How to Buy a Small Multifamily Rental (2-4 Units) in 2025

0:00Duplexes, triplexes, and quadplexes are the best real estate investment for anyone looking to build wealth and achieve financial freedom in 2025. And today I will share the unique advantages of small multifamily properties in the current market that we're in. I'll outline step-by-step exactly how to find and buy one, and I'll share a few mistakes you need to avoid if you're going to invest in this asset class.

0:30Hey everyone, welcome back to the BiggerPockets Real Estate Podcast. I'm your host, Dave Meyer, head of real estate investing here at BiggerPockets. And on this show, we help you achieve financial freedom through real estate investing. Today on the show, we're talking about one of my all-time favorite topics and favorite strategies, particularly for new investors, small multifamily properties. When I say small multifamily, I'm specifically talking about properties with two to four units. These are, like I said, duplexes, triplexes, fourplexes. The reason I like them so much is that they provide more economies of scale than just your basic single family homes, but they are easier to acquire and they are less risky than larger multifamily buildings.

1:18And I think this sort of makes them a perfect sweet spot for almost every investor, whether you're early career or you're more experienced and are just trying to scale a bigger portfolio. So in this episode, what we're going to do is I'll start by explaining the unique advantages of two to four unit properties, especially in the current high home price, higher interest rate environment that we're currently in. Next, I will walk through a five-step blueprint of how to find, analyze, finance, and then close on small multifamily properties right away. And then I will share some common mistakes that I see a lot of new investors make with these types of properties and we'll get them out in the open so you can hopefully avoid those mistakes.

2:05And by the end of today's episode, you will have a complete roadmap for buying your first small multifamily. Let's get to it. So let's just start a little bit with some context. So two to four unit properties have always made a lot of sense to me. That's how I got started. I still like buying them. They're still the thing that I prefer to buy. If I could just pick and design a deal out of nowhere, I would buy two to four units all the time because I just think they serve this sweet spot. They allow you to get residential debt. I find them a little less risky than single family homes, which we're going to talk about in a minute.

2:41More and more two to four unit properties are starting to hit the market. I've been getting calls from real estate agents, from wholesalers, people who really do want to start moving these things. And that honestly hasn't happened in a couple of years, which is why I wanted to do this episode because it's got me pretty excited about this asset class again. And I want to go into this a little bit and just take a minute to explain the differences between small multifamily and let's just say single family investments and why I prefer two to four units if I have the option. Number one is multiple income streams.

3:15This is just a risk mitigation tactic because if you buy a triplex and you have three different tenants paying you rent, if you have a vacancy in one unit, you still have the other two income streams coming in. And of course, there can be situations where that doesn't happen, but it does offer some risk mitigation as opposed to a single family property where you just have that one tenant and if they stop paying or you have a hard time finding a new tenant when they move out, that means you can lose 100 % of your income and that can hurt. So small multifamilies allow you to have those multiple income streams and to protect you a little bit against vacancies.

3:56The second thing I really like about this asset class is economies of scale. Basically, think about it this way. For a house that's 3 ,000 square feet, you could have a single family home that has one tenant, one income stream, And it also has one roof. In a lot of cases, it also has one HVAC system. It has one hot water heater, one foundation, right? One driveway, one garage. Well, if you have a two unit or a four unit, a lot of times you get those economies of scale. You can have two units that are still 3 ,000 square feet, but they're probably bringing in higher rent because generally speaking, two 1 ,500 square foot properties are going to bring in more rent than one 3 ,000 square foot property.

4:40Might not be true everywhere, but that is true most places. And then you have still one roof. And so the expenses for that roof, for that HVAC, for lawn care, get split between two units. And that can lead to efficiencies in both your repairs and maintenance and management costs. And you just don't get that if you're buying multiple single family homes. The third thing I love is just scale. We just talked about economies of scale, which is kind of like how efficiently a lot of your repairs are and your maintenance. But also you just get to scale to more doors, which is not my favorite way of measuring your property, but it does allow you to pick up more units.

5:18It allows you to bring in more revenue, which is the thing I do really care about. And so small multifamilies, if you were just going to go out and buy one property this year, probably means that you are going to be able to generate more revenue from the one property you buy this year, as opposed to if you bought a single family home in a similar neighborhood. And that can just help you scale your portfolio faster. So fourth thing is the option to owner occupy. This is an awesome thing that you can do. We have tons of resources on BiggerPockets you can check out. But basically what I'm talking about is house hacking.

