The Ultimate Underrated Rental Property of 2025 (for Small Investors)

What’s the best rental property for the average investor? It’s not a single-family rental, it’s not a large apartment building, it’s not even a duplex or a triplex—it’s a “sweet spot” small multifamily. These investment properties, ranging from five to 25 units, make more money, are easier to manage, and help you scale faster to achieve financial freedom. Even large multifamily investing experts like Brian Burke are ditching the huge apartment complexes to buy these. But what makes these small multifamily investment properties so much better than their bigger and smaller counterparts? We’re discussing the massive investing opportunities in 2025 for these properties with Brian today and how new investors and those looking for a manageable portfolio can leverage these properties to reach financial freedom. These types of properties are still experiencing low prices with limited competition, which means that if you know about them, you already have an advantage. How long do we have until multifamily prices rebound and these investments become out of reach for regular investors? How do you analyze a small multifamily property to ensure it makes you monthly passive income? Brian shares his wisdom and gives an exact timeline for when it may be too late to buy. In This Episode We Cover: The rental property “sweet spot” for more income and fewer headaches Why it’s easier to own multifamily than single-family homes The multifamily real estate crash and why prices are LOW right now How to analyze small multifamily before you buy and which expenses most new investors forget What makes a “good” small multifamily real estate deal in 2025 And So Much More! Links from the Show Join BiggerPockets for FREE Let Us Know What You Thought of the Show! Ask Your Question on the BiggerPockets Forums BiggerPockets YouTube Apply to Be a BiggerPockets Podcast Guest! Try REsimpli, The Only All-In-One Real Estate Investor CRM Software That Helps You Manage Data, Marketing, Sales, and Operations Grab Brian’s Book, “The Hands-Off Investor” Sign Up for the BiggerPockets Real Estate Newsletter Property Manager Finder How to Buy a Small Multifamily Property (A Step-by-Step Case Study for Newbies!) Connect with Brian Connect with Dave (00:00) Intro (01:54) The Rental Property “Sweet Spot” (04:31) Management is EASIER! (07:36) It’s On SALE! (10:53) How Long Will Opportunity Last? (13:38) “Good” Deals in 2025 (17:48) How to Analyze Small Multifamily (24:03) Can Small Investors Do This? Check out more resources from this show on BiggerPockets.com and https://www.biggerpockets.com/blog/real-estate-1100 Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Email [email protected]. Learn more about your ad choices. Visit megaphone.fm/adchoices

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:05Dave Meyer?

  Hey everyone, I'm Dave Meyer and this is the BiggerPockets Real Estate Podcast, where we teach you how to achieve financial freedom through real estate investing. Just recently, I was on a panel for the BiggerPockets Momentum Virtual Investing Summit with our friend, Brian Burke, and he said something really interesting. He thinks the sweet spot in real estate right now is properties with 5 to 25 units. And if you don't know Brian, he's been investing for a long time. He's been in the game for 30 years. He's been contributing to BiggerPockets since 2013. So he's one of the most successful investors in the entire BP community. He's also just one of those people who's been right so many times that every time he says something like this, I pay close attention.

• 0:50Dave Meyer?

  Now, if you've heard him on the show before, you know that he's not shy about telling you all the things that he's not investing in. So when I heard Brian say he is interested in this asset class of 5 to 25 unit properties, I wanted to find out more, and that's what we're doing on the show today. On this show, we talk almost every episode about residential real estate, which is properties from single-family homes up to four units. And we sometimes talk about the other end of the spectrum, commercial multifamily real estate, mostly in the context of syndications that raise millions of dollars to go buy very large apartment buildings or housing developments.

• 1:30Dave Meyer?

  This middle ground, though, of 5 to 25 unit properties sometimes gets lost in the shuffle. So I want to ask Brian, what makes those properties attractive? Whether we've hit the point in the market cycle where investors should be jumping on deals in this category? And then I'm going to ask him his advice on how investors can analyze, purchase, and operate this type of property. Let's bring on Brian Burke. Brian, welcome back to the BiggerPockets Podcast. Thanks for being here.

