Quick Summary:

Small multifamily properties (5-20 units) are an ideal starting point for new real estate investors. They provide manageable risk, high potential returns, and flexible financing options, including conventional loans, seller financing, and master leases. By finding the right deals, building relationships, and understanding financing strategies, investors can successfully enter commercial real estate and build long-term wealth.

In the world of commercial real estate investing, there’s a common misconception that bigger is always better. 

Many investment groups push the narrative that you need to acquire massive 100+ unit complexes to generate significant profits. 

How to Buy Your First Multifamily Small Apartment Building?

• Small multi-family properties (5-20 units) often provide better investment returns than larger complexes, with less competition from institutional investors and lower capital requirements.

• Properties with 5+ units are valued based on Net Operating Income (NOI), allowing investors to significantly increase property value through strategic rent increases and improved management.

• Creative financing options like seller financing, master leases, and seller carry are more accessible with smaller properties, making it easier for new investors to enter the market.

However, this couldn’t be further from the truth. 

In fact, some of the most lucrative opportunities in real estate investment lie in smaller multi-family properties, specifically those ranging from 5 to 20 units.

This guide will work you through why properties with 5-20 units could be your perfect entry point into commercial real estate investing, covering their advantages, how to find the best deals, financing options, and key strategies for long-term success.

Why Start with Five Units?

Understanding why five units is the ideal starting point requires understanding the fundamental difference between residential and commercial property valuation. 

See, properties with four units or fewer are considered residential, while five units and above are commercial. 

This distinction has significant implications for property valuation and potential returns.

Now, residential properties (4 units or fewer) are valued primarily based on comparable sales in the area. 

However, commercial properties (5+ units) are valued based on two factors:

1. Comparable sales
2. Net Operating Income (NOI)

This dual valuation method creates additional opportunities for value creation. 

For example, let’s say you increase rents by $100 per unit over two years ($50 per year) in a five-unit building:

• Monthly increase: $100 × 5 units = $500
• Annual increase: $500 × 12 months = $6,000

Using a conservative 8% capitalization rate, this $6,000 NOI increase translates to a $75,000 increase in property value ($6,000 ÷ 0.08 = $75,000). 

This means that by just increasing your rent, you have also increased your properties value, this is very different from 4 units and below that are valued solely on comparable sales in the area.

Why Small Multifamily Properties Make a Smart Investment

Small multi-family properties, specifically those with 5-20 units, offer a sweet spot between residential and commercial real estate that many investors overlook.

When you’re just starting in multi-family real estate investing, smaller properties offer several distinct advantages that make them particularly attractive for newcomers.

Advantages of Small Multifamily Properties

1. Easier to Manage and Understand

Managing an 8-unit building is significantly less complex than handling a 100-unit complex. 

Small properties allow new investors to learn the fundamentals of property management, rental markets, and investment strategy without being overwhelmed.

2. Lower Financial Barriers to Entry

Smaller properties require less upfront capital, making them more accessible. 

While large apartment complexes often require millions in equity, small multifamily properties can often be acquired with tens or hundreds of thousands of dollars.

3. More Flexible Financing Options

When dealing with individual owners rather than large institutions, financing becomes more flexible. 

Many sellers are open to creative financing options, such as:

• Seller financing (where the seller acts as the bank)
• Master lease agreements
• Hybrid financing structures (combining traditional loans with seller carrybacks)

4. Manageable Risks and Mistakes

Every new investor makes mistakes. 

When errors occur in a small property, they are less costly and easier to recover from compared to large properties, where mistakes can lead to substantial financial losses.

Consider it a form of risk management: you’re limiting your potential downside while you gain experience.

Investment Benefits of Small Multifamily Properties

Beyond personal advantages, small multifamily properties offer unique investment benefits that make them highly attractive.

1. Reduced Competition

One of the most significant advantages is the reduced competition you’ll face when pursuing these properties. 

While institutional investors and large investment firms typically focus on bigger properties, small multi-family buildings often fly under their radar. 

This means you’re primarily competing with individual investors or small investment groups, creating more opportunities to find good deals.

2. Less Sophisticated Sellers

Many small multi-family properties are owned by individual investors or “mom-and-pop” operators rather than professional property management companies. 

These owners often manage their properties more casually and might not optimize their operations for maximum profitability. 

This creates opportunities for value-add investors who can implement professional management practices and improve operational efficiency.

3. Easier Negotiations 

When dealing with individual owners rather than institutional sellers, negotiations often become more straightforward and personal. 

There’s typically less red tape, fewer approval layers, and more room for creative deal structuring. 

This can lead to better terms and more flexible arrangements that benefit both parties.

4. Higher Potential Returns

On average, small multi-family properties can offer higher cash-on-cash returns compared to larger complexes. 

This is often due to their inefficiencies and the opportunity to implement professional management practices. 

Additionally, because these properties are often undermanaged, there’s usually significant potential for value appreciation through improved operations.

How to Find Great Small Multifamily Deals

Success in small multi-family investing largely depends on your ability to find good deals. 

There are two primary methods for generating deal flow:

1. Working with real estate agents 

2. Implementing direct mail marketing campaigns.

Working with Real Estate Agents

The key to working with agents is understanding that you’re not just looking for properties – you’re building relationships. 

First, clearly define what you’re looking for: 5-20 unit properties with value-add potential. 

This could include properties with below-market rents, management issues, deferred maintenance, or low occupancy rates. 

However, be clear that you won’t consider properties in extremely distressed areas or completely vacant buildings.

