The Ultimate Underrated Rental Property of 2025 (for Small Investors)

Dave:
Hey everyone, I’m Dave Meyer and this is the BiggerPockets Real Estate Podcast where we teach you how to achieve financial freedom through real estate investing. Just recently I was on a panel for the BiggerPockets Momentum Virtual Investing Summit with our friend Brian Burke and he said something really interesting. He thinks the sweet spot in real estate right now is properties with five to 25 units. And if you don’t know Brian, he’s been investing for a long time. He’s been in the game for 30 years. He’s been contributing to BiggerPockets since 2013, so he is one of the most successful investors in the entire BP community. He’s also just one of those people who’s been right so many times that every time he says something like this, I pay close attention. Now, if you’ve heard him on the show before, you know that he’s not shy about telling you all the things that he’s not investing in.
So when I heard Brian say he is interested in this asset class of five to 25 unit properties, I wanted to find out more. And that’s what we’re doing on the show today. On this show, we talk almost every episode about residential real estate, which is properties from single family homes up to four units, and we sometimes talk about the other end of the spectrum, commercial multifamily real estate, mostly in the context of syndications that raise millions of dollars to go buy very large apartment buildings or housing developments. This middle ground though of five to 25 unit properties sometimes gets lost in the shuffle. So I want to ask Brian what makes those properties attractive, whether we’ve hit the point in the market cycle where investors should be jumping on deals in this category, and then I’m going to ask him his advice on how investors can analyze, purchase and operate this type of property. Let’s bring on Brian Burke. Brian, welcome back to the BiggerPockets podcast. Thanks for being here.

Brian:
It’s great to be back again even so soon.

Dave:
Yeah, well this is what you get for saying interesting things when we’re talking in different venues. Brian and I were talking on the Momentum Summit and you said something that really intrigued me about five to 12 unit properties. Can you just tell me and everyone why you think that’s kind of a sweet spot? Right now

Brian:
You have this kind of imperfect market in the small multifamily space, so you get into large multifamily a hundred units and up. It’s a very efficient market. It’s dominated by professionals who do it for a living. There’s not a lot of great deals to be found, but the small multifamily space, that’s where your mom and pop landlords live. That’s where you have tired landlords, that’s where you have deaths that lead to state sales and just all the kinds of things that happen in human life all happens in that smaller multifamily space. And as they say that chaos and dislocation breeds opportunity. So I think there’s opportunity in that smaller space.

Dave:
And do you think it doesn’t apply to even smaller multifamilies or does this also apply to two, three and four units?

Brian:
I think it applies to those two to four unit as well as it does that five to really, I’d say five to 25 unit space really kind of fits into this bucket. All of that applies when you get down into the smaller two to four unit space. There you have a little bit more competition from live in house hackers. You have some of that in that space, and I think you don’t have the economy of scale that you have with kind of that five to 25 unit space. So while the rules still apply there, I think that you get a little bit even sweeter spot if you’re in this as a real multifamily investor to be in that slightly larger space.

Dave:
Yeah, I’ve noticed that a lot and honestly why my personal interest has peaked to go into this commercial area is less about the economies of scale that you mentioned, but two to four units just seems super competitive and I think it’s BiggerPockets fault, I don’t know, but we’ve been preaching how valuable they are and they are. But you see now pricing on duplexes for example, is just kind of crazy unless you’re an owner occupant, and it’s because house hackers rightfully can pay more and still make those deals pencil. Whereas if you’re trying to scale a portfolio, you obviously can’t live in every property and you can’t pay as much as the person who’s going to house hack that property. So I totally agree with you on that. At the same time, I’m a little bit for some reason nervous to go beyond four units. Is it really all that different?

Brian:
There’s nothing to be afraid of. You brought up a good point about the smaller ones having maybe it’s BiggerPockets fault because you have all the house hackers coming in, but it’s also part of the reason that that space is so competitive is you can get Fannie Mae loans with lower down payments. You can get FHA. There’s regular conventional real estate lending that’s available to a single family home buyer. The same types of financing are available in that two to four unit space, and that does create a different competitive landscape. Once you’re five units and up, it’s considered commercial. That means the lending guidelines are different. It means down payment requirements are different, but operationally it’s basically still the same thing. Now the larger you get kind of in some respects, the easier it gets too.

