A Guide to Multifamily Real Estate Investing for Beginners
So you’ve been investing in properties and you’re pretty sure the time has come to move up from rental houses to multifamily real estate. That’s fantastic! The rate of return for multifamily dwellings can be much higher than for individual properties because instead of getting rent from a single tenant, you can multiply the potential rent three or four times. If you invest in an apartment building or a community of them, you could increase that multiplier even further. This efficiency comes from the way the costs scale in larger buildings.
You probably won’t get as much rent per unit in a multifamily building as you would renting a whole house to one tenant. At the same time, you will still multiply your returns if you plan correctly. For a simple example, let’s use a duplex. If you can get 75 percent of the rent out of each side of the duplex that you could have gotten out of a single-family dwelling that cost the same amount, you make 150 percent as much gross income. Maintenance expenses will increase with multiple tenants, but typically not at the rate that your income increases when you move into multifamily real estate.
Choosing the right properties to start with is the key for beginners. Look at moving from single-family homes to duplexes or even up to quadruplexes as your next step. Not only will finding ways to manage the larger properties be easier if you scale carefully, but the increased cost of multi-unit properties also will not be too much greater than larger single-family homes in most markets. Once you have a handle on managing properties with more tenants, the increased income will make it easier to buy that large apartment building you’ve been dreaming of.
Turnkey-ready investments tend to bring a lower return than properties that need some renovation and love, but they also tend to come ready for business, so you can either take over managing existing tenants or begin filling them for yourself. This decreases your startup costs and brings you a return on your investment faster, even if it is a lower return. Deciding whether you will improve properties for yourself or if you prefer purchasing ready-to-lease properties has to be a personal strategic decision because the path that brings you the best return on your multifamily real estate investment will be highly dependent on your property management style.