• 1:58Speaker 01

  It's great to be back again, even so soon.

• 2:00Dave Meyer?

  Yeah, well, this is what you get for saying interesting things when we're talking in different venues. Brian and I were talking on the Momentum Summit, and you said something that really intrigued me about five to 12-unit properties. Can you just tell me and everyone why you think that's kind of a sweet spot right now?

• 2:19Speaker 01

  You have this kind of imperfect market in the small multifamily space, right? So you get into large multifamily, 100 units and up. It's a very efficient market. It's dominated by professionals who do it for a living. There's not a lot of like, quote unquote, "great deals" to be found. But the small multifamily space, that's where your mom and pop landlords live. That's where you have tired landlords. That's where you have deaths that lead to estate sales, and just all the kinds of things that happen in human life all happens in that smaller multifamily space. And as they say, that chaos and dislocation breeds opportunity. So I think there's opportunity in that smaller space.

• 2:58Dave Meyer?

  And do you think it doesn't apply to even smaller multifamilies, or does this also apply to two, three, and four units?

• 3:05Speaker 01

  I think it applies to those two to four unit as well as it does that five to, really, I'd say five to 25-unit space really kind of fits into this bucket. All of that applies. When you get down to the smaller, like, two to four-unit space, there you have a little bit more competition from live-in, like, house hackers. You have some of that in that space, and I think you don't have the economy of scale that you have with that five to 25-unit space. So while the rules still apply there, I think that you get a little bit even sweeter spot if you're in this as a real multifamily investor to be in that slightly larger space.

• 3:45Dave Meyer?

  Yeah, I've noticed that a lot. And honestly, why my personal interest has peaked to go into this commercial area is less about the economies of scale that you mentioned, but two to four units just seems super competitive. And I think it's BiggerPockets' fault. I don't know, but we've been pre- How valuable they are and they are, but you see now pricing on duplexes, for example, is just kind of crazy unless you're an owner occupant and it's because house hackers rightfully can pay more and still make those deals pencil. Whereas if you're trying to scale a portfolio, you obviously can't live in every property and you can't pay as much as the person who's going to house hack that property. So I totally agree with you on that.

• 4:31Dave Meyer?

  At the same time, I'm like a little bit for some reason nervous to go beyond four units. Like, is it really all that different?

• 4:38Speaker 01

  There's nothing to be afraid of. You brought up a good point about the smaller ones having, you know, like maybe it's bigger pockets fault because you have all the house hackers coming in, right? But it's also part of the reason that that space is so competitive is you can get Fannie Mae loans with, you know, lower down payments. You can get FHA, you know, there's regular conventional real estate lending that's available to like a single family home buyer, the same types of financing are available in that two to four unit space. And that does create a different competitive landscape. Once you're five units and up, it's considered commercial. That means the lending guidelines are different. It means down payment requirements are different, but operationally it's basically still the same thing.

• 5:19Speaker 01

  Now, the larger you get, kind of in some respects, the easier it gets too. So I had a 540 unit apartment complex. It was easier for me to manage than my 11 unit. And, and that's just kind of part of the way it is as you grow and scale and get teams. But when you're starting out and trying to build a portfolio, this smaller multifamily space is a great place to learn. It's a great place to build a portfolio and, and believe me, you'll learn more than you want to learn, but that'll be really useful. And so don't be afraid of it.

• 5:53Dave Meyer?

  The other thing that intrigues me is like, I personally got into real estate buying small multifamilies that were in Denver and there's kind of these, you know, cut up old mansions and Victorians. And recently have only been trying to buy purpose built small multifamilies because the organization of them, the consistency between. Between units does, in my opinion, make a really big difference. Whereas all these old buildings that weren't meant to be multifamilies that you cut up are just such a pain in the butt to manage and to fix. Whereas, you know, you buy a 540 unit, every unit is a carbon copy of each other. There maybe there's a couple of layouts, but you know, the, the systems, the appliances you

• 6:35Dave Meyer?

  need, they're repeatable, they're knowable in a way that some of these small multifamilies aren't. So that, that part of it definitely appeals to me.

