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How to Get Started in Multifamily Investing

For many individual investors, graduating from single-family rentals to multi-family properties is the next step toward generating passive income and building long-term wealth.

Phoenix and its surrounding communities continue to attract investors wanting to buy in a market known for chart-topping rent growth, a balanced economy with a diverse employment base, property appreciation, and prices that are considered more affordable than many other markets.

While Arizona-based investors are active in the Metro Phoenix multifamily market, agents at Tru Realty also work with a number of out-of-state investors who tell us they feel priced out of their more-expensive markets. They want their investment dollars to go further, and their cash flow to begin sooner…investing objectives they can pursue more easily in Arizona than in their home states.

Multifamily Investing: Where To Begin

It’s easier than you think! Here are a few key steps to launching your investment portfolio.

Step 1: Know Your Budget

Whether you pay cash for a property, use funds from a 1031 exchange, or seek financing, knowing your true price point will ensure you are spending your time wisely on identifying properties that fit your budget.

If you purchase a duplex, triplex, or fourplex, you can use the same kind of mortgage used to buy single-family homes. While not all mortgage lenders or mortgage brokers work with multifamily buyers, many do. To save time and effort, ask your real estate agent for lender recommendations.

As an investor who will not live in one of the units, a conventional loan is your only option. VA and FHA loans are available when you plan to reside in one unit.

Multifamily properties with 5+ units fall under the commercial real estate category and must be purchased with commercial loans. These generally require larger down payments and more stringent underwriting rules.

Step 2: Get Pre-Approved

Before you begin your Metro Phoenix multifamily property search in earnest, you’ll want to nail down a loan approval from your lender. This ensures there are no surprises and gives you the confidence to know what down payment you will be expected to provide to secure a property.

While you could stop at getting a pre-qualification from your lender, providing the documentation to get pre-approved makes you a much stronger buyer. In a real estate market like Metro Phoenix, which is competitive for all property types, you’ll want every advantage you can get.

Step 3: Decide Your Strategy: Turnkey or Value-Add

Do you want a property that is already renovated or are you looking to add value to a property and increase its value? Much of the multifamily housing in Phoenix and surrounding cities were built decades ago. It’s common to find properties built in the ‘40s, ‘50s, ‘60s, and ‘70s.

Just as on the residential side, some multifamily buyers prefer a turnkey, remodeled move-in ready property and others want to roll up their sleeves (hire a crew) and remodel or improve a property in need of TLC.

A turnkey property should be easier and less expensive to manage. They are also more appealing to tenants thanks to new mechanical systems and modern appliances and finishes. A value-add property will be less expensive to purchase, with needs ranging from modernizing the appearance to a complete rebuild from the studs out.

Step 4: What is Your Ideal Tenant Profile?

Some multifamily investors begin by determining the tenant base they want to appeal to. One investor said he wanted to own in an area with tech-savvy tenants who could pay their rent via an app so he could self-manage his property and lower his operating expenses.

Other landlords are looking for the guaranteed rent provided by offering housing to tenants with Section 8 vouchers. The Arizona Department of Housing manages Section 8 programs, which provide rental payment assistance to qualified tenants. Landlords receive these funds directly from the program. There is a waiting list for tenants seeking a Section 8 voucher and tenants must meet guidelines to maintain their Section 8 status.

Step 5: Self-Manage or Go with a Pro

To increase their income potential and lower their operating costs, especially for two-to-four-unit properties, some investors choose to manage their properties themselves. If an out-of-state owner, this works best when they’ve found a local repair company or handyperson who can respond quickly when a repair is needed.

Many investors want to be as hands-off as possible. They don’t want to be involved with tenant screening, taking repair calls, or collecting rent. They want as passive an investment as possible. Metro Phoenix has a plethora of professional property management companies that can be contracted to handle every facet of the tenant cycle and manage repairs, etc., so all the owner has to do is check their bank balance every month.

If you have always wanted to invest in multifamily properties and are eyeing Phoenix as an ideal market, Tru Realty agents are well-versed in guiding both new and experienced investors through the process…and would be delighted to help you build your income-generating portfolio. Reach out today to learn more.


About the Author

Melanie Johnston is a real estate professional with a unique background that includes experience in journalism, public relations, and marketing. These skills allow her to create effective marketing campaigns that help her clients achieve their real estate goals. She can help you analyze your home or investment property in order to formulate a maximum return drawing from her own success with fix-and-flips and short-term rentals. From first-timers to investors looking for the right return on their money, Melanie can help you find the perfect fit for your lifestyle! Contact her at melanie@trurealty.com.

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