Is small multifamily <5 units a good opportunity in 2023 and beyond

Multi-Family and Apartment Investing
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Is small multifamily <5 units a good opportunity in 2023 and beyond

Kate Lee
Member since 2020 · 26 posts · 26 votes

Hi BP folks!  I watched Brandon Turner's master class on small multifamily (< 5 units) and found it fascinating, as this could be my learning springboard to do larger apartment deals.

Questions:

1) does the new higher interest rate environment still make investing in small multifamily cashflow/profitable?

2) what are the best markets in USA, with growing population?

3) is anyone in the BP pro membership who can share their experience?  https://www.biggerpockets.com/pro/videos

Thanks so much!

Kate

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Zachary Ware
Member since 2022 · 405 posts · 455 votes
3y

The best market to invest in 2-4 units is the market you live in. Doing a househack with FHA is a great entry point and in my opinion one of the safest options you have. You are there at the property and know what is going on with the neighborhood. The second best is a city with a growing population and diversity on the economic side as well such as having multiple big employers who are in different industries. I think the southeast is still a great area to focus on.

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  • Trevor Richardson
    Real Estate Broker · Reno, NV · Member since 2023 · 267 posts · 297 votes
    3y

    Yes they are. Because of the tough lending market we are seeing some of the best opportunities for our investors in years. They are getting properties at a discount, and if interest rates improve in a year they are looking forward to refinancing.

    1Reply
  • Kate Lee
    OP
    Member since 2020 · 26 posts · 26 votes
    3y

    @Trevor Richardson thanks for chiming in!  I'm hearing that large deals are blowing up because borrowing rates keep changing. Do you see opportunities for the small multifamily <5 units, and the opportunity to do seller financing (or "subject to" or some type of creative financing) with mom/pop owners?  Be great if you can please elaborate on what you're experiencing. I'm thinking of starting with small multifamily as it's a springboard for learning and graduating to the larger multifamily.  But I'm also afraid the as cap rates rise, the price of small multifamily will also drop significantly.

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  • Trevor Richardson
    Real Estate Broker · Reno, NV · Member since 2023 · 267 posts · 297 votes
    3y

    Seller financing is rare and sub-to is not really investing. It’s a click-bait silly strategy for distressed property. We deal with actual investors putting 25% down on purchasing an investment property. 

    All multifamily is is stable right now. Not because of interest rates, because apartment demand remains high. Properties are full of tenants and the cash flow is great. We see great deals right now for small multifamily owner that need to sell, not because the property is bad, but because they just need to sell. 

    2Reply
  • Alecia LovelessPro Member
    Member since 2019 · 3k+ posts · 2k+ votes
    3y

    @Kate Lee There's plenty of opportunities for great 2-4-10 unit deals still available. The great thing about the 2-4 unit deals is the conventional financing which is fairly easy to get. You can also use DSCR loans but I've just used Fannie/Freddie for my loans.

    I’ve put 25% down and made at least the 1% rule, still finding some that are meeting the 2% rule in terms of rent and cash flow. You just need to analyze lots of deals and get good at doing the analyzing in specific markets so you get a good feel for things in those markets when you see them and then run calculators to be sure of what you thought. Once you’ve run dozens and dozens or hundreds of calculations on deals you get good at knowing if something will work or not.

    As far as specific markets to try you could look to the Midwest like everyone recommends or try towns in the Top 10 list of places to invest in but I like to find my own little niche markets that haven’t been “discovered” yet where prices might be lower still and there’s room for investors to move in and have some opportunities. You could try to get creative with searching on some of the AI platforms to find some of these markets.

    0Reply
  • Sam McCormackBusiness Member
    Real Estate Agent · Cincinnati, OH/NKY · Member since 2021 · 1k+ posts · 833 votes
    3y

    @Kate Lee

    Hi Kate, and of course it still works! It takes more than just plugging numbers into calculators to get those results. It seems like everyone is doing it, aka why it doesn't work as well. But the people who really want it aren't going to just plug in a few times and give up because "nothing works". An area like Cincinnati and Northern KY have strong rental markets. And just because it doesn't work now, doesn't mean it won't in a year or 2. Many people aren't willing to be patient, again, these are the people who just plug in some numbers a few times and give up. 

