Multifamily Real Estate Investment Guide

Why multi-unit properties behave differently from houses, how they are valued, and how to start with house hacking or passive investment.

Economies of scale

A fourplex has one roof, one foundation and one lot, but four rent checks. Per-unit costs for maintenance, management and insurance tend to fall as the number of units rises, and a single vacancy hurts less when other units are still paying.

Two to four units versus five or more

Properties with two to four units are financed and valued much like houses: residential loans, and prices set largely by comparable sales. Properties with five or more units are commercial real estate: they use commercial loans, and their value is driven mainly by the income they produce.

That difference changes the strategy.

Forced appreciation

Because larger properties are valued on income, raising net operating income raises the value directly. Value is roughly NOI divided by the market cap rate.

Adding $100 a month to the rent of 20 units adds $24,000 a year of NOI. At a 6% cap rate, that is about $400,000 of additional value, provided expenses do not rise with it.

House hacking

Buying a two- to four-unit property, living in one unit and renting the others is one of the most accessible ways to start. FHA loans allow as little as 3.5% down on these properties if you live in one of the units, generally for at least a year. The other units' rent can cover much of the mortgage.

Expect more management

More units mean more tenants, more turnover and more maintenance calls. Budget for professional management even if you plan to start without it, and check local rules on registration, inspections and tenant protections, which are often stricter for multi-unit buildings.

Syndications and partnerships

Larger deals are often structured as syndications: passive investors provide most of the capital and an operator finds, finances and runs the property. Many offerings are open only to accredited investors.

Read the fees, the operator's track record and the assumptions behind projected returns carefully. As a passive investor you have little control once the money is in.