Start your search on commercial real estate platforms like LoopNet, but understand that the best deals often never make it to these public listings. 

When you contact agents about listed properties, focus on building relationships rather than just discussing the specific property. 

Your goal should be to position yourself as a serious buyer who agents will think of first when they get new listings.

The most valuable relationships are with agents who understand the small multi-family market and regularly deal with these properties. 

These agents often have “pocket listings” – properties that aren’t publicly listed but are available for sale. 

Building strong relationships with these agents can give you access to deals before they hit the market.

Implementing Direct Mail Marketing Campaigns

Direct mail marketing remains one of the most effective ways to find off-market deals. 

When done correctly, it allows you to bypass competition and connect directly with property owners who might be interested in selling.

Your direct mail campaign should focus on:

1. Targeting absentee and out-of-state owners first, as they’re often more motivated to sell due to management challenges
2. Using fresh, accurate mailing lists from reliable data providers
3. Maintaining consistent contact through multiple mailings over time (typically every 4-5 weeks for 3-5 mailings)

The key advantage of direct mail is that it allows you to circumvent real estate agents, potentially leading to better deals and more flexible terms. 

When owners respond to your mailings, you have the opportunity to build direct relationships and understand their motivations for selling.

How to Finance Your First Small Multifamily Property

There are two primary approaches: traditional financing and creative financing.

1. Conventional Financing

Conventional financing for small multi-family properties works similarly to residential mortgages, typically requiring:

• A 25% down payment
• Strong credit history
• Proof of income and assets
• Property documentation

You can pursue conventional financing through either local banks or loan brokers. 

Local banks offer the advantage of potentially more flexible terms and local market knowledge, while loan brokers can shop your loan to multiple lenders to find the best terms.

When working with loan brokers, remember they work on commission and therefore have a strong incentive to close your loan. 

They often have relationships with multiple lenders and can find creative solutions that might not be available through a single bank.

2. Creative Financing Options

Creative financing becomes particularly valuable when:

1. You lack sufficient down payment funds
2. Your credit history is less than perfect
3. The property condition makes conventional financing difficult

Here are four creative financing strategies to consider:

1. Seller Financing

The property owner acts as the bank, holding the note while you make payments directly to them. 

This can be particularly effective with free-and-clear properties where the owner wants regular income rather than a lump sum.

2. Seller Carry

In this hybrid approach, you might get a conventional loan for 75% of the purchase price, make a 10% down payment, and have the seller carry a note for the remaining 15%. 

This can help you acquire properties with less money down while still satisfying bank requirements.

3. Master Lease

This option gives you control of the property without actually purchasing it initially. 

You lease the entire property from the owner with an option to buy, allowing you to benefit from cash flow and appreciation while building up resources for an eventual purchase.

4. Wholesaling

While not a financing method per se, wholesaling can help you build capital for future purchases. 

You find and contract properties, then assign those contracts to other investors for a fee, typically $25,000-$30,000 per deal.

Keys to Success in Small Multi-Family Investing

To succeed, you need:

1. Ambition

Your level of ambition directly correlates with your potential for success. 

The more ambitious you are, the more likely you are to push through challenges and seek out opportunities.

2. Persistence

Real estate investing is a marathon, not a sprint. The ability to persist through challenges and continue learning is crucial for long-term success.

3. Specialized Knowledge

The more you understand market dynamics, financing, deal structuring, and property management, the better equipped you’ll be to capitalize on opportunities.

Conclusion

Small multi-family properties represent an excellent entry point into commercial real estate investing. 

They offer a perfect balance of manageable risk and significant upside potential, particularly for newer investors. 

By focusing on properties with 5-20 units, you can build a solid foundation in real estate investing while developing the skills and experience needed for larger investments in the future.

Remember, as Sir Richard Branson says, “Brave people don’t live forever, but cautious people don’t live at all.” 

Take that first step into small multi-family investing, but do so with knowledge, preparation, and a clear strategy for success.

Whether you’re looking to build long-term wealth, generate passive income, or launch a career in real estate investing, small multi-family properties offer a proven path forward. 

The key is to start with the right property size, implement effective deal-finding strategies, and utilize appropriate financing methods for your situation.

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About the Organization:

Legacyalliance is a trusted real estate advisory firm offering guidance on small multifamily property investment, financing solutions, and strategic deal-making. We help investors make informed decisions, maximize returns, and grow their real estate portfolios professionally and compliantly.

FAQs

What is a small multifamily property?

A small multifamily property typically has 5-20 units. These properties are valued based on Net Operating Income (NOI) and offer a balance between residential and commercial investment advantages.

Why should I start with a 5-unit property?

Properties with 5+ units are considered commercial, allowing value creation through rent increases and improved management, unlike residential properties with 4 units or fewer that are valued solely on comparable sales.

What are the advantages of small multifamily properties?

Small multifamily properties are easier to manage, require less capital, face less competition, allow flexible financing options, and provide opportunities for higher cash-on-cash returns.

How do I find small multifamily deals?

Deals can be found by building strong relationships with real estate agents who specialize in small multifamily properties or by running direct mail campaigns targeting absentee and motivated property owners.

What financing options are available for small multifamily properties?

Financing options include conventional loans, seller financing, seller carry (hybrid), master lease agreements, and creative strategies such as wholesaling to build capital.

How can I succeed as a new small multifamily investor?

Success requires ambition, persistence, specialized knowledge of market dynamics, financing, deal structuring, and property management to capitalize on opportunities and minimize risks.

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