Real Estate Investing 301: Large Multifamily Buildings, Monopolizing Your Investment

A Beginner’s Guide to Large Multifamily Buildings

Congrats on making it to the final article in our series! So far, we’ve covered how to start building your investment portfolio with single-family homes and then move on to small multifamily buildings. Today, we’re stepping up to a whole new level: large multifamily buildings (LMFs).

What is a Large Multifamily Building?

A large multifamily building is any property with 5 or more units, though many LMFs have a lot more. These buildings are very different from smaller properties, especially when it comes to financing. Because they’re larger and more complex, lenders treat them as commercial properties, which means you need a commercial loan to buy one.

Key Differences Between Small and Large Multifamily Buildings

Here are some of the major differences you’ll notice when comparing small multifamily buildings (SMFs) to large multifamily buildings (LMFs):

1. Size and Cost
   

• LMFs are much bigger and more expensive to buy than SMFs.

• They have more residents and more things to maintain, fix, and manage.

2. Economies of Scale
   

• With more units, LMFs often benefit from economies of scale. This means you can save money by buying supplies in bulk or managing multiple units at once.

3. Staffing Needs
   

• Running a large property typically requires dedicated staff to handle leasing, maintenance, and other day-to-day operations.

How LMFs are Valued

One of the biggest differences between small and large properties is how their value is determined.

• For smaller properties, like single-family homes, the value is often based on how much similar homes have recently sold for in the area.

• But for LMFs, the value is determined by two key things: Net Operating Income (NOI) and Capitalization Rate (Cap Rate).

Here’s a quick explanation:

• Net Operating Income (NOI) is the total income the building generates after subtracting expenses.

• Cap Rate is a percentage that helps estimate the potential return on investment.

The formula for calculating the value of an LMF is:

Value = NOI ÷ Cap Rate

For example, if the building generates $100,000 in NOI and the cap rate is 10%, the value of the property would be $1,000,000.

Financing LMFs: What You Need to Know

When it comes to financing large multifamily buildings, banks don’t focus as much on your personal income. Instead, they look at the building’s financials—how much money it’s making, its expenses, and its overall condition.

Your personal credit still matters, but the financial performance of the building is the main thing lenders care about.

Loan Terms for LMFs

Loan terms for LMFs can vary, but here’s what to expect:

• Down Payment: You’ll likely need to put down between 20% and 35% of the property’s purchase price, or even more.

• Loan Length: Loans may be amortized over 10, 20, or 30 years, but the full balance could be due in 3, 5, or 7 years. Some lenders also offer interest-only payments for the first few years, meaning you only pay the interest before paying off the principal.

Final Thoughts

Large multifamily buildings open up a world of opportunities for real estate investors, but they are more complex than smaller properties. While we’ve only scratched the surface in this article, we hope you now have a better understanding of how LMFs work and how they differ from smaller investments.

Stay tuned for more insights in our upcoming posts! In the meantime, feel free to check out this article and other resources on our website.