Multi-Family Commercial Real Estate: Everything You Need to Know

Forbes calls it the key to growing your portfolio and earning more passive income, while CoStar says demand for it is at its highest since 2021. 

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Multifamily commercial real estate is often talked about as a hot asset class, but it can be something of a puzzle to investors and developers who:

• Are unsure about how profitable multifamily compares to other asset classes
• Are unfamiliar with market-specific factors that affect it, like vacancy rates and rent growth
• Don’t know how or where to start when it comes to multifamily real estate investing.

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No wonder. After coming under pressure from recent interest rate rises and an uncertain economic outlook, the multifamily sector has experienced “what feels like a full market cycle in the span of just a few years”, according to market specialists FS Investments. 

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In this guide, we take a deep dive into what a multifamily developer or investor needs to know, including:

• Is multifamily residential or commercial real estate?
• What is a commercial multifamily development?
• Is multifamily profitable?
• How to measure the profitability of multifamily
• How is multifamily commercial real estate performing right now?
• How to invest in multifamily.

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Is multifamily commercial or residential real estate?

A common question that swirls around the CRE sector is “Are multifamily homes considered commercial?”

The answer is simple: Multifamily properties can be both commercial and residential real estate. 

Smaller multifamily homes are typically classed as residential, while larger apartment buildings or complexes with five or more units fall under the umbrella of commercial properties. 

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This commercial multifamily housing might be apartment buildings, townhomes, or the fashionable condo (condominium). 

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Multifamily commercial real estate is also common in cities and suburban areas because it meets several types of residential demands, including student housing and senior housing which are often in short supply.

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Here’s a breakdown of the typical characteristics of each multifamily type.

What is a residential multifamily?

• Smaller properties. Typically one to three units (duplexes or triplexes).
• Owner-occupancy. Often owner-occupied or managed by a small landlord. Often townhomes or condos (condominiums).
• Financing. Usually residential mortgages with lower down payments and interest rates.
• Lease terms. Shorter lease terms (often month-to-month or year-to-year).
• Property management. Less complex management requirements.

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What is a commercial multifamily?

• Larger properties. Typically multifamily housing of four or more units like apartment buildings or high rises. Can also be student housing or senior housing, both of which operate on a larger scale than typical residential properties. 
• Investment properties. Primarily held as investments for rental income.
• Financing. Commercial loans with higher down payments and interest rates.  
• Lease terms- Longer lease terms (often one to three years).
• Property management- More complex management requirements, often with professional property management companies.

This distinction may not seem vital but it impacts many areas, including financing, lease terms, and property management requirements.

Mixed-use properties, which combine multiple residential units with commercial spaces, also fall under multifamily commercial real estate due to their blend of purposes.

Is multifamily profitable?

Investors are drawn to commercial multifamily properties for the potential for consistent rental income, as each unit within the building can contribute to the project’s profitability. 

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The “cap rate” (capitalization rate) is often used to measure the property's potential return on investment, helping investors compare opportunities across the real estate market.

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We can examine the profitability of multifamily properties by looking at them through the eyes of two types of buyers: investors and developers.

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Investors are drawn to multifamily because it generates a solid long-term rental income across multiple units within each building. This cash influx opens the door to further investment opportunities and portfolio growth.

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“Instead of adding units one at a time, investing in a multifamily property adds two, three, or even 20 units at one time” says CRE entrepreneur Alex Vasquez writing for Forbes. “Having a large, diverse portfolio protects you from major cash flow issues when vacancies or volatile economic shifts occur.”

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Multifamily investments are also flexible in that they allow for diverse income streams. Take new construction or mixed-use developments that combine residential units with commercial office space or retail, for example.

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Many investors finance these properties through lenders like Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corporation), which offer attractive terms for multifamily projects. 

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For developers, multifamily properties offer great opportunities for new construction or value-added projects. Converting an office space into a multifamily unit with popular amenities (like a garden space or private gym), for example, can greatly increase its value in a short time. Improving its energy efficiency or repurposing underused space can also be profitable moves.

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Market fluctuations and changing interest rates may still affect the performance of commercial multifamily properties, but they still remain one of the more stable investment choices in real estate thanks to their short-term income and long-term value growth.

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How to measure the profitability of multifamily

As mentioned, investors and developers evaluate the value of a multifamily project through the prism of a "cap rate", or capitalization rate). 

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Expressed as a percentage, this is a metric that compares a property’s net operating income to the property's value in order to estimate its return on investment.

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Let’s use an example of a 50-unit apartment complex in a growing metro area like Houston to make this clearer.

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Suppose the complex generates  $500,000 in annual rental income, with commercial property operating expenses (including maintenance, property management, and taxes) totalling $150,000.

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The net operating income (NOI)  (income after operating expenses), would be $350,000 ($500,000 in rental income minus $150,000 in expenses).

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If the apartment complex is valued at $4,000,000, we can calculate the cap rate  as follows:

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A cap rate of 8.75% would be a very good potential return for investment in this case, given that recent data from CBRE shows that it exceeds the US’s average cap rate (across four separate indicators) in some way.

