Multifamily Investing 101

Multifamily encompasses residential rental properties with two or more units. The sector is typically divided into small multifamily (2–4 units), mid-size apartment buildings (5–50 units), and larger apartment communities (50+ units). Properties with 5 or more units cross into commercial financing territory, which changes how they're valued and how they're underwritten.

Unlike single-family residential, multifamily is valued primarily as a business—specifically, as the present value of its income stream. That income stream is a function of occupancy, market rents, operating expenses, and the investor's required return. This is a meaningful distinction: the comparables approach that drives residential pricing is secondary in multifamily; income and expense analysis drive value.

CBRE's 2024 Multifamily Investor Survey consistently shows apartment demand supported by homeownership affordability constraints. When monthly mortgage costs for an equivalent home run 40–60% above market rents—as they did across many Midwest markets in 2024—rental demand is structurally supported regardless of short-term employment fluctuations.

Multifamily transactions are financed through agency debt (Fannie Mae, Freddie Mac), FHA/HUD loans, conventional commercial mortgages, debt service coverage ratio (DSCR) loans, and bridge loans for properties in transition.

Agency debt is available on stabilized properties with 90%+ occupancy for 90 days (typically). Loan-to-value ratios on agency products have ranged from 75–80% on acquisitions. Freddie Mac's Small Balance Loan program is particularly relevant for properties between $1M–$7.5M.

Bridge loans are common in value-add acquisitions where the business plan requires lease-up to stabilization before refinancing into permanent agency debt. The carry cost of bridge financing must be built into the pro forma—bridge rates typically price 200–400 basis points over SOFR.

Multifamily transactions involve terminology that bridges residential and commercial real estate. Understanding the vocabulary helps in both underwriting and negotiation.

A proper underwrite starts with the rent roll and ends with a sensitivity analysis on exit assumptions. Everything in between is verification.

Request 12–24 months of operating statements (T-12) plus the current rent roll. Compare in-place rents to market comps—this is where most value-add upside or risk is hiding. Verify occupancy trends: a property showing 95% occupancy on the rent roll may have achieved it through concessions that won't be sustainable.

Expense analysis is often where amateur underwriting breaks down. Management fees, maintenance, insurance, and real estate taxes are the four largest line items. Insurance costs have increased substantially since 2022 in many markets. Tax reassessment risk post-acquisition is real—many Indiana counties reassess at sale, which can materially change the underwritten tax expense.

The most expensive mistake in multifamily acquisitions is underestimating capital expenditure needs and then being surprised during hold. A value-add business plan built on renovation budgets from 2019 will fail in a 2024 construction cost environment.

Overestimating rent growth achievable through value-add renovation is a close second. Renovated units in a B-class submarket do not command Class A rents. The ceiling is set by employment, demographics, and competitive supply—not by granite countertops.

Exit cap rate assumptions deserve more scrutiny than entry cap rates. A property acquired at a 6.5% cap rate with an assumed 5.5% exit cap in Year 5 embeds a significant value appreciation assumption. If cap rates remain flat or expand, the return profile changes completely.

The 2021–2022 apartment development wave peaked in markets across the Sunbelt and created localized supply pressure. Midwest markets, including Indiana and Kentucky, saw more modest new supply additions and maintained stronger occupancy levels through 2024. According to CoStar, Indianapolis apartment vacancy held below 7% in most submarkets through Q3 2024.

Rent growth moderated from the exceptional 15–20% annual gains seen in 2021–2022. Midwest secondary markets settled into 2–4% annual effective rent growth through 2024, which is consistent with long-run historical averages. This is a normalization, not a deterioration.

Transaction volume nationally dropped approximately 60% from the 2021 peak as rate increases made deal math difficult. In Indiana and Kentucky, smaller assets (under $5M) maintained more consistent transaction velocity because private buyers and local operators remained active despite institutional capital pulling back.

In multifamily, broker relationships often determine access to deals before they reach the public market. Sellers of apartment properties in secondary markets frequently prefer discreet processes over broad LoopNet listings—they don't want tenants, employees, or lenders knowing the property is being sold until terms are settled.

A broker representing a buyer brings market context: what similar properties have actually sold for (not just what they're listed at), what financing is available, and what due diligence findings are common in the local market. On the sell side, a broker who maintains an active buyers list can execute faster and at better prices than a pure MLS-style listing approach.