Speaker 3:
So

Brian:
I had a 540 unit apartment complex. It was easier for me to manage than my 11 unit, and that’s just part of the way it is as you grow and scale and get teams. But when you’re starting out and trying to build a portfolio, this smaller multifamily space is a great place to learn. It’s a great place to build a portfolio, and believe me, you’ll learn more than you want to learn, but that’ll be really useful. And so don’t be afraid of it.

Dave:
The other thing that intrigues me is I personally got into real estate buying small that were in Denver and there’s kind of these cut up old mansions and Victorians. And recently I’ve only been trying to buy purpose-built small multifamilies because the organization of them, the consistency between units does in my opinion make a really big difference. Whereas all these old buildings that weren’t meant to be multifamilies that you cut up are just such a pain in the butt to manage and to fix. Whereas you buy a 540 unit, every unit is a carbon copy of each other. Maybe there’s a couple of layouts, but the systems, the clients you need, they’re repeatable. They’re knowable in a way that some of these small, so that part of it definitely appeals to me.

Brian:
Yeah, they can get a little crazy, especially when you get into these modified buildings and there’s lot those actually’s, a lot of em in Buffalo, when I was out there looking and bought this 11 unit, we looked at a lot of properties that were like two story single family homes that got repurposed into duplexes where the lower floor is one unit and the upper floor is another unit. And there’s all kinds of oddities that you find in that. And man, it runs the gamut. I mean between shared utilities and just a lot of those buildings are older and then their systems are really, really tough shape. So there can be a lot of challenges, but there’s also, again, anytime there’s challeng, there’s opportunity.

Dave:
Totally agree. Just when you’re reaching scale and when I’m trying to buy units in this part of my portfolio, I’m looking for ease of maintenance. So it just seems like this five to 25 unit area could be good, but I want to bring up sort of the elephant in the room, which is it a good time in the market to actually pursue these types of commercial deals. But first, Brian, we do have to take a quick break. We’ll be right back. Welcome back to the BiggerPockets podcast here with Brian Burke talking about a potential sweet spot in the market right now, which is rentals that have five to roughly 25 units. Brian was telling us a little bit before about what appeals to him, but I’m curious, Brian, commercial has been in a pretty big correction over the last couple of years. Do you think we are approaching a good time to buy for this subset of the multifamily asset class?

Brian:
Well, that depends. Dave, do you like to buy things at the top or the bottom? Bottom? Well then I think this might be the time for you, then it might not be the time for everybody. The challenge of doing that though is the best time to buy anything is when it’s most uncomfortable to do so. I have a mentor of mine in stock investing. He says the stock market is the only market where buyers fear a sale,
And I think the real estate market also kind of fits into that category. When times are tough, people get scared and they don’t want to get in, that means it’s a good time to get in. Now, I can’t say that today is the precise bottom of the market, but I can tell you that it topped out in the second quarter of 2022 and it’s been on a down slide ever since. And if we’re not at the bottom, we’re close enough to it where if you make a move now on a really well-priced property because you found some needle in a haystack, then I don’t think you’ll be sad that you did. This to me is a good time to buy. New inventory is starting to decline. Rents will come back when new deliveries start to decline in the second half of this year. So I think this is a really compelling opportunity in the small multifamily space.

Dave:
I love hearing that because I am very interested in buying these right now. So that’s very good news. I really do think this is a really interesting sweet spot for people. So hopefully everyone is also considering this because as Brian said, commercial real estate has been on sale for the last couple of years. But Brian, we are starting to see the residential market slow down right now. I’ve said that I think we’re going to have relatively flat prices this year. I think you sort of agreed when we were talking a couple of weeks ago. So can you maybe help our audience understand how and why the commercial space and the residential space don’t necessarily move in lockstep?