• 6:42Speaker 01

  Yeah, they can get a little crazy, especially when you get into these modified buildings. And, you know, there's, there's a lot of those, actually, there's a lot of them in Buffalo. When I was out there looking and bought this 11 unit, we looked at a lot of properties that were like two-story, single-family homes that got repurposed into duplexes. Where the lower floor is one unit and the upper floor is another unit. And there's all kinds of oddities that you find in that. And man, it runs the gamut. I mean, between shared utilities and just a lot of those buildings are older and then their systems are really, really tough shape. So there can be a lot of challenges, but there's also, you know, again, anytime there's challenge, there's opportunity.

• 7:22Dave Meyer?

  Totally agree. I just, when you're reaching scale and, you know, when I'm trying to buy units in this part of my portfolio, I'm looking for ease of maintenance. And so it just seems like this five to 25 unit area could be good. But I want to bring up sort of the elephant in the room, which is, is it a good time in the market to actually pursue these types of commercial deals? But first, Brian, we do have to take a quick break. We'll be right back. Most investors only think about insurance when something goes wrong. A tenant injury, storm damage, loss of rent. Then suddenly the cheapest policy doesn't feel like the best one anymore. That's why a lot of BiggerPockets investors use steadily for landlord insurance designed

• 8:06Dave Meyer?

  specifically for rental properties. Whether you own one property or a growing portfolio, they make it simple to get covered properly. And BiggerPockets Pro members get an extra 5% off their landlord insurance premiums. Visit biggerpockets.com/landlordinsurance to get a quote today.

• 8:24Dave Meyer?

  I just booked a backpacking trip through Olympic National Park. Two nights out on the trail, no cell service, nothing to do but eat trail mix and stare at mountains. I'll never get tired of. That's the whole appeal. But while I'm off grid, my place doesn't need to sit empty. I can list my space on Airbnb and make a little extra income while I'm away. And with Airbnb's co-host network, I could partner with a vetted local co-host to help take care of the details. From guest communications to onsite support. So I can fully unplug and enjoy my time out in the backcountry. If you've got upcoming travel plans, you can find a co-host at Airbnb.com/host.

• 9:05Dave Meyer?

  You know that thing where you discover a feature you wish your software had? And it turns out it already exists, just on a different platform. Like, oh, you want rent payments processed in two days? Rent Ready does it. Oh, you want to block tenants from making partial payments mid eviction? Rent Ready does that too. Oh, you want full accounting and tax-ready reports without paying for a second tier? Rent Ready does it. And oh, you want tenant screening that doesn't overcharge your applicants? Rent Ready also does this. Basically, if you've ever complained out loud about your property management software, Rent Ready probably already built the fix.

• 9:45Dave Meyer?

  It's $12 a month. You're welcome. Sign up right now for $50 off your first year of Rent Ready with promo code BPcash. BiggerPockets Pro members get it completely free. Sign in through your Pro account at rentready.com/biggerpockets. That's rent, R E D I, dot com slash biggerpockets. Buying real estate has a funny way of making the future feel very real. You start thinking about mortgages, cash flow, tenants. And suddenly you realize, if something happened to me, would the people I love be okay? That's why life insurance is one of those things that's easy to put off, but is super important to actually deal with. Ethos makes getting life insurance fast and easy, 100% online.

• 10:28Dave Meyer?

  You can get a quote in seconds, apply in minutes, and potentially get same-day coverage. There's no medical exam. You just answer a few simple health questions online. You can get up to $3 million in coverage and some policies are as low as $30 a month. Ethos helps provide financial security and helps protect the people who depend on you. Take 10 minutes to get covered today with life insurance through Ethos. Get your free quote at ethos.com/realestate. That's E T H O S dot com slash real estate. Application times may vary. Rates may vary.

• 11:06Dave Meyer?

  Welcome back to the BiggerPockets Podcast here with Brian Burke, talking about a potential sweet spot in the market right now, which is rentals that have five to roughly 25 units. Brian was telling us a little bit before about what appeals to him. But I'm curious, Brian, you know, commercial has been in a pretty big correction over the last couple of years. Do you think we are approaching a good time to buy for this subset of the multifamily asset class?

