How to Buy Your First Multi-Family Apartment Building

Nov 13, 2017

Purchasing small multi-family apartment building has several benefits. A small multi-family apartment building, from five to eight units, is not only easier to finance, but you often only need a single investor to help you acquire the property.

And even though you may be a new investor, any mistakes are minimized by the size of the property. Thus, if you fail to fill vacancies or overestimate how long it will take to renovate the property, it will be easier to recover.

There will also be less competition when dealing with smaller investment properties. Instead of fighting with huge investment companies or partnerships, you’ll be able to go head to head with individual investors.

Plus, since you’re dealing with small apartment building owners, they are usually owned by one or two people, which means it’s easier to negotiate a win-win agreement. These owners are also less sophisticated, which means they will be more open to more creative financing options.

And because multi-family are smaller mom-and-pop-style apartment buildings whose owners are afraid to raise the rent, you can often find more profit potential with just a few minor changes. This, along with the general tendency for smaller buildings to have a higher cash-on-cash return, can make a significant difference to a newer investor.

How To Finance A Small Multi-Family Apartment Building

how to finance a small multi-family apartment building

Technically a 5-plex apartment building, unlike a 4-plex, is considered a commercial property. You can choose to finance your multi-family property through a bank, loan broker, or private loan.

The loan broker’s job is to shop your loan around to numerous banks until they find a bank that will accept your application and will give you a good deal. Because they get paid a commission when you receive a loan, they work harder to get your loan approved.

Smaller apartment buildings mean you are working with the seller face to face, instead of a huge corporation. This means you will have a better chance of using creative financing in instances where your credit isn’t credit, or the property would normally not be eligible for a loan.

Types Of Creative Financing Strategies

types of creative financing strategies

  • Seller-financing

The seller acts like a bank and provides you with a mortgage to buy the property. You pay them a down payment, as well as any monthly payments. A properly-structured contract protects both the seller if the event payment is not made on time, allowing the seller to foreclose on the property or collect the money owed.

Please note that using this tactic may be a problem if there is still a mortgage on the property, as some banks have a clause that the mortgage becomes due in full if there is a transfer of title.

  • Master Lease

A Master Lease is an easy way to get ownership of a property without having to deal with a mortgage or any private lenders. A master lease is essentially a lease with the option to buy.

The buyer receives what is called equitable title, which gives them responsibility for the property and allows them to handle any transactions.

You are required to cover any expenses incurred by the property, but you can also keep any profits accrued, and at the end of the lease, you have the option to purchase the property at the original price stated in the lease.

  • Wholesale

In wholesaling, the investor finds a great deal, puts it under contract, and then assigns the contract to another real estate investor, who pays a fee.

These are usually off-market deals that the investor presents to a carefully cultivated list of buyers. So although you will need to spend a great deal of time finding off-market deals and adding buyers to your network, the money you make can be used for a down payment on a building of your own.

If you’re truly interested in owning a commercial income property, you can be successful even if you need to start out small. Keeping the right mindset, increasing your knowledge of commercial real estate, and not being afraid to make mistakes are the key to success.

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