    I am a realtor in Cincinnati/Northern Ky, I see a good amount of deals work here, mostly my off market findings from cold calls. Let me know if Cincinnati sounds like a place you'd be interested in checking out!

    [email protected]859-443-4952
    Sam McCormack Realtor
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    1Reply
  • Dani Murphy
    Investor · Winter Park, CO · Member since 2023 · 24 posts · 11 votes
    3y

    Thank you for your post, @Kate Lee! Another perspective to consider is focusing on larger multifamily properties, where economies of scale come into play. For instance, having 10 vacancies within a 200-unit property equates to only 5% vacancy, in contrast to a 4-unit property where a single vacancy amounts to 25% of the whole. One or two vacancies could kill your cash flow with smaller deals. 

    Investing in larger multifamily properties brings several advantages, including reduced property management costs, increased flexibility in handling vacancies, and the potential to enhance value through renovations and adjusting rents to match the market rates.

    Moreover, investments in large multifamily typically provide robust cash flow that can effectively cover debt service even in this interest rate environment. It's an avenue that offers more stability than retail, industrial, and office amidst market ups and downs.

    Syndications, Funds, Partnerships, etc. are ways to get involved with this asset class. 

    Happy Investing,

    Dani 

    0Reply
  • Zachary Ware
    Member since 2022 · 405 posts · 455 votes
    3y

    The best market to invest in 2-4 units is the market you live in. Doing a househack with FHA is a great entry point and in my opinion one of the safest options you have. You are there at the property and know what is going on with the neighborhood. The second best is a city with a growing population and diversity on the economic side as well such as having multiple big employers who are in different industries. I think the southeast is still a great area to focus on.

    14Reply
  • Tanner Lewis
    Lender · Austin, TX · Member since 2021 · 447 posts · 441 votes
    3y
    Quote from @Zachary Ware:

    The best market to invest in 2-4 units is the market you live in. Doing a househack with FHA is a great entry point and in my opinion one of the safest options you have. You are there at the property and know what is going on with the neighborhood. The second best is a city with a growing population and diversity on the economic side as well such as having multiple big employers who are in different industries. I think the southeast is still a great area to focus on.

    Adding onto what Zachary said, I would look into the FHA option because in many areas, you can qualify for a quadplex for over a million (~1.1 for where I am in Austin, Texas) with only 3.5% down plus PMI (I believe 1.75% plus monthly increased interest to 20% equity). It is a great option for using high leverage to decrease your housing expenses while you save to invest in more real estate. That is why it is typically a great option for beginners. 

    If you go this route, I highly suggest that you look into the FHA requirements in your area and speak with a professional. 
    1Reply
  • Michael BlankPro Member
    Rental Property Investor · Atlanta GA · Member since 2013 · 85 posts · 82 votes
    3y

    If doing a smaller deal helps you wrap your head around the process, then absolutely go for it. From there, you'll find yourself doing larger deals no problem. 

    In terms of location, do your research. It can be beneficial to invest in your area but don't let that hold you back. If you can get to the property within a quick flight, it's worth looking at. 

    Podcast Guest on Show #324
    0Reply
  • Caleb Brown
    Real Estate Agent · Kansas City · Member since 2018 · 4k+ posts · 3k+ votes
    3y

    Definitely still out there. Overall deals are slim BUT they are out there. Certain markets is better than others. Just run your #'s and verify the rents. 

    0Reply
  • Pauleen B Atkinson
    Rental Property Investor · Los Angeles, CA · Member since 2019 · 35 posts · 35 votes
    3y
    Quote from @Trevor Richardson:

    Seller financing is rare and sub-to is not really investing. It’s a click-bait silly strategy for distressed property. We deal with actual investors putting 25% down on purchasing an investment property. 

    All multifamily is is stable right now. Not because of interest rates, because apartment demand remains high. Properties are full of tenants and the cash flow is great. We see great deals right now for small multifamily owner that need to sell, not because the property is bad, but because they just need to sell. 


     Trevor, I'm so very glad you touched on sub-to financing.  What a sham.  Does no one ask the question, in a sub-to deal......"What happens if the seller bankrupts?"  

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