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                                             Source: CBRE

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 A higher cap rate suggests a higher return but it can come with more risk. High cap rate investments often have lower purchase prices as they are located in less desirable areas. They may also come with higher vacancy rates or the need for major repairs and improvements.

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In this example, the investor would need to compare this cap rate to other investment properties or market conditions to assess whether it meets their investment goals.

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How is multifamily commercial real estate performing right now?

The two multifamily lenders mentioned previously both conduct an annual deep dive into the state of the US multifamily industry. 

Fannie Mae and Freddie Mac both released reports in mid-2024 analyzing the current state of play. Their findings, conducted by teams of CRE professionals, offered some interesting insights.

High cap rates are putting downward pressure on valuations

Cap rates are trending upward alongside high interest rates, which is applying downward pressure on property valuations, causing them to decline by approximately 19% from their 2022 peak  (Freddie Mac).

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                                   Source: Freddie Mac

A moderate increase in vacancy rates

Both reports found that national vacancy rates are expected to rise moderately  (between 6 and 6.25%) thanks to over a million new units entering the market in 2024.

Slower rent growth

Rent growth has been limited, with predictions that it will stay below long-term averages for the rest of 2024. Freddie Mac anticipates a 2.7% rise influenced by supply outpacing demand in several metros. 

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Rising concessions

The number of units offering rental concessions has increased, with 21% of properties providing an average of 5% discounts, especially in oversupplied areas ​(Fannie Mae).

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Regional variation

Performance varies regionally, according to both reports.  Sun Belt and Mountain West metros are seeing high supply and slower rent growth, while Midwest and Northeast regions, with less new construction, experience more moderate growth​.

In summary

Despite short-term pressures, both reports found that demand remains high supported by high homeownership costs, a stable labor market, and favorable demographics, especially among young renters. 

This is positive news for investors and developers as multifamily remains a resilient asset class, but they should be wary of overbuilding in saturated markets and potential rent growth limitations as new supply enters the market​.

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How to invest in multifamily step-by-step

Making the leap into multifamily commercial real estate can be daunting for a first-time buyer but, like with all kinds of property purchases, having a structured plan can help things flow smoothly.

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Here’s a step-by-step guide that many multifamily investors follow:

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1. Research the market

Research is, of course, vital, but many investors get it wrong.

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Focus on areas with strong demand for rental units, such as metros with consistent rent growth, near public transit or commercial hubs. 

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It’s also important to assess the pros and cons of each project type and match them to your own needs, as well as carry out a single-tenant vs multi-tenant analysis to be sure that multifamily is the best way to go.

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Knowing the type of multifamily deal is also key.  Triplexes and fourplexes, for example, offer increased rental income but also require more complex management than duplexes.

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2. Secure financing 

Before you start bidding, work with a broker or lender to secure CRE financing.

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Understanding your loan options is essential, whether they’re conventional loans, Fannie Mae or Freddie Mac options, or alternative lenders. You’ll also need to make sure you have the right credit score and debt-to-income ratio to qualify.

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The interest rate and associated fees are obvious things to look out for, but many investors also forget other factors like prepayment penalties.

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Another overlooked area is the down payment, soft deposit, or earnest money deposit, around 1 to 2% of a property’s value, that most sellers demand from you to confirm your interest.

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Not having this can scupper a promising deal, but it also gives the buyer time to carry out due diligence before completing a purchase. 

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3. Evaluate potential properties

Whether funding is in place or not, it’s useful to use tools like cap rate (as mentioned above) and property valuation to evaluate potential multifamily investment properties. 

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Look at occupancy rates, square feet, rent growth, and the current condition of the property. Value-add properties may need some work to increase their value.

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4. Make an offer 

Once you’ve found a property that meets your criteria, it’s now time to work with a commercial real estate broker to make an offer. 

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Be ready to negotiate, as the multifamily market can be competitive. If you’re competing with others, you may need to offer a quicker closing time or put down earnest money quickly. 

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Some online lenders work quickly with this incentive in mind. Duckfund, for example, speeds up property acquisition by offering financing for earnest money deposits with minimal fees. Investors can apply in two minutes, get approval within 24 hours, and have the deposit paid within 48 hours. 

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The refundable deposit and ability to work on multiple deals at once make it a fast, affordable option, and their acceptance rates are higher than average thanks to accurate AI-powered credit approval.

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5. Renovate and manage

After purchasing, you may need to make repairs or updates, especially if it’s a value-add project. Then, create a property management plan, either by hiring professionals or managing it yourself, to handle day-to-day operations and tenant relations. 

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Multifamily investments offer long-term value and steady cash flow—just ensure you follow these steps to maximize your returns.

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Ready to see how Duckfund’s Sign Now Pay Later model can help you lock down your next multifamily investment? Contact us today or sign up to see how you can get EMD funding in just 48 hours.