Brian:
Yeah, people always like to talk about the real estate market as if there is such a thing that all real estate does the same thing at the same time. And there’s a market cycle slide that you’ll often see people put up when they’re talking about real estate market cycles where the cycle goes up and it peaks out and then it comes down and then it troughs out and then it goes back up again. But I have a slide that’s way better than that and it has a bunch of lines that are crisscrossing in all kind of different ways because that’s really what the real estate market looks like. It’s looks like total chaos because you could have home prices in a slide while multifamily is increasing. Industrial could be going up while offices going down and hotels are trading sideways. All these things can be happening.
And what is also interesting is even within the same type of real estate, it can be moving in two different directions in two different locations. I mean, it might be where multifamily in buffalo is on a tear, but multifamily in Los Angeles is on a downside. These could be happening at the same time. So we always have to keep that in mind. But there’s a lot of bad news that’s been coming out about commercial real estate. Multifamily office especially has been in a really bad spot. What you have to look at is where in the cycle are we and what are the chances that that cycle is going to bottom out and then start to move in the opposite direction. Now, if you’re talking about going out and buying office buildings, yeah, it’s really bad out

Speaker 3:
There.

Brian:
Will they come back? That’s debatable. Maybe they will, maybe they won’t. But on the multi side, you see new deliveries coming down. You see rent growth starting to flatten. It was negative for a while. Now it’s flattening. When I look at rent growth forecast for the future, they’re trending up in most markets starting later half of this year and into next year. So if you can buy before that’s already happened, what do they say? Buy on the rumor and sell on the news. This is kind of we’re in that rumor stage. So I think that despite the fact that there’s been a lot of turmoil, I just think that that’s what creates opportunity.

Dave:
All right, well now you’re giving me FOMO and anxiety that I need to go buy something immediately. How long do you think this opportunity lasts? Do you think we’re just starting and there’s going to be opportunity for years to come, or is this kind of like a right here, right now kind of opportunity?

Brian:
I think that we have a little bit of time. There’s no sense to rush anything. You can let this play out. I don’t think that we’re looking at a V-shaped recovery where all this sudden we’re going to have this immediate massive bounce. I think that this recovery is going to be a process, and I think over the course of the next couple of years, you’re going to have some really sharp buying opportunities. And I think over the subsequent couple of years, you’re going to see the market start to mature. I’ve made up a few sayings. I might’ve said ’em on one of your podcasts before. I don’t remember which one, but people used to say about the multifamily markets survived till 25. These were the owners who were trying to just hang on. Well, they got to 25, but they’re still in a lot of distress.

Dave:
Yeah, nothing got better,

Brian:
Nothing got better. Their interest rates are still high, their loans are still coming due. And I had come up with a bunch of new saying and the dive in 25 was my first one, and that meant that the market’s going to stop going down. I mean, before it goes up, it first has to stop coming down. And I think we’re going to reach that point this year. And then I think it gets fixed in 26, meaning that I think next year we’re going to start to see some of this work itself out. The market’s going to get legs under it. I think you’re going to be an investor heaven in 27, meaning there’s going to be deals out there. You’re going to see the stuff that you bought. You’re going to get rent growth. You’re going to start to see price growth, and I think if you wait until 28, you’re going to be too late. Those are my sayings for the day. I

Dave:
Like this. All right,

Brian:
Take it for what it’s worth. So

Dave:
Brian, I want to ask you about property class. Within this space, do you recommend people invest in class A really nice polished spaces, class B, class C? How do you see that trade off in this particular subset of the market?