• 11:32Speaker 01

  Well, that depends, Dave. Do you like to buy things at the top or the bottom?

• 11:36Dave Meyer?

  Bottom.

• 11:37Speaker 01

  Well, then I think this might be the time for you then. It might not be the time for everybody. The challenge of doing that, though, is the best time to buy anything is when it's most uncomfortable to do so. I have a mentor of mine in stock investing. He says, "The stock market is the only market where buyers fear a sale."

• 11:56Dave Meyer?

  Yeah.

• 11:57Speaker 01

  And I think the real estate market also kind of fits into that category. You know, when, when times are tough, people get scared and they don't want to get in. That means it's a good time to get in. Now, I can't say that today is the precise bottom of the market, but I can tell you that it topped out in the second quarter of 2022, and it's been on a downslide ever since. And if we're not at the bottom, we're close enough to it where if you make a move now on a really well-priced property, because you found some needle in a haystack, then I don't think you'll be sad that you did. This, to me, is a good time to buy. New inventory is starting to decline. Rents will come back

• 12:38Speaker 01

  when new deliveries start to decline in the second half of this year. So I think this is Really compelling opportunity in the small multifamily space.

• 12:48Dave Meyer?

  I love hearing that because I am very interested in buying these right now. So, so that's very good news. I really do think this is a really interesting sweet spot for people. So hopefully everyone is also considering this because as Brian said, commercial real estate has been on sale for the last couple of years. But Brian, we are starting to see the residential market slow down right now. You know, I've said that I think we're going to have relatively flat prices this year. I think you, you sort of agreed when we were talking a couple of weeks ago. So can you maybe help our audience understand how and why the commercial space and the residential space don't necessarily move in lockstep?

• 13:27Speaker 01

  Yeah, people always like to talk about the real estate market as if there is such a thing that, you know, all real estate does the same thing at the same time. And there's a market cycle slide that you'll often see people put up when they're talking about real estate market cycles where the cycle goes up and it peaks out, then it comes down and then it troughs out and then it goes back up again. But I have a slide that's way better than that. It has a bunch of lines that are crisscrossing, you know, and all kinds of different like ways, because that's really what the real estate market looks like. It's looks like total chaos. Because you could have home prices in a slide while multifamily is increasing, industrial could be going up while offices going down

• 14:07Speaker 01

  and hotels are trading sideways. All these things can be happening. And what is also interesting is even within the same type of real estate, it can be moving in two different directions in two different locations. I mean, it might be where multifamily in Buffalo is on a tear, but multifamily in Los Angeles is on a downside. These could be happening at the same time. So we always have to keep that in mind. But you know, there's a lot of bad news that's been coming out about commercial real estate, multifamily, office especially has been in a really bad spot. What you have to look at is where in the cycle are we? And what are the chances that that cycle is going to bottom out and then start to move in the opposite direction?

• 14:49Speaker 01

  Now, if you're talking about going out and buying office buildings, yeah, it's, it's really Bad out there. Will they come back? That's debatable. You know, maybe they will, maybe they won't. But on the multi side, you know, you see new deliveries coming down. You see rent growth starting to flatten. It was negative for a while. Now it's flattening. When I look at rent growth forecasts for the future, they're trending up in most markets, starting later half of this year and into next year. So if you can buy before that's already happened, you know, what do they say? Like buy on the rumor and sell on the news. You know, this is kind of where in that rumor stage. So I, I, I think that this, you know, despite the fact that there's been a lot of turmoil, I just think that that, that's what creates opportunity.

• 15:32Dave Meyer?

  All right. Well, now you're giving me FOMO and anxiety that I need to go buy something immediately. How long do you think this opportunity lasts? Do you think we're just starting and there's going to be opportunity for years to come? Or is this kind of like a right here, right now kind of opportunity?

