For real estate investors looking to expand into small multifamily, assessing potential 5-8 unit buildings involves balancing granular property metrics against local market conditions. Savvy buyers consider both near-term risks around stabilizing occupancy alongside long-term investment and cash flow goals.
Due Diligence Mitigates Surprises
“It’s vital to get a comprehensive look at the property and evaluate all scenarios upfront before purchasing any building,” advises seasoned investor Emma Watkins. “Completing detailed due diligence reduces the chance of negative surprises after closing.”
Watkins suggests analyzing three core areas:
1. Building Attributes and Purchase History
2. Location Dynamics and Comparable Sales
3. Financial Returns and Renovation Costs
Assessing The Building’s Characteristics
Start by confirming fundamentals like total units, square footage, year built, occupancy history and ownership tenure. More units offer additional income streams but also increase operational costs.
Evaluate the property condition beyond just visible issues. Assess windows, insulation, piping and wiring for efficiency upgrades balancing utility costs and tenant comfort.
Cross-check advertised rents and expenses against past leases and utility bills for accuracy, not just seller estimates. Review any pending repairs required to comply with building codes.
Reviewing Location Influences and Recent Sales
Experienced investors also evaluate area job growth, transportation access, school rankings, recent comparable sales prices and local policy changes.
Proximity to essential services and commuter routes attracts residents. Meanwhile zoning changes or new taxes hinder returns.
Target submarkets with sustained rent growth and low volatility. Suburban locales often expect more amenities versus urban settings compensating through location.
Forecasting Returns and Budgeting Improvements
Look beyond asking price to realistically model investment returns and improvement budgets. Consider long-term goals before structuring debt and required equity.
“A property meeting both cash flow and appreciation objectives with limited renovation needs often merits becoming more flexible on your acquisition price,” Wade notes.
Still most operators budget 1-3% of property value for near term upgrades and maintenance annually.
Let’s look at some attractive scenarios below.
Northwest | Seattle-Portland
Property: 7-unit apartment building
Description: The property consists of (4) one-bedroom units, (2) two-bedroom units, and 1 three-bedroom unit. It is a well-maintained Class B building with three stories built in 1990. The current income is $120,000 per year with a sales price of $1,500,000. With minor upgrades, the proforma income is projected to increase rents by 5% to nearby comparable properties.
Southwest | Phoenix Metro
Property: 6-unit multifamily property
Description: This Class C property offers (6) two-bedroom units in a two-story structure. The property has been recently renovated and currently generates $72,000 per year. The asking price is $900,000 with some flexibility. The area will approved for redevelopment by the city which will improve its demand and the ability to raise rents. Tenants are on one-year leases.
Southeast | Charlotte, NC
Property: 5-unit multifamily property
Description: The property features a mix of (2) modernized one-bedroom units and (3) two-bedroom units in a two-story Class C building with high ceilings within 5 miles of the beach. It has a historic architectural design and generates $90,000 per year. The selling price is $1,250,000. The property cash-flows as is.
Texas | DFW Metroplex
Property: 8-unit apartment complex
Description: This Class A property features (8) two-bedroom units in two separate buildings. It is a new construction with modern amenities, generating $192,000 per year. The selling price is $2,400,000. The property currently cash flows positively and also has the potential for high appreciation due to local economic growth.
Northeast | Tri-state area
Property: 7-unit multifamily property
Description: The property consists of (3) one-bedroom units and (4) two-bedroom units in two separate buildings on the same parcel lot. It generates $126,000 per year and is selling for $1,600,000. Tenants are long-term with typical maintenance every year, Roof and a/c units replaced two years ago.
These scenarios provide new small apartment building investors with an overview of the unit mix, property class, building characteristics, current income, selling price, and the potential for cash flow and property value appreciation through renovations or rent adjustments.
When evaluating a first small multifamily purchase like a 5- to 8-unit building, investors should plan for and prepare substantial down payments in the 25-35% range at a minimum. Securing commercial loans for a 5+ unit asset class requires this amount of investor commitment from all commercial lenders.
How to Finance Your Small Multifamily Building
Unlike financing a duplex or 4-plex via residential programs allowing 5-10% down as an owner-occupant, scaling up to the commercial multifamily loan category changes lending standards. Experienced brokers advise new investors not to count on finding low down payment from any reputable bank, credit union, or mortgage broker.
Most owners utilize commercial lenders familiar with 5-8 unit multifamily financing dynamics which include:
– 75% Max LTV Ratios
– Minimum 660 Credit Score
– 5/1, 7/1 and 10/1 ARM Loan Terms
– 25 Year Amortizations
– Debt Service Coverage > 1.25
– Loan approval based solely on the property’s rental income or proforma if empty.
Conducting quality due diligence enables properly matching financial expectations to market realities when buying the first small income-producing asset.