5:53If you want to and are willing to live in one of the units and buy a duplex, a triplex, a fourplex, there are tons of advantages. You get better debt. It's a great learning experience. The underwriting is a lot easier. And so that ability to live in one of the units and rent out the others is something I love about small multifamily. It gives you just a lot of flexibility, especially early in your investing career if you're sort of going with the house hacking approach, which is an amazing approach, you should definitely think about that. And obviously, owner-occupied doesn't work if you're buying single-family rentals.

6:27That just becomes your primary residence, right? So if you want to do an owner-occupied rental strategy, you got to buy a two-unit, a three-unit, or a four-unit. So those are some of the comparisons for small multifamilies compared to single families. But what about larger stuff? Because I can imagine people are thinking, yeah, I'm sold on the ideas of scaling and multifamily, but why stop at four units? Why not go up five, 10, 20 units if you could just do that? The first, and I think the most important reason is financing. When you get above a four unit property, so anything five units or bigger, you get commercial debt, and that is just a whole nother ballgame.

7:10It is much riskier debt. It is typically variable rate debt. It usually has a balloon payment. And if interest rates and the interest rate environment shift in a way that you don't like, it could put you in a really bad spot. And the risk of interest rates changing is much, much, much smaller in residential debt because almost everyone who buys a two to four unit property is probably going to buy it with fixed rate debt. That's the same kind of debt you get on your single family home or your single family residents, that interest rate is locked in for 30 years. So even if the interest rate environment changes, you're still paying the exact same amount.

7:50And that type of debt structure adds a level of stability and risk mitigation to your portfolio that I personally really value. I think it's super important because if I'm going to invest for the next 10, 20, 30 years, when I buy a property, I hope to hold onto it that long. And if I don't have fixed rate debt, I'm not that confident I'm going to be able to hold onto it. But on two to four units with that fixed rate debt, I feel very confident. So those are the many reasons I absolutely love two to four unit properties and why I think almost every investor should have these in some level in their buy box.

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11:53Welcome back to the BiggerPockets podcast. I'm Dave Meyer, giving you my ultimate guide to buying a small multifamily property in 2025. Before the break, we went over why I love small multifamilies. Now it's time to turn our attention to how do you actually pull this off? And I've got a five-step buying process for you. Step one is going to be doing your market research and setting your goals. Because as I say on the show, no matter what strategy you're looking for, what your buy box looks like, before you start looking at properties, you need to know what you're actually trying to accomplish.

12:31If you are trying to get rich quick, you might want to be in a different industry. But what I really mean is, are you looking for something time intensive? Are you looking for something that you could add value to? Are you looking for something that's going to be pretty easy for you to manage and isn't going to take a lot of time. I know it's not as fun as going on Zillow and clicking around and looking at everything, but I promise you it will make your entire investing process easier if you just spend a couple of minutes trying to figure out what is realistic for you and what's going to work well with your personal circumstances, your goals, and your lifestyle.

13:06Once you've done that, it's time to figure out if your local market is going to offer you the type of deals that are aligned with your goals and sort of the vision that you have for yourself. There are certain markets, a lot in the Midwest, in the Northeast, that just have tons of small multifamilies. Like there are just duplexes, there are fourplexes all over the place. It's probably gonna be pretty easy to find them and they're probably relatively affordable. Meanwhile, there are some markets where they just don't build this kind of stuff. And so you have to ask yourself, in those kinds of situation, do I want to do this strategy?

13:42Because sure, I love small multifamilies, but maybe it's not right for you if it's just not in your own backyard. Or do you want to go to a market and maybe invest out of state to find these kinds of properties? Maybe you do want to invest somewhere in the Midwest or in the Northeast because you're sold on the concept of them. This is also true about price, right? Because certain places, maybe they do have duplexes, but they're insanely expensive and the numbers don't make sense. And so So you need to decide if small multifamilies work in your market for you, and if not, where you're going to actually go buy them.

14:15If you are sold on the idea of small multifamily and they don't work in your own backyard and you're thinking about doing this long distance, some of the places I would just check out are Michigan, Indiana, Ohio, Pennsylvania, New York, Iowa, Kansas City. these places are relatively affordable and have a lot of this kind of inventory. They make a lot of sense. I would check those out. If you want to look for new construction, like I just mentioned, there are places where they're doing build to rent, where you can also find these things. On the Cashflow Roadshow, we just went and saw some build to rent places in Indianapolis that were pretty attractive.