• 15:46Speaker 01

  I think that we have a little bit of time. There's no sense to rush anything, you know? You can let this play out. I don't think that we're looking at a V-shaped recovery where all of a sudden we're going to have this immediate massive bounce. I think that this recovery is going to be a process. And I think over the course of the next couple of years, you're going to have some really sharp buying opportunities. And I think over the subsequent couple of years, you're going to see the market start to mature. You know, I, I made up a few sayings. I might've said them on one of your podcasts before. I don't remember which one, but people used to say, you know, about the multifamily market, survive till 25. These were the owners who were trying to just hang on. Well, they got to 25, but they're still in a lot of distress.

• 16:27Dave Meyer?

  Yeah, nothing got better.

• 16:28Speaker 01

  Nothing got better. Their interest rates are still high. Their loans are still coming due, you know? And, and I had come up with a bunch of new sayings. End of the dive in 25 was my first one. And that meant that, you know, the market's going to stop going down. I mean, before it goes up, it first has to stop coming down. And I think we're going to reach that point this year. And then I think it gets fixed in 26, meaning that I think next year, we're going to start to see some of this work itself out. The market's going to get legs under it. I think you're going to be in investor heaven in 27, meaning there's going to be deals out there. You're going to see, you know, the, the stuff that you bought. You're going to get rent growth. You're going to start to see price growth. And I think if you wait until 28, you're going to be too late. Those are my, those are my sayings for the day.

• 17:11Dave Meyer?

  I like this. All right.

• 17:13Speaker 01

  Take it for what it's worth.

• 17:14Dave Meyer?

  So Brian, I want to ask you about property class within this space. Like, do you recommend people invest in Class A, really nice polished spaces, Class B, Class C? How do you see that trade off in this particular subset of the market?

• 17:28Speaker 01

  It really has to match to your risk profile and the amount of work you really want to put in. If you have a high tolerance for risk, and let's say, you know, you're like a really young go getter, like, I'm going to kill it in the real estate business and I'm going to go find this really super like below market deal, put in a ton of work and really turn it around. Buying Class C properties might be for you because there's some people that just won't touch them because they're really management intensive, it's really difficult to pull that off. It takes a lot of energy and a lot of time and it's a lot of risk. If you have that in you, that's a really great place to start.

• 18:07Speaker 01

  And I guarantee you will learn 10 times more about this business than you will if you want to just go buy Class A properties.

• 18:14Dave Meyer?

  And more than you want to, like you said.

• 18:16Speaker 01

  More than you want, yeah, 100% more than you want to. But if you're kind of like moderately risk averse, going into that Class B space is probably a good, a good place to be. And if you're just absolutely like hands off person, like, oh, I don't want to mess with anything. I want no risk. I don't want bad tenants. I don't want to have to deal with any of that stuff. Class A properties is probably the best place for you. Now, you'll probably find that it's the least amount of return, but on a risk adjusted basis, it's a very good return. So, you know, you've got to match your personality and your risk tolerance and the amount of work you're willing to put in and then decide from there which class is right for you.

• 18:55Dave Meyer?

  And I'm going to ask you a question you're absolutely going to hate, but I'm going to ask it to you anyway. You know, what is a good deal in this market, right? Because I know that cap rates are going to be very different in different property classes, different markets. But can you just maybe give us a little bit of a guideline for like how you would look for and spot a good deal in today's day and age?

• 19:17Speaker 01

  Yeah, I mean, a lot of people want to focus on cap rate and say, oh, a good deal means it's this cap rate or that cap rate. Forget about cap rate.

• 19:24Dave Meyer?

  I know you hate that.

• 19:25Speaker 01

  I just hate cap rate. It's just such a useless metric. What you really want to think about is the cash flow and replacement costs. I mean, if you can buy a property for a price that's less than you can build it for, you're already starting off on solid footing. But remember, this isn't only called multifamily. This is also called income property. It's another way that this is referred to as income property. You don't go buy a 20-unit apartment complex because it's a nice place for you to live. I mean, sure, you could live in it, but that's generally not why people buy 20-unit apartment buildings. They buy it because it's income property. That means you got to look at what is the income?

