Why multifamily beats single-family
A single-family home generates one rent check. A fourplex generates four — with only one roof, one foundation, and one tax bill to manage. Economies of scale reduce your per-unit costs and increase your cash flow.
Multifamily properties also offer house hacking potential: live in one unit and rent the others. FHA loans allow 3.5% down on 2–4 unit properties if you owner-occupy. This is the fastest path from renter to landlord.
Financing multifamily properties
- 1–4 units: Conventional or FHA financing. Same loan products as single-family, but higher down payment (20–25% for investment, 3.5% for owner-occupied FHA).
- 5+ units: Commercial financing required. Lenders evaluate the property's income, not just your personal income. Loan terms are shorter (15–25 years) and rates higher.
- Portfolio lenders: Local banks and credit unions often offer more flexible terms for small multifamily (5–20 units).
- Seller financing: Some sellers will carry a note, especially for properties needing work. Negotiate terms directly.
Analyzing multifamily deals
The analysis is similar to single-family but with more moving parts:
- Gross scheduled income: Total rent if 100% occupied.
- Vacancy allowance: 5–10% depending on market.
- Effective gross income: Scheduled income minus vacancy.
- Operating expenses: Taxes, insurance, maintenance, management, utilities (if landlord-paid), landscaping, snow removal.
- Net operating income (NOI): Effective gross income minus operating expenses.
- Debt service: Mortgage principal + interest.
- Cash flow: NOI minus debt service.
- Cap rate: NOI divided by purchase price. Target 6–10% depending on market.
Property management considerations
Multifamily properties require more hands-on management than single-family:
- Tenant turnover: More units = more frequent turnover. Budget accordingly.
- Common areas: Hallways, laundry rooms, and outdoor spaces require maintenance and cleaning.
- Noise complaints: Proximity creates conflict. Have a clear noise policy and enforcement process.
- Parking: Insufficient parking is a top tenant complaint. Assign spaces or implement a permit system.
- Utility splitting: Decide whether to include utilities in rent or bill separately. Submetering is fair but expensive to install.
Scaling from small to large multifamily
The path from a duplex to a 50-unit building:
- Phase 1 (1–4 units): Learn the basics with conventional financing. House hack if possible.
- Phase 2 (5–20 units): Commercial financing, professional property management, and standardized systems.
- Phase 3 (20–50 units): Full-time focus, in-house maintenance team, and institutional lending relationships.
- Phase 4 (50+ units): Syndication or partnership to raise capital. Professional asset management.
multifamilyduplextriplexscalinginvesting