The Pros of Investing in Apartments Early
Looking for your first multifamily investment property? It pays to act sooner than later. Find out more in our guide.
- The Benefits of Investing in Multifamily Early
- Financing Options for First-Time Multifamily Investors
- Bank Loans
- Agency Loans
- HUD Loans
- Bridge Loans
- Some Calculators for Your First Multifamily Loan
- Multifamily Mortgage Calculator
- Loan-to-Value Ratio Calculator
- Debt Service Coverage Ratio Calculator
- Taking Your First Steps Toward Investing in Multifamily
- Investing in Multifamily Syndications
- Conclusion
- Related Questions
- Get Financing
Are you new to the commercial real estate investment game? Not sure where to begin? Don’t worry about it — this article was written for you…and any other people you might want to share it with.
You’ve probably heard that getting started in investing early is the best way to find success. It's true, and it's strikingly true with your first multifamily investment property.
The truth is that starting early can have a huge impact on your long-term wealth. When you’re 30 years old, for example, the difference between starting multifamily investment and waiting until you’re 40 can be enormous — even despite the ups and downs of economic cycles. Read on to learn more about why investing in multifamily today is the best way to build your wealth in the long run.
The Benefits of Investing in Multifamily Early
Investing in apartment buildings early can be truly advantageous. The most obvious benefit is the potential for high investment returns. While multifamily properties are generally more expensive than single-family homes, they provide solid, strong returns — even during recessions in all but a handful of cases. I wrote a whole article on multifamily versus single-family investment, though, so enough about that.
A huge benefit of buying your first multifamily investment property early is the ability to take advantage of compounding returns. Over time, small amounts of money invested into multifamily properties can grow exponentially due to the power of compounding returns. This means that the earlier you start investing in multifamily, the more wealth you’ll have in the long run.
Need an example for that? Allow me.
Let’s say you buy an apartment complex for $1 million. That sounds like a lot, I know — but realistically, with a great loan you’d only need to shell out about $200,000. You sell it five years later for $1.2 million. Honestly, it doesn't seem like a great return, but even with this conservative investment scenario, you went into a deal with $200,000 and walked out with double that, at $400,000. That is a great return, not to mention all the profit you got from your rental income during those five years.
Using your proceeds, you invest again. This time in two multifamily properties at similar amounts — say, $400,000 total for two properties worth $1 million apiece. If that appreciates in a similar way, you could walk away with $800,000 after a conservative gain on a sale. Next, you buy three or four properties. Rinse, repeat.
The later you get started, the less time you have to get further into the game.
Finally, investing in multifamily properties early can help you diversify your investment portfolio. One of the main benefits of apartment investing is how relatively low risk the asset class is. If the market crashes, that may well wipe out your 401(k) — but odds are, your apartment buildings will be doing just fine.
Financing Options for First-Time Multifamily Investors
I alluded to this a bit earlier, but the most important factor to consider when investing in multifamily is how you’re going to finance the property. If you go in all-cash, that may sound great — but you’re limiting your returns significantly. Getting financing with leverage is a key way of maximizing your returns. Fortunately, there are a variety of financing options available for first-time multifamily investors like you.
Bank Loans
Some of the most popular options for a first-time investor are bank loans. They may not always have the absolute best terms on the market, but you’ll have a much easier time finding a lender willing to work with you, even despite your lack of experience. There are some trade-offs here — loans are nearly always going to be recourse for a first-time investor. That means if you default on your loan, the bank can go after more than just the property to cover its losses.
Agency Loans
Agency loans are another great option. What do I mean by an agency loan, you ask? I mean loans backed by Fannie Mae or Freddie Mac. These financing instruments typically are non-recourse, come with leverage as high as 80%, and lock in a fixed interest rate for the life of the mortgage.
Fannie Mae is usually very willing to work with first-time investors, though it may require you to live near the apartment building — which most first-time multifamily buyers do — and that there’s a professional management company handling operations. Even if a borrower doesn’t tick all those boxes, Fannie loans are usually still possible if you get a waiver; it would just mean a reduced loan-to-value ratio.
Freddie Mac can be a little more hesitant. If you’re working with a management company, though, they may also offer a waiver, but it would mean more stringent requirements, like a lower LTV or a higher debt service coverage ratio.
HUD Loans
Loans backed by the Department of Housing and Urban Development are some of the most advantageous financing options out there in the multifamily world. Think 35-year fixed rate terms. Full amortization. And leverage can be up to 83.3% for market-rate apartment buildings or an incredible 87% for rental assistance properties.
