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Investing in real estate property can be profitable, but it’s not always easy. You’ve got to find the right deal, manage tenants and repairs, and deal with unexpected problems. There’s a lot that can go wrong, and this is why it’s so important to take all the necessary precautions. The more you know prior to buying real estate for investment, the better off you’ll be and the stronger your plan will be if (or when) something goes wrong.
If you’re considering multi-family real estate investing as a serious source of income, here’s how to get started, followed by ten things you should know before you buy.
What is Multi-Family Real Estate Investing?
A multi-family home is an apartment building, duplex, triplex, or other buildings that house more than one family in separate spaces. It’s great for those who want to increase their investment portfolio while gaining income, and they can sometimes be easier to manage than single-family homes. Plus, you can even do an owner-occupier situation and live in a unit to reduce the need for a building manager.
Related: BRRRR Strategy with Matt Mckeever – Landlord Studio Podcast
The 10 things at a glance:
- Know the differences between a duplex, triplex and quadruplex
- Four units is where residential financing ends
- Multi-family earns more but takes more work
- You'll need a team
- Balance condition, location and budget
- Choose a building you can handle
- Expect the purchase to take months
- Plan how you'll manage the property
- Don't expect quick profits
- Run the numbers before you buy
10 Things to Know for Beginners
1. Know the Differences Between a Duplex, Triplex, and Quadruplex
Multi-family properties are grouped by how many separate units they contain. A single-family home has one, a duplex has two, a triplex has three and a quadruplex (usually called a fourplex) has four. Anything with five or more units is an apartment building. As the unit count goes up, so do the rental income, the number of shared walls and neighbors, and the amount of management involved.
Duplex
A duplex is a single building with two self-contained homes. The units sit either side by side (a horizontal duplex) or one above the other (a vertical duplex). Each has its own kitchen, bathroom, bedrooms and entrance, and some have their own yard or patio. The shared wall is what separates a duplex from two detached houses. For tenants it feels close to renting a house; for investors it's the most common first step into multi-family.
Triplex and fourplex
A triplex adds a third unit and a fourplex a fourth. They're often older large houses that have been converted, or small buildings put up as rentals. Each extra unit adds income without adding another roof, lot or closing, which is why many investors see the fourplex as the sweet spot of small multi-family.
Apartment buildings (5+ units)
An apartment is a self-contained home that takes up part of a larger building. Once a property has five or more of them, lenders and appraisers treat it as commercial real estate rather than residential. That changes how you finance it and how it's valued: by its net operating income and the local cap rate, not by what similar homes nearby have sold for.
2. Four Units Is Where Residential Financing Ends
The biggest practical difference between these property types is financing. Properties with one to four units qualify for residential mortgages, which usually have lower down payments, lower rates and 30-year terms:
- FHA loans let you buy a two- to four-unit property with 3.5% down (with a credit score of 580 or higher), as long as you live in one of the units.
- VA loans allow eligible veterans and service members to buy up to four units with no down payment, again if they live in one.
- Conventional loans allow as little as 5% down on an owner-occupied two- to four-unit property. If you won't live there, expect to put down around 25%.
Triplexes and fourplexes bought with an FHA loan also have to pass the self-sufficiency test: 75% of the property's estimated rent, including the unit you'll live in, must cover the full monthly mortgage payment, including taxes and insurance. Duplexes are exempt.
Five or more units means a commercial loan. Down payments are typically 20% to 30%, terms are often shorter, and lenders base approval mainly on whether the property's income covers the debt rather than on your personal income.
Duplex vs triplex vs fourplex vs apartment building
| Property type | Units | Key features | Pros for investors | Cons for investors |
|---|---|---|---|---|
| Duplex | 2 | Two self-contained units, side by side or stacked, each with its own entrance and one shared wall | Easiest way to house hack. Residential financing, including FHA if you live in one unit. Easy to resell to owner-occupiers. One vacancy still leaves half your rent coming in | A vacancy cuts your income in half. Smallest scale of the four. If you house hack, your tenant lives on the other side of the wall |
| Triplex | 3 | Three units, often a converted large house or a small purpose-built building | More rent per purchase while still using residential loans. A vacancy costs a third of your income, not half | FHA buyers must pass the self-sufficiency test. Fewer resale buyers than for a duplex. More shared systems to maintain |
| Fourplex (quadruplex) | 4 | Four units. The largest property that still qualifies for a residential mortgage | The most units you can buy with residential financing. Roof, insurance and maintenance costs are spread across four rents | FHA self-sufficiency test applies. More tenants, turnover and maintenance to manage. Higher purchase price than a duplex or triplex |
| Apartment building | 5+ | Five or more units, from small walk-ups to high-rises, usually with shared common areas | Valued on net operating income, so raising rents or cutting costs directly raises the value. Vacancy risk spread across many units | Commercial financing with larger down payments and shorter terms. Usually needs professional management. Much more capital up front |
3. Multi-Family Earns More but Takes More Work
There are quite a few differences between different properties, and it’s a good idea to understand both before you decide to start investing. Single-family homes are much easier to manage, they require less of a down payment, and they are more widely available than multi-family homes. On the other hand, multi-family homes can earn you quite a bit more in income in the same amount of time, you can sometimes receive tax benefits when you invest in them, and they are often easier for you to insure.
