Multifamily investments cover residential properties with 2 or more units, primarily acquired for the purpose of generating rental/passive income.
Because multifamily investments are rarely owner-occupied, banks usually demand more stringent lending requirements, including larger down payments and higher interest rates. For properties with 4-units or less, a down payment of 15-20% is often required. For properties with more than 4-units, a down payment of 25-30% is required. Interest rates are about an eighth of a point higher than rates on residential properties.
The idea is that tenant-occupied properties with an absentee owners are not as well maintained as owner-occupied ones. Additionally, owners of multifamily investments typically deal with issues such as evictions and tenant misuse of the property, therefore degrading the lender’s asset collateral.
A major concept in real estate investing is that of cap rate, which calculates the rate of return on a given investment property given its value and the net operating income (NOI).
Capitalization Rate = Net Operating Income/Value
The major advantage of buying multifamily properties is having someone else (the tenant) pay the owner’s mortgage through monthly rents. In many instances, owners may collect more rental income than their loan payments and operating expenses, resulting in positive cash flow. On the flip side, a poorly managed multifamily property with high tenant turnover, vacancy rates, expensive maintenance, or an unscrupulous property manager can result in negative cash flow.