Best of all, HUD loans have few restrictions on borrower experience, unless you’re getting a construction loan. What’s more, their liquidity and net worth borrower requirements are far more flexible compared to even agency loans. Biggest downside with a HUD loan is that it takes more time to get the financing, but for many, it’s well worth the wait.
Bridge Loans
This is the most expensive loan on the list, by far. Bridge loans are short term in nature, and generally they’re available for any income-producing asset that meets a lender’s standards — in other words, they aren’t based on your experience, credit score, or net worth.
Most bridge loans are interest-only and have a term of between six months and two years. They carry a pretty high interest rate, but they’re quick to close, meaning there’s far less waiting around for your money. LTVs can be up to 75% in a best-case scenario.
Some Calculators for Your First Multifamily Loan
We have a few calculators that may be of great help when you’re exploring those financing options, by the way. They’re on other pages throughout our site, but I’ve added a couple here to get you started.
Multifamily Mortgage Calculator
This one’s critical in understanding how much debt you can afford to take. Bring your amount, interest rate, term, and amortization in, and see how it plays out in terms of your monthly debt service costs.
Loan-to-Value Ratio Calculator
I’ve mentioned LTV once or twice in this article, and for good reason. It’s a crucial measure and often a hard limit lenders will set. That means if you exceed a specific loan-to-value ratio, you may not be able to get a loan. If you know a property’s value and the loan amount you’re hoping for, plug them in here.
Debt Service Coverage Ratio Calculator
I haven’t talked about DSCR a whole lot in this piece, but it’s important. Most lenders have pretty strict requirements in terms of what your property’s cash flows should be, relative to debt cost. Basically, they want to be sure your income from your apartment building is always going to be enough to pay them back.
Taking Your First Steps Toward Investing in Multifamily
So, how do you get started? First, get educated on the sector. You’re already here. That’s great — welcome. You’ve come to the right place. Go through our blog, our education pages, even our loan products. Our mission is to educate. But don’t just stop here, either. Check out Investopedia. Wikipedia. Market reports for your city. Property listings for your submarket. Even a podcast or two can’t hurt.
Basically, look at and listen to everything. And take notes.
The next step is to create a solid business plan. You should develop a plan that outlines how you’re going to finance the property, what type of renter you’d ideally like to target, and how you’ll manage the property.
Pro-tip: If it’s a five-unit apartment building and you’re pretty handy around the house, you might be able to handle most things yourself. But even so, it’s a lot of work. If this is just going to be your side gig, read up on best practices and be honest with yourself: Do you have enough time to be a good landlord all by yourself? If not, start talking to property managers.
The third step is to research multifamily properties in your market. The vast majority of first-time investors buy a property near where they live. That’s not a bad thing — quite the opposite, really — but don’t fool yourself into thinking you know everything about renting in your town or city. Study reports. Talk to an investment broker. Treat your home market like you’ve never been there. Be curious, and you’ll reap many rewards by overcoming assumptions that could sink you fast.
Investing in Multifamily Syndications
A less active way to invest in apartment investing is to get involved with a multifamily syndication deal. A syndication is a process where multiple investors combine capital to purchase an asset that may otherwise be out of reach — or too risky for them to go it alone.
There are plenty of advantages and drawbacks to multifamily syndication, but the gist of it is that it’s lowest cost but lower reward. If you join forces with 20 other investors to buy that $1 million apartment building in the earlier example, if all investments are equal, you’ll only reap 5% of the reward.
Still, if capital is the main issue and this is your best way to get on the multifamily investment ladder, do it. Just be sure you clearly understand how the proceeds of the investment will be distributed — how much of a cut you’ll get, essentially — to avoid any headaches later on down the line.
Conclusion
Investing in the multifamily sector is an incredibly powerful way to build long-term wealth, no matter when you pull the trigger on your first investment. The earlier you start, however, the more lucrative your investment returns will generally be.
You can almost think of it like that classic wheat and chessboard problem. In this context, investing early is like the full experiment, where one grain of wheat becomes 18 quintillion grains, when doubled for each of the 64 squares on a chessboard. Investing late is, in many ways, like halving the number of squares on the board — which ends you up with about 4.3 billion grains. Not bad, but many, many orders of magnitude lower.
Am I saying you’ll make $18 quintillion from a dollar invested in a multifamily property? Well, no. But the sooner you get involved, the more opportunity you have to reap exponential financial returns.
Oh, and if you need some help talking through the financing angle of your first multifamily deal, we can help you with that. Fill in that form below, and we’ll get you a whole bunch of quotes you can compare, free of charge — and we can definitely help out with any questions you’ve got.
Related Questions
What are the benefits of investing in apartments early?
Investing in apartment buildings early can be truly advantageous. The most obvious benefit is the potential for high investment returns. While multifamily properties are generally more expensive than single-family homes, they provide solid, strong returns — even during recessions in all but a handful of cases.
