Last Updated: January 2024
In residential real estate investing, multifamily rentals are the next level above single family rental real estate. Multifamily rentals share the same investment stability of an “essential need” but provide investors with greater returns as the amount of units scale up. The multifamily asset class includes everything from a duplex up to a multi-hundred unit apartment building. Below we take a deep dive into everything you need to know about multifamily rental properties.
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What is Multifamily Real Estate?
Multifamily Real Estate Definition
A multifamily property is any residential property that contains more than one housing unit. While they serve for residential dwelling, the general purpose for the property type is for investment (owner-occupied or not).
Multifamily Rental Properties Explained
Multifamily rental properties are buildings designed to be home to multiple families or individuals at the same time. Think of an apartment building where each apartment is its own separate living space, but they all share the same structure. Instead of one front door leading to one home, there might be dozens, each leading to a unique residence. People rent individual units, sharing common areas like hallways, laundry rooms, and sometimes amenities like a pool or gym. These properties can vary in size, from duplexes with just two units to sprawling complexes with hundreds. They’re a popular choice for urban living where space is at a premium and communal living becomes more practical.
8 Types of Multifamily Properties
Multifamily properties generally range in size from small (2 units) up to large (100+ units). The most common types of multifamily properties include duplexes, triplexes, quadraplexes, apartments, mid-rises, high-rises, ADUs, and affordable housing properties. Below, we explore each type and their unique characteristics:
Accessory Dwelling Units
Accessory Dwelling Units (commonly referred to just as ADU) are a secondary housing unit on a single-family or multifamily residential lot. ADUs need to follow a permitting process and be approved by the local building jurisdictions, but can be much more cost effective and quicker to build than a traditional structure. Recent favorable legislative advancements in states like California, have given a boost to the popularity of these unit additions by streamlining the permitting process.
Affordable Housing Units
Affordable housing in the multifamily sector refers to residential buildings with multiple units that are offered at reduced rental rates to low- and moderate-income tenants. These properties are often subsidized or regulated by government programs to ensure that rents remain affordable and accessible. The focus of affordable multifamily housing is to provide decent, safe living environments for individuals and families who might otherwise struggle to afford market-rate housing.
Multifamily Property Classifications
Residential multifamily properties are typically classified into three categories based on factors such as age, location, construction quality, and amenities. Understanding the distinctions between Class A, Class B, and Class C properties can help investors align their investment strategies with their risk tolerance, financial goals, and property management preferences. We take a look at each class below.
Class A properties represent the highest quality multifamily assets in a given market. These buildings are usually newer or recently renovated, boasting modern architecture, high-end finishes, and a comprehensive suite of amenities. Class A properties are often located in prime areas with excellent access to employment centers, shopping, and entertainment. Tenants in these buildings typically enjoy a luxurious living experience, which commands premium rental rates and attracts a more affluent demographic.
Class B properties are a step down from Class A in terms of quality, age, and amenities. These types of rental properties tend to be older, but are generally well-maintained and still offer a comfortable living environment. Class B properties might have fewer or more basic amenities compared to Class A, and are usually located in good overall neighborhoods. Investors often target Class B properties for value-add opportunities to upgrade rentability and increase cash flow.
Class C properties are characterized by older buildings that often require significant building renovations and upgrades. These properties typically have fewer amenities, if any, compared to Class A and B properties. Despite the potential for higher maintenance and management costs, Class C properties can offer investors higher cap rates and opportunities for substantial value creation through property improvements and revitalization of surrounding areas.
Multifamily Investing Strategies
Multifamily investing strategies encompass many approaches tailored to achieve specific financial goals within the real estate sector. These strategies often consider factors such as location, market demand, economic indicators, and growth projections. Investors continually analyze the risk-versus-reward dynamics, adjusting their strategies based on market conditions and long-term projections. The key to multifamily investing is maximizing returns through both rental income and property appreciation.
Top 5 Largest Multifamily Companies 2024
The multifamily industry is an important sector of real estate with many players. Top multifamily companies offer diverse living solutions with desirable amenities, that cater to the rising demand for both urban and suburban living.
Multifamily Rental Property Loans
Securing financing to purchase multifamily properties can be a much different process than getting a single family home loan. While a conventional loan will scrutinize the borrower’s creditworthiness and financial ability to repay the loan, larger multifamily loans are more dependent on the property’s performance. When financing multifamily rental properties, keep in ming the number of units: 4-units and under can qualify for conventional financing, but 5-units and above is considered a commercial loan.
Multifamily Rental Insurance
Multifamily insurance provides coverage for both landlords and tenants in residential buildings with multiple units. For landlords, a landlord insurance policy typically includes protection against property damage, liability claims, and potential loss of income. Tenants can benefit from having renters’ insurance, which covers personal property, liability for injuries or damages to others within their rented unit. Both types of insurance are essential for mitigating the financial risks associated with multifamily living, ensuring that both property owners and residents are protected from unexpected losses or damages.
Multifamily Rent Prices
Multifamily rent prices are influenced by a variety of factors including location, property size and amenities, local housing demand, and overall economic conditions. In urban areas and popular neighborhoods, rent prices tend to be higher due to increased demand and proximity to amenities and employment opportunities. Economic factors like inflation, income levels, and the availability of housing also play a significant role in determining rent prices. Additionally, trends in the real estate market, such as the rise of luxury apartments or increasing demand for affordable housing, can impact multifamily rent prices, making them a dynamic component of the housing market.
