Multi - Family 2 - 4+

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2-4 Unit Multifamily Residences (MFRs)

We believe 2-4 unit multifamily residences are the easiest to get into when you are just starting out. They also have the most benefits with the fewest downsides.

Some of the benefits include:

• It can be relatively cheap to buy a duplex, triplex or fourplex compared to a larger property.

• You’ll have relatively low interest rates (though not as low as SFRs) because you can use a residential loan, which usually has better terms than a commercial loan (click here to read about residential vs. commercial loans).

• There is less competitive pressure from real estate investment firms. These are companies that use institutional funds (i.e., pension funds, 401k funds) to buy apartment complexes.

• Other benefits include the ability to spread the risk of vacancies and maintenance costs over 2-4 units rather than a single unit with a SFR.

The downsides to the 2-4 multifamily category is that most cities have fairly low inventory compared to SFRs. You may have higher utility costs because some of the utilities supplying a MFR aren’t split between the units. (e.g., you usually have one sewer line going to a MFR rather than each individual unit having their own sewer line.) However, it’s often possible to bill back utility costs to renters each month, making this type of investment even more attractive.

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5-15 Unit Multifamily Residences

When you get above four units, you no longer qualify for residential loans. At this point, you have to switch to commercial lenders. Commercial loans tend to have higher interest rates and/or shorter loan periods, making your monthly mortgage payment higher.

Also the more units you have, the greater the competition from real estate investment firms. These firms tend to avoid smaller (less than five unit) MFR and SFR. This is because it’s less efficient for them to buy them due to the transaction cost and time.

However, as the market for larger complexes has started to dry up in the last few years, it seems that these investment firms are getting into 5-15 and even 2-4 MFRs. Because of the higher capital outlay required, the higher borrowing costs and the level of competition with this type of residence, we would recommend against starting your investment career with >5 unit buildings

>15 Unit Multifamily Residences

The split at 15 units is somewhat arbitrary, but above 15 units, it gets complex. You have higher capital requirements and intense competition from investment firms. You also have think about not just individual tenants but about creating a community. This might entail creating and managing common spaces like laundry rooms, playgrounds, barbecue areas, etc.

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