• 20:08Speaker 01

  And if it doesn't have income, it's not a good deal. So when you're underwriting, you're going to look at your rent minus vacancy, minus operating costs, minus property taxes, insurance, minus interest. What's left? And don't forget about capital improvements. You're going to have water heaters that break. You're going to have parking lots that need to be resurfaced. You're going to have roofs that need to be replaced. Amortize the cost of those big-ticket items over their lifespans and adjust for that as part of your cash flow question. And are you in positive cash flow territory? And is the cash flow that you're going to receive enough to make the investment worthwhile? There's another old saying that I really liked that says, "All investments have risk,

• 20:53Speaker 01

  but not every risk is worth the investment." If you are going and buying a property that you have to put $200,000 of your cash into, and you're going to get 100 bucks a month of positive cash flow, you've got to really consider whether or not this is a smart investment. If you could go invest in a mutual fund, a stock, or whatever, and get a much better return. You want to get a return on your capital. So look at it from a return on capital basis, not a cap rate basis, return on capital basis.

• 21:24Dave Meyer?

  Brian, I have more questions for you about these medium-sized multifamily properties. But first, we do need to take a quick break.

• 21:33Dave Meyer?

  For my wife's birthday, I wanted to make her a new website for her landscape design business. So I researched a lot of different options. I tried out a couple, but honestly, it was really overwhelming. It was pretty time consuming and still, the site wasn't coming out the way I wanted it to. Then I tried Hostinger and everything was super simple. I asked Hostinger's AI to build a clean site for her business and it had a working version up in minutes. No coding or designer needed. Plus, its AI agent helps with SEO, website copy, and email marketing after launch. You get domain, website, email, all in one account. And right now, you can get Black Friday and Cyber Monday

• 22:15Dave Meyer?

  pricing through December 14th. So snag Hostinger's services at their lowest prices before the sale ends. Create your website today for just $1.99. Go to hostinger.com/realestate and use code REALESTATE for an additional 10% off Black Friday and Cyber Monday pricing. I just booked a ski trip to Park City and I've already got the whole thing planned out. Five days, first tracks every morning before the crowds show up, my knees reminding me I'm not 25 anymore by the second run, and an embarrassing number of overpriced burritos at the lodge. I don't even care. This is the trip I look forward to all year. But here's the part I actually appreciate. The practical side of my brain kicking in

• 22:59Dave Meyer?

  is that my place doesn't have to just sit there empty the whole time I'm away. I can list my space on Airbnb and bring in a little extra income while I'm out getting humbled on a mountain. And with the co-host network, I'm not the one handling all of it. You can partner with a vetted local co-host who can create your listing, manage reservations, message guests, and even handle the styling. So I get to fully focus on my trip and my place is still working for me the whole time. Find a co-host at airbnb.com/host. Investing in real estate has always been smart, but it hasn't always been simple. Now it's both, thanks to the Fundrise Flagship Fund. The Fundrise Flagship Fund launched

• 23:42Dave Meyer?

  More than five years ago with a mission of delivering low fee access to blue chip private market real estate. Today, the Fundrise Flagship Fund has grown to manage more than a billion dollars of real estate on behalf of hundreds of thousands of investors, making it one of the largest funds of its kind. For those who believe real estate has an important role to play in their portfolio strategy, the Fundrise Flagship Fund has positioned itself as both a simple and a smart option. Whether you're starting with $10 or $10,000, the Fundrise Flagship Fund makes adding real estate's unique potential for both passive income and consistent growth. Just visit fundrise.com/pockets to make your first investment today.

• 24:25Dave Meyer?

  Carefully consider the investment objectives, risks, charges, and expenses of the Fundrise Flagship Fund before investing. This and other information can be found in the fund's prospectus at fundrise.com/flagship. This is a paid advertisement.

• 24:40Henry Washington?