Brian:
It really has to match to your risk profile and the amount of work you really want to put in. If you have a high tolerance for risk, and let’s say you’re a real young go-getter, I’m going to kill it in the real estate business and I’m going to go find this really super below market deal, put in a ton of work and really turn it around. Buying class C properties might be for you because there’s some people that just won’t touch. They’re really management intensive. It’s really difficult to pull that off. It takes a lot of energy and a lot of time, and it’s a lot risk. If you have that in you, that’s a really great place to start, and I guarantee you will learn 10 times more about this business than you will if you want to just go buy class A properties

Dave:
And more than you want to, like you said, more than you want

Brian:
To, yeah, a hundred percent more than you want to. But if you’re kind of like moderately risk averse, going into that class B space is probably a good place to be. And if you’re just absolutely hands-off person like, look, I don’t want to mess with anything. I want no risk. I don’t want bad tenants, I don’t want it to deal with any of that stuff. Class A properties is probably the best place for you. Now, you’ll probably find that it’s the least amount of return, but on a risk adjusted basis, it’s a very good return. So you’ve got to match your personality and your risk tolerance and the amount of work you’re willing to put in and then decide from there which class is right for you.

Dave:
And I’m going to ask you a question you’re absolutely going to hate, but I’m going to ask it to you anyway. What is a good deal in this market, right? I know that cap rates are going to be very different in different property classes, different markets, but can you just maybe give us a little bit of a guideline for how you would look for and spot a good deal in today’s day and age?

Brian:
Yeah, I mean, a lot of people want to focus on cap rate and say, oh, a good deal means it’s this cap rate or that cap rate. Forget about cap rate.

Dave:
I know you hate that.

Brian:
I just hate cap rate. It’s just such a useless metric. What you really want to think about is the cash flow and replacement cost. I mean, if you can buy a property for a price that’s less than you can build it for, you’re already starting off on solid footing. But remember, this isn’t only called multifamily. This is also called income property. It’s another way that this is referred to as income property. You don’t go buy a 20 unit apartment complex because it’s a nice place for you to live. I mean, sure you could live in it, but that’s generally not why people buy 20 unit apartment buildings. They buy it because it’s income property. That means you got to look at what is the income, and if it doesn’t have income, it’s not a good deal. So when you’re underwriting, you’re going to look at your rent minus vacancy, minus operating costs, minus property taxes, insurance minus interest, what’s left.
And don’t forget about capital improvements. You’re going to have water heaters that break. You’re going to have parking lots that need to be resurfaced. You’re going to have roofs that need to be replaced, amortize the cost of those big ticket items over their lifespans and adjust for that as part of your cashflow question. And are you in positive cashflow territory? And is the cashflow that you’re going to receive enough to make the investment worthwhile? There’s another old saying that I really liked that says, all investments have risk, but not every risk is worth the investment. If you are going and buying a property that you have to put $200,000 a year into and you’re going to get a hundred bucks a month of positive cashflow, you’ve got to really consider whether or not this is a smart investment. If you could go invest in a mutual fund stock or whatever and get a much better return, you want to get a return on your capital. So look at it from a return on capital basis, not a cap rate basis, return on capital basis.

Dave:
Brian, I have more questions for you about these medium size multifamily properties, but first we do need to take a quick break. We’re back. Here’s the rest of my conversation with Brian Burke. Now, just totally asking for a friend and for our audience, not for myself, but if you were to be interested in this kind of deal, how does the underwriting and deal analysis process differ from either single family rentals or smaller two to four units

Brian:
In this five to 25 arena? It’s very similar to underwriting a fourplex. You’re going to look at your rent, you’re going to look at vacancy factor. And here’s something that I think is really important that people miss. If you own a fourplex, you can probably fill that fourplex up and have almost no vacancies for long stretches of time.
But when you get into this five to 25 unit space, your property is going to follow the market. So if the market has 10% vacancy, you’re going to find yourself 10% vacant. If you’re a hundred percent full, you’re doing something wrong. So really look at economic vacancy factors. Be respectful of what the market data is telling you about vacancy, about rent growth, about rental rates, because you’re going to be a byproduct of the greater overall market. It’s really tough to beat it when you get into these larger properties. The other thing to think about is the utilities. Who’s paying for them, who pays for what? Make sure you’re quantifying that and you’ve got a good management fee in there to pay a really good management company to help you with it. I’m not really a big fan of the DIY approach. I know some people really like to do it that way, but I’d much rather have a really strong competent manager in there and overseeing what they’re doing. So make sure that you’re accounting for those expenses. Those are the big things to look for when underwriting in this space.

