Apartment complexes, condominiums, duplexes, and lofts are just a few examples of housing types that fall under the umbrella term “multifamily houses.” Multifamily homes are a versatile and frequently more economical choice for many Americans who are living in urban areas or who cannot or do not like to reside in a single-family home. In 2021, the worth of multifamily lending exceeded 487 billion dollars due to the rapid expansion of the multifamily industry in previous years. The multifamily investment in the real estate market was larger than the office market in 2021, accounting for 42% of the entire U.S. market.
If you’ve been working in the real estate investing industry for some time, there’s a good chance that you’ve begun to consider multifamily investing. If so, you’ve probably read or heard about the many advantages that are available: Increased cash flow, simpler management, and large tax breaks. But if money is tight, you might be asking how to buy a multifamily property with no money. Investing in multifamily properties may seem out of your price range if you don’t have a sizable cash reserve.
And while it’s true that many real estate investing deals, including those related to multifamily investment properties, will be deprived of essential working capital if a suited deposit isn’t placed, that still doesn’t imply that you can’t buy multifamily real estate if you’re strapped on the deposit side.
You might even discover that the first lesson in your “Multifamily Investing for Beginners” program is a successful one by using your financing alternatives creatively. Here are seven tips to help you in this attempt, including how to buy a multifamily property with no money down.
Can you buy a multifamily property with no money?
You normally have two choices when purchasing real estate: pay cash or borrow money to fund the transaction.
Mortgages come in a variety of forms. You’ll probably need to put down some money as a down payment on a house if you decide to get a loan to buy it.
The minimum deposit payment you pay will vary depending on the type of mortgage you pick, and it will influence the conditions and interest rates that lenders will provide you (the typical down payment on a property is much under 20%).
Although it doesn’t necessarily have to come from your own savings account, this money needs to come from somewhere. Investors that put “no money down” on a multifamily property are simply utilizing little or no personal funds to pay the purchase’s initial expenditures.
There are various options to finance the acquisition of a multifamily investment property if you don’t have much cash on hand.
1. Hard Money
Hard money lenders, in case you’re not familiar with the concept, are characterized as independent individuals or smaller businesses that lend “hard money” to a borrower depending on the worth of a property, not the borrower’s credit score.
Although a hard money loan has far more onerous terms than a conventional mortgage loan, it isn’t named “hard money” because of its high-interest rate and origination fees. Still, since math is the foundation of hard cash. Does the loan-to-value ratio (LTV) of the property satisfy the requirements set forth by the hard money lender, which is ideally 65% or lower?
If it does, there’s a strong chance you’ll be able to make a purchase, especially if you did your research and identified a multifamily building that checks all the right boxes for a reliable source of cash flow. If not, it’s time to continue looking.
2. Repair Compensation
Investors sometimes ignore this tactic, but it can be an effective approach to raise money for the down payment on a multifamily property. This is how it works: After inspecting a multifamily property, you’ll prepare a list of the repairs that must be made before the sale is finalized. If the seller agrees to the transaction, you will then receive that money back at closing.
You then have two options:
You are in charge of the repairs. Although not the best option, if you have the knowledge and the time, this can work.
A better option is to have a group of contractors and/or home improvement experts on hand who you (or your partner) have previously worked with to undertake the repairs.
You can frequently get a reduction on the labor and material expenses of the repair, which is money you can use as your down payment, because you’ve given them consistent service in the past or will do so in the future.
Direct Investment
Not everyone desires to become a landlord in order to increase their real estate holdings. Fortunately, they can make indirect investments through platforms for crowdsourcing and real estate investment trusts (REITs).
With the use of online real estate crowdfunding platforms, real estate investors can pool their funds under the Jumpstart Our Business Startups Act of 2013 to purchase multifamily homes and other kinds of properties. Due to the platforms, regular investors now have access to real estate opportunities that were previously exclusively open to the very wealthy.
Companies known as REITs own a variety of properties, including residential complexes. Shares are available for purchase on the open market, and the corporation distributes the rent and earnings to shareholders. The business must annually distribute to shareholders at least 90% of its taxable income in order to be considered a REIT.
REITs are one of the better investment options for passive income investors.
House hacking
The term “house hacking” describes using real estate that you already own to make money. You might, for instance, use Airbnb to advertise your property or rent out your in-law suite.
Another choice is to rent out your primary residence and relocate to one of the apartments in the multifamily building you purchase. By doing it this way, you’d probably make more money than if you’d rented the apartment to a tenant.
Finally, if you have a single-family house, you might join the ADU trend. converted garage, a attached or detached home, or an interior renovation can all be considered accessory dwelling units. The rental revenue may be substantial. Homeowners can use personal loans, cash-out refinancing, or home equity to pay for a new ADU.
Property crowdfunding
Consider using crowdfunding to finance the purchase of a multifamily property instead of obtaining financing from a single lender. With crowdfunding, you can raise money by requesting a number of little investments from people as opposed to a single large one.
To launch a crowdfunding campaign, you don’t need any money; but, you do need a solid network and a compelling proposal. Since lenders are more likely to be concerned with the success of your project, you should be ready to persuade them of its viability. Although it could take a lot of commitment, the good news is that once your property is successful, investors will be more likely to recommend you to others and support your future endeavors.
