vacancy and marketing costs. Furthermore, multiple tenants who fail to pay rent can reduce your cash flow and necessitate costly evictions.

Compliance with housing regulations

Zoning, rent control, and other local housing regulations can lower your property’s profitability. Failure to comply with them may also result in hefty fines and legal battles.

Complex management and maintenance

As your portfolio grows, managing and maintaining your properties can get more complex, leading to potential operational inefficiencies.

Need for adequate insurance and liability protection

Multifamily properties must be insured against property damage from tenants and natural disasters. Furthermore, real estate investors need liability protection against potential health risks to tenants.

Example of successful multifamily investing

Craig McGrouther, Director of Business Development at Texas-based Lone Star Capital, recently appeared on The Deal Makers podcast to share his firm’s successes in a challenging multifamily market.

Despite rising costs from higher interest rates, insurance, and inflation, McGrouther explained how his firm leverages local tax abatement programs to find good deals. He also expects to find discounts on multifamily properties as commercial debt matures over the next few years and sellers are forced to sell to avoid refinancing at higher rates.

Bottom line: You can find multifamily property investing opportunities in any market.

Conclusion

Ultimately, multifamily properties can be a great investment. Not only do they provide steady cash flow and capital appreciation, but they help provide much-needed housing.