The #1 Rental Property Newsletter
Multifamily Rental Property News
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Marketing Multifamily Properties
Buy and Sell Multifamily Rental Properties
Buying and selling multifamily properties are rental real estate sales transactions that involve a combination of real estate investors and renters, both working together. Buying a multifamily property can be an exciting endeavor to grow your investment portfolio, while, selling a multifamily property can release tied-up capital in a property and unlock new levels of growth to acquire larger multifamily properties.
Multifamily Rental Listing Websites
Real estate listing websites that list multifamily properties streamline the buying, selling, and renting process. Multifamily real estate investors and tenants can review many properties in a short period of time from the convenience of their smartphone.
Multifamily Property Leasing
Multifamily property leasing involves renting out residential properties to multiple tenants on the same property, in order to generate investment income while also providing a supportive living arrangements for the occupants.
Rental Real Estate Agents
Rental real estate agents serve as essential facilitators of income property transactions. They possess and leverage their expertise to help property owners, tenants, and investors navigate the buying, selling, and leasing process.
Managing Multifamily Properties
Managing multifamily properties depends a lot on the age, size and market of the property. A newer duplex (2-unit) in a pricy suburban neighborhood might require minimal management efforts beyond normal maintenance and upkeep. Conversely, an older mid-rise apartment complex (100-unit) in an urban infill market will likely require a management team, dedicated maintenance personnel, and frequent attention to unit turnover and rent collection.
Multifamily Rental Property Law
Multifamily Rental Property Documents
Documents used in multifamily rentals are essential for managing tenant relationships and legal compliance. The cornerstone document is the residential lease agreement, which outlines the terms and conditions of the tenancy, including rent, duration, and policies. Additionally, various letters and notices, such as rent increase notifications, lease renewal letters, maintenance requests, and notices for lease violations or eviction proceedings, play critical roles in communication and record-keeping between landlords and tenants throughout the tenancy.
Multifamily Landlord Tenant Law
Multifamily rental real estate landlord-tenant law encompasses the legal framework that governs the relationships and interactions between landlords and tenants in properties with multiple residential units. These laws, which vary by state and locality, cover a wide range of issues including lease terms, security deposits, rent control, maintenance responsibilities, tenant rights, and eviction procedures. Designed to protect both parties, these laws ensure fair and equitable treatment, and provide mechanisms for resolving disputes.
Multifamily Rental Construction
Renovating Multifamily Rental Properties
Renovating multifamily properties involves both exterior and interior updates to enhance the building’s functionality, aesthetic appeal, and overall value. Exterior renovations can include landscaping, façade improvements, parking lot repairs, and updating common areas to boost curb appeal and property safety. Interior renovations typically focus on individual units, upgrading kitchens, bathrooms, flooring, and lighting to modernize the living space and meet current market expectations, thereby attracting and retaining tenants while potentially increasing rental income.
Multifamily Rental Property Maintenance
Maintaining multifamily properties is a vital aspect of property management, involving regular inspections, repairs, and upkeep of both individual units and common areas. This maintenance encompasses a range of tasks from routine activities like cleaning, landscaping, and servicing HVAC systems, to addressing specific repair needs of tenants. Effective maintenance not only ensures a safe and appealing living environment for residents but also plays a crucial role in preserving the property’s value and preventing more significant, costly repairs in the future.
Multifamily Rental Property FAQ
When is Multifamily Considered Commercial?
The terms “Multifamily” and “Commercial Real Estate” are sometimes believed to be different and mutually exclusive things. The reality is that Multifamily can be a type of Commercial Real Estate under certain conditions. Residential rental properties that are 2-4 units, are indeed considered as Multifamily (or Residential Multifamily). Once a residential rental property has 5 or more units, it then is considered to be a Commercial Multifamily property.
The biggest impact that this distinction has on investors is during financing. Financing a Triplex (3-Unit) can be done via a Conventional loan that is generally easy to obtain if a borrower has decent personal financials. However, financing a 5-Unit or 20-Unit apartment building falls under the commercial loan type that requires greater borrower requirements of the property.
Should Landlords Include Utilities for Multifamily Properties?
In multifamily rental properties, the decision to include utilities in the rent or have tenants pay separately can significantly impact both landlords and tenants. This choice is particularly important for this rental real estate asset class, as it affects everything from rental pricing and property appeal to utility management and cost allocation. Understanding the differences between these two approaches is crucial for making informed decisions that align with financial goals and property management strategies.
|Utilities Not Included
|Rental price is typically higher to cover utility costs, potentially simplifying budgeting for tenants.
|Lower base rental price, but tenants pay additional bills separately, offering more transparency in utility usage.
|Appeal to Tenants
|More attractive to tenants seeking convenience and all-inclusive billing; reduces the hassle of managing multiple accounts.
|Appeals to tenants who prefer to manage and monitor their own utility usage, potentially encouraging conservation.
|Increased responsibility for landlords in handling utility bills and potential risk of higher usage by tenants.
|Less administrative burden for landlords, as tenants handle their own utility accounts and payments.
|Costs are shared or divided among tenants, which can lead to potential overuse if not monitored.
|Clearer cost allocation, as tenants pay directly for their individual usage, promoting responsible consumption.
|Provides predictability in expenses for tenants; landlords can budget for average utility costs in the rent.
|Fluctuations in utility costs can affect tenants’ monthly budgeting; landlords have more predictable rental income.
More Types of Rental Real Estate
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