Related: Investing in Student Apartments with Justin Newbury
Why small multi-family is a popular first investment
- More than one rent check. Two to four rents from one property can boost your cash flow well beyond what a single-family rental at the same price would earn.
- Vacancy doesn't mean zero income. When a single-family home is empty, rent stops completely. In a duplex or fourplex, the other units keep paying.
- You can live in one unit. House hacking lets your tenants cover part or all of your mortgage, and it unlocks the low-down-payment loans above.
- Tax benefits. You can deduct the expenses of the rental units and depreciate their share of the building, even if you live in another unit. See the tax benefits of investing in rentals.
- A lower entry price than an apartment building. Two- to four-unit properties cost far less than five-plus-unit buildings, and the residential financing makes them accessible to individual investors.
4. You’ll Need a Team
The world of real estate investing is very lucrative–but it’s also risky. If you learn the game properly and take good care of your properties, you’ll likely do very well for yourself. After all, you don’t get rich by playing things safe. You can’t invest in real estate without a team. If you’re serious about investing in real estate, then it’s best that you find reliable professionals that are well-versed in their respective fields.
For a multifamily purchase, your team usually includes:
- A real estate agent or broker who knows multifamily
- A lender or mortgage broker who does two- to four-unit or commercial loans
- A home inspector, plus roof, sewer or HVAC specialists if needed
- A real estate attorney or title company
- An insurance agent
- A CPA who works with landlords
- A property manager, or reliable contractors if you'll manage it yourself
5. Balance Condition, Location and Budget
When it comes to figuring out what makes a suitable investment property, you need to look at many different factors. You want a property that is easy to maintain, has a good location and one that is suited to your budget. If your property needs lots of work to be in good shape then you need to figure out if it will be worth the work and if you are willing to do what will need to be done.
6. Choose a Building You Can Handle
The type or condition of the building you choose will likely depend on your cash flow and what is available in your area. You should be looking for something that doesn’t require too much for repairs or maintenance if you want to try and keep your income high, but you can’t slack on maintaining the building or your tenants won’t be happy. Look for a good location that is near schools and shopping opportunities and try to look for a number of units you can handle.
When you tour a building, check:
- Occupancy and rents: how many units are rented, and whether current rents are below market
- Tenants and leases: lease terms, payment history and any month-to-month tenants
- Big-ticket systems: the age of the roof, HVAC, water heaters, plumbing and electrical, which drive your future capital expenses
- Utilities: whether each unit has its own meters, or you'll pay for water, gas or electricity
- Extra income: parking, laundry and storage
- Unit mix: two- and three-bedroom units usually attract tenants who stay longer than studios do
- Legal use: permits and zoning for the number of units
7. Expect the Purchase to Take Months
It can take months to find the right property, months more for your offer to be accepted, and even more time before the closing process is finished. You have to do a lot of research upfront to find properties that are in good condition at reasonable prices while also being located in areas that you want to work with. And don’t forget that your time is valuable, too–you may have to miss out on other investment opportunities as you wait for the perfect properties.
As a rough guide, once your offer is accepted, a residential loan on a two- to four-unit property usually closes in 30 to 45 days. Commercial loans on five or more units often take 60 to 90 days, because the lender also reviews the property's income.
8. Plan How You’ll Manage the Property
Once you’ve successfully purchased a property, it’s up to you to make sure that everything is running smoothly on the back end. This means regular inspections and repairs, as well as finding tenants who will look after your property and pay their rent on time. Managing a rental property takes a lot more effort than just finding that perfect spot and collecting cash.
Related: Best Property Management and Accounting Software
9. Don’t Expect Quick Profits
As with other kinds of investments, there are no shortcuts to success when it comes to multi-family real estate investing. You can’t just buy any property; you have to work with experts to find the best deals. You can’t just take on any tenant; you might end up with a renter that destroys your investment property. And there’s no guarantee of instant profit–it may take years before you see real returns on your initial investments.
Houses don’t become profitable overnight, so be aware of this fact before you buy your first property. It may take months or years before the revenue from your development is enough to cover all of your expenses–and that’s just to break even. If you want to live off of your real estate investments, it could be years before that happens–and even then, you will have ongoing costs for repairs and management.
10. Run the Numbers Before You Buy
Before you make an offer, run the deal through these numbers. Use the seller's figures as a starting point, then rebuild them with your own assumptions for vacancy, repairs and management.