Investigate Seller Financing
You might be able to avoid financing from a lending institution and instead obtain assistance from the seller if you don’t have the money for a down payment on a property.
There is no minimum down payment necessary for owner financing. There are various arrangements for seller financing, including:
• All-inclusive mortgage: In this type of loan, the seller gives credit for the whole amount of the home’s purchase price, less any down payment.
• Junior mortgage: The seller finances the remaining balance while the buyer borrows money to cover the difference.
• Land contracts: Until the buyer makes the last payment on the property and receives the deed, the buyer and seller co-own the property.
• Lease purchase: The seller agrees to sell the property to the buyer on the predetermined terms after the buyer has leased it from them for a predetermined amount of time. The purchase price may be deducted from lease payments.
• Assumable mortgage: If the lender agrees and the buyer is eligible, they may be able to take over the seller’s mortgage. Mortgages backed by the FHA, VA, and USDA are assumable.
Private Funds
Lenders of private capital are essential for more than only buying single-family residences. Private lenders can be a terrific method to continue forward on a development plan if you do not even currently have the money for a down payment. They can be especially helpful on the multifamily aspect of things, such as financing in multifamily units.
Similar to single-family homes, private lenders are not required to be affiliated with an investment company. You can find some of the greatest private money lenders in the market for you in your current social network. This covers relations, pals, medical professionals, coworkers, etc.
Why would a person in your network donate money to you? For people who contact you, the possibility of a better return than many are earning from their retirement account, supported by real estate, can make this a persuasive proposition.
Shares in equity
It differs differently from dealing with a private money lender to find equity share investors. You guarantee a consistent return for your investor when working with a private lender. However, when you work with an equity share investor, you’re offering them a part of the estate’s equity in return for the money required for a deposit on multifamily real estate.
As an illustration, suppose an equity share owner offers you $100,000 to use toward a multifamily building. Then, in return, you can give the investor a 40% portion of the property’s equity. This would enable your investor to get 40% of the property’s monthly cash flow as well as 40% of the price at which the property is ultimately sold.
The fact that investors are drawn to equities makes this a potent tactic. Additionally, this approach offers investors the option to produce both short-term and long-term cash flow, which you may use to persuade potential investors to contribute a down payment.
Benefits of Purchasing Multifamily Property
You should take the time to consider the advantages and disadvantages to determine if adding a multifamily property to your investment portfolio is good for you. Investors are drawn to these opportunities by the numerous advantages of investing in multifamily properties.
Recurring Revenue: One of the most notable advantages of this investment is the consistent monthly income that a multifamily property may generate. Deals that are financially smart have the potential to cover your monthly costs and put money in your pocket each month.
Revenue Diversification: A single-family rental property’s income will be lost while it is vacant. However, in a multifamily building, even if one unit is vacant, the remaining units will still bring in money, reducing the cost of the vacancy.
Low Maintenance: All units in a multifamily building can be serviced simultaneously for maintenance issues like roofing or central heating. You’ll be able to do this to save time, money, and labor costs.
Multiple Income Sources: In bigger multifamily properties, investors might create additional on-site revenue streams. Installing coin-operated laundry facilities or charging renters extra fees for parking or garage spaces will generate cash in addition to the monthly rent.
Performance-Based Financing: Instead of taking into account your own financial status, financing for multifamily properties is determined by the property’s performance. If you want to invest in real estate but don’t have an excellent credit score, this may help you.
Cons of Purchasing Multifamily Real Estate
Although purchasing and owning multifamily property has numerous advantages, it can also be more difficult than investing in a single home, so it’s critical to be aware of any potential difficulties.
Management: Managing a multifamily building can take a lot of work, particularly if there are more than 4 apartments. Instead of handling it themselves, many investors opt to hire on-site property managers or a property management firm. However, each of these solutions will incur additional expenses.
Higher Turnover: As opposed to the 5- to 7-year tenure of the typical single-family renter, tenants of multifamily properties typically occupy a unit for no more than two years. Due to the higher turnover of multifamily tenants, make sure to factor in the marketing expenses required to entice new tenants.
Tenants Mistreat Property: Since multifamily buildings often experience more wear and tear than single-family homes do, investors should plan on having to do more repairs in the interims between each tenant’s occupancy.
High Cost Of Maintenance: When significant problems occur in a multifamily building, more units will be impacted, necessitating more costly maintenance fixes. Investors should be ready for these costs if they ever arise because problems like plumbing or heating system failures will cost more to fix numerous units than they would cost to fix a single-family property.
Summary
Investors will need to consider their challenges and devise inventive solutions to overcome them in order to decide if investing in multifamily real estate is the correct choice for them. Reaching out to your network, researching hard money sources, and even figuring out the resale worth of lumber could lead you to multifamily investment opportunities you never imagined. Of course, any investing approach has advantages and disadvantages. However, multifamily property owners are far more likely to be successful if they are completely aware of what is in store for them.
Working together with 14th Street Capital will give you favorable access as a hard money lender to the thriving Montana real estate market. We provide you with the honesty and information required to thrive as an experienced hard money lender in Montana.