14:57I see these kinds of things in Texas. I see them in Oklahoma. I see them in Tennessee right now. So those are some places you can check out if it's not going to work in your own backyard. All right. Once you figure out that your goals and whether it's going to work in your market, what market you want to invest in, you move on to step two, which is financing. And as I said before, this is where small multifamily really shines in my perspective because up to four units, again, you qualify for residential financing. So if you are going to just buy this as a rental property, you're not planning to house hack and live in it, you can put 20 to 25 % down for these types of properties, which is an affordable down payment from an investor perspective.

15:42Some commercial loans can be higher. You typically get a fairly good interest rate, and you are getting that fixed rate residential debt that I just love so much. And so that's what I recommend people looking at is just try to find a conventional mortgage. You don't need to do anything fancy with a two to four unit property. Just go out and apply for a regular mortgage. The thing I love about this is that there's nothing complicated about it. Go get conventional loans. Now, if you are going to do house hacking, that actually opens up even more beneficial things because you can get, for example, an FHA loan, which allows you to put as little as 3.5 % down if you live in one of these units.

16:24You can also get conventional loans where you put 5 % down. So obviously for newer investors or people who have capital constraints, this might be a way for you to buy four units putting 5 % down. That is truly an amazing way to get into real estate. Again, this is one of the ways I started is the way that so many people start is by doing this house hacking strategy. Now, of course, not everyone can afford 20 % down or if you're not willing to own or occupy, then that's when you could get a little bit more creative. And there's nothing wrong with that. you can look for seller financing because at least in my experience, we're starting to see more and more sellers willing to carry notes and do seller financing.

17:04I want to caveat and say that seller financing is not easy. I know there are a lot of people on social media who go out and say like, oh, just do seller financing. Most people don't want to do seller financing. It is not like the easiest thing to find, but if you can find it, they're great. Like it can be a really good thing to do. So that is definitely something to consider. And then the last thing is just partnerships. I know a lot of new investors overlook this and say, I don't want to partner. I want to own it alone. I'm going to tell you a little secret about this industry. Pretty much everyone partners all the time, even experienced investors.

17:38Partnering is just a reality of real estate investing. Maybe later in your career, you partner less so that you own things outright and you do risk mitigation. But if you're trying to get into it and you know someone who has capital, who wants to be in this, who understands the business, who you have a good relationship with, consider partnering. I partner on a lot of deals. I know tons of experienced investors who partner on every single deal that they do. This is just how it works. Don't overlook this strategy if you're trying to get into the industry. So those are the financing options. Just as a reminder, if you have the capital saved up right now and you're not going to own or occupy, my number one recommendation, just do a conventional mortgage.

18:17It's boring, but it's going to work. If you're going to own or occupy, see if the low down payment options work for you. And if you don't yet have enough saved up, consider seller financing or partnership options, because those are ways that you might be able to get into the industry right now, as you are saving up money and building up capital to maybe purchase other properties in the future. So that's step two, just as a reminder, step one was figure out your goals in your market, making sure those are aligned. Step two was figuring out your financing, which we just talked about. Step three, this is where it gets a little fun.

18:50You start looking for properties and doing the analysis. Maybe you think I'm crazy. I actually think this is fun, but it's also where a lot of investors start to go wrong. People fall in love with properties. They look at it emotionally before they actually run the numbers, but you have to have a systematic approach to analyzing deals if you are going to be a successful real estate investor. Now, how you actually go and look for properties is really up to you. But in this new market that we're in, where there's more inventory coming on the market, my recommendation, first step, just go to a real estate agent.

19:28Again, all my advice is really boring. Use a conventional mortgage, use a real estate agent. But this stuff works. We are no longer in this era of three years ago when nothing was on the market and you had to do off-market deals. Now, there are pros and cons of this because prices are falling a little bit. there is more risk in the market, but it also means that there are more deals on the market. And to mitigate those risks of prices going down, take advantage of what the market is giving you. And right now, on-market deals are coming back, and I think that's going to just accelerate into the future.

20:02So there are tons of deal-finding strategies if you want to do off-market deals. There's tons of podcasts we have with Henry Washington on where he talks about how he finds off-market deals. That's awesome. But for most people, honestly, I think look at on-market deals right now, you're going to be able to find two to four units. And as we go into the end of 2025 into 2026, I think there's just going to be more and more of those deals. So once you start getting those leads in and you're seeing these properties, whether it's on Zillow or your agents sending them to you, and you're seeing two to four units, you need a process for going through and figuring out which of all these deals you're actually going to buy.