A huge benefit of buying your first multifamily investment property early is the ability to take advantage of compounding returns. Over time, small amounts of money invested into multifamily properties can grow exponentially due to the power of compounding returns. This means that the earlier you start investing in multifamily, the more wealth you’ll have in the long run.
Using your proceeds, you invest again. This time in two multifamily properties at similar amounts — say, $400,000 total for two properties worth $1 million apiece. If that appreciates in a similar way, you could walk away with $800,000 after a conservative gain on a sale. Next, you buy three or four properties. Rinse, repeat.
Finally, investing in multifamily properties early can help you diversify your investment portfolio. One of the main benefits of apartment investing is how relatively low risk the asset class is. If the market crashes, that may well wipe out your 401(k) — but odds are, your apartment buildings will be doing just fine.
You can almost think of it like that classic wheat and chessboard problem. In this context, investing early is like the full experiment, where one grain of wheat becomes 18 quintillion grains, when doubled for each of the 64 squares on a chessboard. Investing late is, in many ways, like halving the number of squares on the board — which ends you up with about 4.3 billion grains. Not bad, but many, many orders of magnitude lower.
Am I saying you’ll make $18 quintillion from a dollar invested in a multifamily property? Well, no. But the sooner you get involved, the more opportunity you have to reap exponential financial returns.
If you need help talking through the financing angle of your first multifamily deal, you can fill in a form to get a whole bunch of quotes you can compare, free of charge — and you can get help with any questions you’ve got.
What are the risks associated with investing in apartments early?
Investing in apartment buildings early can be a great way to build long-term wealth, but there are some risks associated with it. The most obvious risk is the potential for high investment losses. While multifamily properties are generally more expensive than single-family homes, they can still be subject to market fluctuations and economic downturns. Additionally, there is the risk of tenant turnover, which can lead to lost rental income and higher maintenance costs. Finally, there is the risk of not being able to find a suitable loan product for your investment.
It's important to do your research and understand the risks associated with investing in multifamily properties before you make any decisions. You can read more about the risks of investing in multifamily properties here. Additionally, if you need help finding a suitable loan product for your investment, you can fill out the form on our website and we can help you compare quotes and answer any questions you have.
What strategies can be used to maximize returns when investing in apartments early?
The most important factor to consider when investing in multifamily is how you’re going to finance the property. Leveraging financing is a key way of maximizing your returns. There are a variety of financing options available for first-time multifamily investors, such as conventional loans, Fannie Mae loans, Freddie Mac loans, FHA loans, bridge loans, construction loans, and mezzanine financing. Additionally, investing early is like the full experiment, where one grain of wheat becomes 18 quintillion grains, when doubled for each of the 64 squares on a chessboard. Investing late is, in many ways, like halving the number of squares on the board — which ends you up with about 4.3 billion grains.
What are the tax implications of investing in apartments early?
Investing in apartments early can have a number of tax implications. Depending on the type of investment, you may be able to take advantage of deductions such as depreciation, mortgage interest, and operating expenses. Additionally, you may be able to take advantage of capital gains tax deferral through a 1031 exchange.
Depreciation is a tax deduction that allows you to deduct a portion of the cost of the property over a period of time. This can be a great way to reduce your taxable income and increase your cash flow. Mortgage interest is also deductible, and can be a great way to reduce your taxable income. Operating expenses such as repairs and maintenance are also deductible, and can help reduce your taxable income.
Finally, a 1031 exchange allows you to defer capital gains taxes when you sell an investment property and reinvest the proceeds into a similar property. This can be a great way to defer taxes and increase your cash flow.
For more information on the tax implications of investing in apartments early, you may want to consult a tax professional. They can provide you with more detailed information and advice on how to maximize your tax benefits.
What are the best markets for investing in apartments early?
The best markets for investing in apartments early depend on your individual goals and risk tolerance. Generally, markets with strong job growth, population growth, and a healthy economy are good places to start. Markets with a high cost of living, such as San Francisco, New York, and Los Angeles, may also be good options, as they tend to have higher rental rates and more demand for rental units. Additionally, markets with a large student population, such as college towns, may be good options for investors looking for a steady stream of tenants.
For more information on the best markets for investing in apartments early, check out this article from Multifamily.loans.
What are the most important factors to consider when investing in apartments early?
The most important factors to consider when investing in apartments early are financing options and additional considerations. Financing options for first-time multifamily investors include traditional bank loans, FHA loans, and private money loans. Additional considerations include utility billing, contaminants/health risks, plumbing issues, roofing, wooden building elements, and insurance costs.