Dave:
You said something that if you don’t have vacancy, you’re doing something wrong. Does that mean you’re just undercharging rent?

Brian:
Yeah, you’re undercharging rent. Yeah, rent. Rent. You should be at market vacancy. So if you’ve got 25 units and you’re a hundred percent full, your rents are too low.

Dave:
What about the debt side of things? Because for everyone who’s listening, just when you get a residential mortgage, usually you can get 30 or fixed rate debt. That is not typically what you do with commercial loans. They’re usually adjustable rate mortgages that have a balloon payment after 3, 5, 7, 10 years. So how does that factor the underwriting? Or what should we all be thinking about when we consider commercial debt versus residential?

Brian:
Yeah, commercial debt is a whole different animal. The best financing that you can find out there anywhere is the 30 year fixed fully amortized loan. And those are great for single family homes. You can even find ’em for your duplexes and fourplexes, but that’s not a thing in the small commercial multifamily space. Once you get over five units, you can sometimes find bank financing, especially if you have a relationship loan. If you’ve got a relationship with a local community bank, you might find some really attractive financing. I have that 11 unit building I told you about in New York. I had a local bank that financed it for me on a 25 year fixed rate, fully amortizing loan.

Speaker 3:
Wow.

Brian:
And so in the smaller space, you can find that debt out there. When you get into bigger multifamily, that gets even harder to find, especially when you get over 5 million. Those loans are really difficult to find. They usually will have some type of prepayment penalty. They’ll have shorter maturities like five, seven or 10 years. At that point, you have to pay ’em off for refinance. So it does get a little complicated as the loan size goes up, but if you’re under that 5 million mark, you can find really compelling financing from local community banks. That’s my starting point for that size.

Dave:
Alright, that’s really, really good to know. I guess the question is, assuming you can’t get one of those great fix rate debts, assuming you’re getting a more traditional kind of loan five, seven year or something like that, how do you underwrite that? Because do you just assume that you’re going to get a refinance at some point? Because that seems to be one of the major problems that operators have been facing over the last couple of years that they weren’t able to refinance. So how do you manage that risk?

Brian:
You manage the risk with a longer maturity. And the reason that a lot of operators are having that challenge right now is they got too short of a maturity. There was a period right after Covid where a lot of buyers, especially of larger multifamily, were buying with three year bridge loans. And these loans were intended to buy a property, fix it up, raise the rents, and then get a new loan. That was the reason that you would get those loans. But they kind of got repurposed where these syndicators were using this debt as a crutch because they couldn’t raise enough equity. So they would use these high leverage loans to juice their returns and require ’em to bring less cash to the table. But the trade-off was is that they had three year maturities, and that might work when it works, but if the music stops and there’s no place left to sit, that’s when things go wrong. So the challenge of that refinance is when rates go up, values fall. That refinance is very difficult. Outside of that, assuming that rates stay level or maybe they only go up a little bit and values do not fall, the refinance is certainly doable, especially if you’ve owned the property for a while. And that’s why the longer term maturities really pay off. If you get a loan with a 10 year maturity,
It’s pretty sure that you’ll be able to refinance in 10 years. The market should have gone up by then,

Speaker 3:
And

Brian:
If it did go down, it should have had enough time to come back by that point. And if it went down right before it was refi time, it already went up for eight or nine years and you should still be in pretty good shape. It’s the really short terms that will get you, because three to five years is the blink of an eye In this business. It may seem like a long time, but once you buy a property, you’ll find three to five years goes by really quickly.