20:42Now, what I recommend to people, the easiest thing to do is just use the BiggerPockets calculators. You absolutely could build your own spreadsheet if you want to, but we have calculators on BiggerPockets you can use, the rental property calculator. They are meant to work with these two to four unit properties, and you can easily, in a matter of minutes, maybe the first time you do it, it might take you 20 minutes or 30 minutes. But once you get good at this, it's going to take you probably five to 10 minutes to analyze a deal. And that's super important because my advice about finding deals, especially in the kind of buyer's market we're in today, is to analyze a lot of them.

21:20You want to analyze five deals, 10 deals, 20 deals easily, maybe 50 deals, maybe 100 deals. I will analyze as many deals as I need to until I find the ones that work. The only way that you understand what's a good deal and what's a bad deal in this market is by analyzing a ton of deals. If someone sends you a duplex and it's the first deal you've ever analyzed and they say, is this a good deal? You'll be like, I don't know. It's just a bunch of numbers on a page. But if you had analyzed 30 deals up to that point, you could say, actually, this deal is not great. The cash on cash return, the overall expenses are way higher than the other deals I've been looking at.

22:01I'm going to pass. Or after 40 deals, you're going to say, whoa, I have double checked my numbers and I have run this through the calculator. And this deal is rock solid compared to everything else that I have looked at. This is the one that I am going to buy. And that's why I was saying that it's so important that you have sort of a systematic way of analyzing deals because you need to be able to compare apples to apples. You need to look at one deal next to the other one to be able to say, this one is better than that one. So many people send me two different listings on Zill and they're like, which one's a better deal?

22:37Like, what are the numbers? What's the return? Like there is math that you need to be doing on every single deal and the math needs to line up. How does cash on cash on property A compared to property B? How does the appreciation compare on property A to property B? What are the risks on property A compared to property B? That's why either using the Bigger Pockets calculator or building a spreadsheet that you can scale on your own is so important. And I know there are a lot of metrics out there. I wrote a whole book on how many metrics there are about real estate investing. But if I were you, I would basically want to focus on two or three things.

23:16Number one is your return on equity or your cash on cash return. Personally, I like return on equity. Other people use cash on cash return. They're pretty similar. But what I want you to do is in this market environment that we're in in 2025, you got to have positive cash flow. I know there are people who say to investor appreciation, I wouldn't do it. I just wouldn't in 2025, 2026. It's too risky. I know that means some deals are coming off the table. That's fine. We're in a weird market right now. I would rather all of you protect yourself against downside risk than buy a deal just based on speculation and appreciation.

23:52So that's the number one thing. It's got to have at least break even cash flow. Now, after that, I am willing to take low cash on cash return if there's great upside potential. So I'll take a two, three, 4 % cash on cash return. If this is an A plus neighborhood, it's in the passive progress. There's zoning upside. Maybe I think rents are really going to start going up because 2 % to 4 % cash on cash return is not good enough for me long term. But I'll buy a deal that has 2 % to 4 % cash on cash return if I think I can get that return to 10 % or 12 % in the next couple of years. Now, on the flip side of that, if this is a property in a C-class neighborhood, it's probably not going to appreciate rents are in the middle.

24:38then when I buy it, I need that cash on cash return to be at least 8%, ideally it's closer to 10 % or maybe even 12 % because I'm not going to get my return in other places. And this is sort of the spectrum that I think you need to play with. I know people debate about what's better, cash flow appreciation. I think they're both good personally. I don't buy deals that don't cash flow, so I want to make that very clear. But anything that cash flows, then I think you start to play with these numbers. Is the appreciation worth taking lower cash flow? Or is there so much cash flow that I'm willing to give up appreciation?

25:14That's really up to you. But when you're analyzing your deals, those are the things that I would really look at. What's your total appreciation overall return? What is your cash on cash return? And then compare it to the level of risk. Because you might say, oh my God, this deal is amazing. There's 12 % cash on cash return, but it's a property that has foundation problems in a bad neighborhood where the population is declining. That's not worth it. I'm sorry, 12 % cash on cash return is good, but you're taking on property risk, you're taking on market risk. Nah, not interested in that. So those are the things to look at.