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Investing in multifamily small apartment buildings is a powerful way to build wealth

How to Buy Your First Multifamily Small Apartment Building

Investing in multifamily small apartment buildings is a powerful way to build wealth, offering significant personal and financial advantages. For first-time investors, starting with small apartments (such as 5-unit buildings) offers a manageable yet impactful way to step into the world of real estate.

In this guide, we’ll walk through the personal benefits of owning a small multifamily property, the investment advantages, how to find the best deals, why 5-plexes are a better starting point than 4-plexes, and five ways to finance your first deal—even if you’re short on cash or credit.

Personal Benefits of Owning Small Multifamily Apartments

Owning a small multifamily apartment building brings several personal benefits that make it an excellent entry point into real estate investing:

1. Manageability

A smaller apartment complex, like an 8-unit building, is much easier to understand and manage compared to a 100-unit property. For first-time investors, it’s important to start with something that feels manageable. With smaller units, you can ease into the responsibilities of being a landlord while still benefiting from multiple income streams.

2. Lower Equity Requirement

Smaller properties typically come with lower price tags, meaning you won’t need as much equity upfront to purchase the building. This makes it a more affordable and accessible option for first-time investors, especially those without deep pockets.

3. Creative Financing Opportunities

With small apartment buildings, it’s often easier to explore creative financing options. Due to their smaller scale, these deals typically require less capital, and you may only need a single investor to meet the down payment or credit requirements.

4. Smaller Mistakes, Lower Risk

Managing a smaller property allows for fewer costly mistakes. A smaller investment means your errors won’t cost as much, giving you room to learn and grow as an investor without jeopardizing your financial stability.

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Investment Benefits of Small Multifamily Apartments

Small multifamily properties not only offer personal benefits but also have key investment advantages:

1. Less Competition

Because you’re targeting smaller buildings, you’re less likely to face competition from large institutions or hedge funds. These properties are often owned by individual investors (mom-and-pop operators), which means you’re negotiating with people, not corporations.

2. More Room for Profit

Smaller property owners may be hesitant to raise rents, leaving money on the table for the next owner—you. Mom-and-pop owners often haven’t maximized their property’s profitability, offering you the opportunity to raise rents and increase cash flow.

3. Simpler Transactions

With small multifamily apartments, you’re more likely to work directly with the property owner, bypassing corporate red tape. This makes negotiations faster and simpler, while also leaving room for creative financing arrangements.

4. Higher Cash Flow Per Unit

Small multifamily buildings typically offer higher cash-on-cash returns and internal rate of return (IRR). On average, your cash flow per unit tends to be higher compared to larger properties, making it a lucrative investment option.

How to Find the Best Multifamily Apartment Deals

Finding good deals is key to successful real estate investing. Here’s how you can create a steady flow of potential deals for small multifamily properties.

1. Work with Real Estate Agents

Real estate agents are a great resource for finding multifamily deals. Platforms like Loopnet.com allow you to search for small apartment buildings in your area. Once you find a property, call the listing agent to build a relationship. While you’re not necessarily after the specific property, you are after the relationship with the agent. Over time, agents may send you deals before they hit the market, giving you an edge.

2. Direct Mail Campaigns

Direct mail marketing is another effective way to find off-market deals. Focus on targeting absentee or out-of-state owners, as they’re often looking to offload their properties due to management issues or distance. Create a mailing list and send out letters regularly to ensure you stay top-of-mind when they decide to sell.

3. Networking

In addition to agents and direct mail, networking with other investors, property managers, and real estate professionals can help you stay in the loop about new opportunities. Attend local real estate meetups and make connections that could lead to off-market deals.

Why Start with 5-Plexes and NOT 4-Plexes

The distinction between 4-unit and 5-unit buildings is crucial for first-time investors. Here’s why starting with a 5-plex is a smarter move:

1. Residential vs. Commercial Property

4-unit properties are classified as residential real estate, meaning their value is primarily determined by comparable sales in the area. In contrast, 5-unit properties and above are classified as commercial real estate, where value is based on the net operating income (NOI). As the NOI increases, so does the property’s value—giving you more control over the appreciation of the property.

2. Higher Valuation Potential

Since 5-unit properties are valued based on their income, increasing the rents or reducing expenses directly impacts the property’s overall value. This makes 5-plexes a more strategic investment, allowing for faster and more significant appreciation than residential properties like 4-plexes.

5 Ways to Finance Your First Small Multifamily Deal

Financing your first multifamily property may seem daunting, but there are several ways to make it happen—even if you’re short on cash or credit:

1. Conventional Financing

You can go the traditional route and apply for a loan through a local bank or a loan broker. While local banks often require board approval for your loan, brokers may submit your application to multiple lenders to secure financing.

2. Seller Financing

With seller financing, the seller acts as the bank and finances the purchase for you. This is especially helpful if you have limited funds or credit. Over time, you can refinance with a traditional lender to pay off the seller.

3. Seller-Carry Back

If a conventional lender requires a 25% down payment and you don’t have enough cash, the seller can carry a second loan to cover the shortfall. This is a common financing strategy in multifamily investing.

4. Master Lease

A master lease allows you to take control of a property without owning it outright. You lease the property from the owner, take over management, and make a profit from the difference between the rents you collect and the lease payment. This strategy requires little cash upfront and avoids dealing with banks.

5. Wholesaling

If you’re short on cash, wholesaling can be an excellent way to make money while learning the ropes of real estate. Find a great deal, get it under contract, and then assign the contract to another investor for a fee. You don’t need to take ownership of the property; you simply act as a middleman.

Bottom Line

Investing in small multifamily apartment buildings is an excellent way to build wealth, especially if you’re new to real estate. Starting with a 5-unit property gives you more control over the property’s value, offers better financing options, and lowers the competition. By leveraging creative financing strategies and building strong relationships with real estate agents and property owners, you can find great deals and secure your financial future.

FAQs

What’s the best way to find small multifamily properties?

You can find deals by working with real estate agents, using websites like Loopnet.com, or implementing direct mail campaigns targeting absentee or out-of-state owners.

Why should I start with a 5-unit building instead of a 4-unit?

5-unit buildings are considered commercial properties, meaning their value is based on the net operating income, giving you more control over the property’s appreciation.

Can I invest in multifamily properties with no money down?

Yes, through creative financing options like seller financing, seller-carry back loans, and master leases, it’s possible to invest in multifamily properties with little to no money down.

Source: Multifamily Intelligence

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