- Net operating income (NOI): NOI is rent and other income, minus vacancy and operating expenses, before mortgage payments. A fourplex collecting $8,000 a month with $3,000 a month of operating expenses has an NOI of $5,000 a month, or $60,000 a year. Try our NOI calculator.
- Cap rate: annual NOI divided by the price. $60,000 of NOI on a $750,000 fourplex is an 8% cap rate. Compare it with similar properties in the same market, or use the cap rate calculator.
- Cash flow: what's left each month after operating expenses and the mortgage payment. It's your buffer for vacancies and repairs, so make sure it's positive with realistic assumptions. See how to calculate cash flow.
- Cash-on-cash return: annual cash flow divided by the cash you put in, including the down payment, closing costs and any repairs. See cash-on-cash return vs cap rate.
- Debt service coverage ratio (DSCR): NOI divided by your annual mortgage payments. Lenders usually want at least 1.20 to 1.25, especially on commercial loans for five or more units.
- Quick screens: the 1% rule (monthly rent of at least 1% of the price), the 50% rule (expect operating expenses to take about half the rent) and the gross rent multiplier help you rule deals out fast. Use them to screen properties, not to decide on one.
How to Start Investing in Multifamily Real Estate
If you're ready to buy your first multifamily property, these are the steps most investors follow. The 10 things further down explain each part in more detail.
Step 1: Choose your strategy
Most beginners start with a duplex, triplex or fourplex. You can live in one unit and rent out the rest (house hacking), which opens up low-down-payment loans, or buy it purely as a rental. If you'd rather not be a landlord at all, you can invest passively through a multifamily syndication or a real estate investment trust (REIT) that owns apartment buildings. Syndications are often limited to accredited investors, and minimums are often $25,000 or more. This guide focuses on buying and running a property yourself.
Step 2: Set your budget and get pre-approved
Work out how much cash you can put toward the down payment, closing costs and reserves, then talk to a lender before you start viewing properties. On two- to four-unit properties, lenders can usually count part of the expected rent from the other units, often 75%, toward your income. Expect to need cash reserves on top of the down payment, sometimes several months of mortgage payments.
Step 3: Pick your market
Look for areas where rents are strong compared with prices, jobs and population are growing, and property taxes and insurance won't swallow the rent. Check the landlord-tenant laws too: rules on deposits, rent increases and evictions vary a lot by state and city.
Step 4: Find deals
An agent who knows small multifamily can set up MLS alerts for two- to four-unit properties, and commercial brokers handle most buildings with five or more units. Many investors also find off-market deals through direct mail, wholesalers and their own network.
Step 5: Analyze the numbers
Ask the seller for the rent roll and the trailing 12 months (T-12) of income and expenses. Rebuild the figures with your own vacancy, repair and management assumptions, then check the metrics in item 10 below.
Step 6: Make an offer and do your due diligence
Make your offer subject to inspection and financing. During due diligence, inspect every unit and the roof, HVAC, plumbing and electrical, read every lease, confirm the security deposits, and ask tenants to sign estoppel certificates confirming their rent and deposit. Make sure the number of units is legal under local zoning.
Step 7: Close and set up management
At closing, the tenants' security deposits and any prorated rent should be credited to you. Then tell the tenants who their new landlord is and how to pay rent, open a separate bank account for the property, and set up rent collection, maintenance and bookkeeping from day one.
Multi-Family Investing FAQs
Is a duplex considered a multi-family property?
Yes. Any building with two or more separate housing units is multi-family. Lenders treat two- to four-unit properties as residential and five or more units as commercial.
What are the main types of apartments?
The types you're most likely to come across as a landlord are:
- Studio: also called an efficiency. A single room that serves as living room, bedroom and kitchen, plus a separate bathroom. The cheapest units to buy and furnish, popular with students and single renters, but tenants tend to move on sooner.
- One-bedroom and larger: separate bedrooms from the main living space. Larger units attract couples and families, who usually stay longer.
- Garden apartment: a low-rise building, usually no more than three stories, set in landscaped grounds. Units often have their own entrance.
- Loft: a large open-plan unit with high ceilings, originally converted from industrial buildings. Popular in city centers and can command higher rents.
- Mid-rise and high-rise: larger buildings, usually with elevators and shared amenities, and typically owned by institutional investors.
What's the difference between an apartment and a condo?
Ownership. Apartments in a building are usually all owned by one landlord or company and rented out. A condo is an individually owned unit; the owner can live in it or rent it out, and pays HOA fees toward the upkeep of the shared areas.
Is a duplex a good first investment property?
For many new investors, yes. You can live in one unit and rent the other, use a low-down-payment residential loan, and learn to be a landlord with one tenant instead of several. Run the numbers first: the rent from the other unit should cover a meaningful share of the mortgage, taxes, insurance and repairs.