Dave:
Thank you, Brian. You’ve really demystified the underwriting process for me a little bit. It really doesn’t seem very different from all of the regular presidential underwriting that I’ve done, and hopefully everyone listening to this sees that this really isn’t all that complicated. If you can underwrite a single family home or duplex, you can make some small adjustments and be able to underwrite these types of deals as well. But I want to sort of just talk about, just strategically, Brian, if you think this is a good asset for just regular investors, the average BiggerPockets listener, someone who’s going to buy a handful of units over the course of their lives to support their financial freedom, is this a better option than buying a bunch of single families or two or three triplexes or something like that? Why or why not?

Brian:
Well, I think it’s a different approach. It’s hard to say that one is necessarily better over the other because a lot of this depends on your own individual circumstances. Now, with the larger the properties you get, the more units you have concentrated in one location. Now that comes with advantages and disadvantages. The advantages are, let’s say you have a 20 unit apartment building and you have 20 single family homes. Well, in the 20 unit apartment building instead of 20 roofs to maintain, you have one roof to maintain
Instead of 20 property managers, because they’re all in different places. You have one property manager, instead of having to hire a landscaper to mow 20 lawns, there’s one landscaper mowing, one lawn. So you do get economy of scale, but the trade-off is you get some operational complexity. You get big enough, you might have to have an onsite person in California. If you have more than 15 units in one location, you have to have a quote onsite manager. So that adds some complexity to the business instead of just being really simple. So the financing is a little more complicated in the larger stuff, but I’m a believer in economy of scale. I’m a believer that in real estate investing, your journey takes you to larger properties. And I don’t mean more square footage on a house, I mean larger properties than others, more units in one location because that economy of scale is what gets you cash on cash return, which eventually gets you retirement. And single family homes can do it, but it’s very operationally complex to have a lot of scattered houses in a lot of different places. So I personally advocate for kind of a balanced hybrid approach where you might have, instead of a hundred single family homes, maybe you have five 20 unit buildings, and those could be in different locations. That’s fine. You get kind of the best of both worlds by having some geographic and portfolio diversification, yet also some consolidation to capture economy of scale.

Dave:
All right. I like it. I mean, you and I both are I think friendly with Chad Carson. I asked him the same question. He said the exact opposite thing, if you all listen to this thing, he was like, go buy 75 single family homes. But I think personally, I’m more of your belief. I started with small multifamily. I have some single family, and then I went sort to the opposite where I invest in syndications and the kind of stuff you do, which is hundreds of units. But I’m trying to fill out that sort of middle spot that I don’t have diversification and an ownership over. So that’s pretty interesting.

Brian:
At one point, I had 120 rental houses, and at one point I had 4,000 apartment units. Wow. I think it was easier to manage the 4,000 apartment units than the 120 rental houses.

Dave:
That’s amazing.

Brian:
He might’ve pulled that off really well, but I dunno, that’s just me. I mean, everybody’s different.

Dave:
I’m curious about timing though, Brian, because I totally buy the diversification aspect, but is this something new people should consider? Do you recommend building your way up to it?

Brian:
I recommend building your way up to it as you’re scaling to larger properties. I mean, it doesn’t mean you have to buy a single family house before you buy a duplex, but if you’re in a skip single family homes and go straight into multifamily, I would suggest starting with something that’s in the one to four category, just because of the ease of finance and just learning and getting your feet wet. And then I would get into that five to 15 unit space. There’s not a lot of difference in five to 15 units. You get over 15 units carrying that 16 to 25, that starts to get a little bit more complicated. It might behoove you to start in that five to 15 beforehand. I personally, I think I had a duplex first, and then I went straight to a 16 unit

Speaker 3:
And

Brian:
It was complicated for me to figure out. So I really always recommend climbing the ladder as a much easier way to get on a roof than to jump up on top of it. So no problem with starting small and working your way up.

Dave:
That’s good advice. I like that saying you’re full of good sayings today, Brian. I like that story. I’m

Brian:
Trying.

Dave:
Alright, well, thanks again, Brian, and thank you all so much for listening to this episode of the BiggerPockets podcast. If you enjoyed this episode as much as I did, please make sure to give us a five star rating either on Spotify, apple, or wherever you’re listening. We’ll see you next time.