  Buy smart, drive for less, and trade for more. That's Toyota Ford ability. And it all starts with a great deal from your local Toyota dealer. Make a smart buy on an all-wheel-drive Camry, Corolla Cross, or get a Corolla sedan packed with the latest features, advanced tech, and head-turning style. Take a test drive in two of Toyota's most popular SUVs, the spacious, family-friendly Grand Highlander and adventure-ready RAV4. And with so many hybrid and plug-in hybrid models available across the lineup, plus efficient all-electrics like the BZ, BZ Woodland, and all-wheel-drive CHR, you can drive your way and skip the pump. And long after you leave the lot, your Toyota keeps delivering with legendary resale value built on a reputation

• 25:23Henry Washington?

  for quality and reliability. So when it's time for your next Toyota, you could trade in for more from a great deal today to a great value tomorrow. A Toyota is right for you. Shop toyota.com for deals and details, or stop by your local Toyota dealer today. Toyota, let's go places. BiggerPockets Real Estate is brought to you by Ma'ad. Ma'ad prescribes a once-or-twice-daily midophonal drink that can keep you energized, focused, and alert throughout the day. Here's the mechanism. Energy drinks with caffeine temporarily Brawk Eudentazine, the chemical that makes you tired. It builds up and when the caffeine wears off, it all crashes down on you at once. Modafinil works differently. It engages multiple pathways in your brain.

• 26:03Henry Washington?

  Dopamine, norepinephrine, histamine, and orexin to achieve steady energy and alertness for 10 to 12 hours. Modafinil was invented in the 1970s and since it's been used in the highest performers on the planet. Soldiers, pilots, and astronauts aboard the space station use modafinil in high-stakes situations where full concentration and alertness are paramount. It's now available at mod.com to qualifying patients. Visit mod.com, that's M-O-D dot com for free consultation and get 10% off your first order plus free shipping with promo code B P R E. That's promo code B P R E at mod.com. See their website for important safety information and we thank mod for sponsoring the pod.

• 26:51Dave Meyer?

  We're back. Here's the rest of my conversation with Brian Burke. Now, just totally asking for a friend and for our audience, not for myself. But if you were to be interested in this kind of deal, how does the underwriting and deal analysis process differ from either single-family rentals or smaller two to four units?

• 27:12Speaker 01

  In this five to 25 arena, it's very similar to underwriting a fourplex. You're going to look at your rent, you're going to look at vacancy factor. And here's something that I think is really important that people miss. If you own a fourplex, you can probably, you know, fill that fourplex up and have almost no vacancies for long stretches of time.

• 27:35Dave Meyer?

  Yep.

• 27:35Speaker 01

  But when you get into this five to 25 unit space, your property is going to follow the market. So if the market has 10% vacancy, you're going to find yourself 10% vacant. If you're 100% full, you're doing something wrong. So really look at economic vacancy factors, be respectful of what the market data is telling you about vacancy, about rent growth, about rental rates, because you're, you're going to be, you know, A byproduct of the greater overall market, it's really tough to beat it when you get into these larger properties. The other thing to think about is like the utilities, who's paying for them, who pays for what? Make sure you're quantifying that and you've got a good management fee in there to pay a really good management company to help you with it.

• 28:20Speaker 01

  I'm not really a big fan of the DIY approach. I know some people really like to do it that way, but I'd much rather have a really strong competent manager in there and overseeing what they're doing. So make sure that you're accounting for those expenses. Those are the big things to look for when underwriting in this space.

• 28:37Dave Meyer?

  You said something that if you don't have vacancy, you're doing something wrong. Does that mean you're just undercharging rent?

• 28:44Speaker 01

  Yeah, you're undercharging rent. Yeah, you should, you should be at market vacancy. So if you've got 25 units and you're 100% full, your rents are too low.

• 28:54Dave Meyer?

  What about the debt side of things? Cause for everyone who's listening, just, you know, when you get a residential mortgage, usually you can get 30 or fixed rate debt. That is not typically what you do with commercial loans. They're usually adjustable rate mortgages that have a balloon payment after three, five, seven, 10 years. So how does that factor into the underwriting? Or what should we all be thinking about when we consider commercial debt versus residential?

• 29:20Speaker 01

  Yeah, commercial debt is a whole different animal. You know, the best financing that you can find out there anywhere is the 30 year fixed, fully amortized loan. And those are great for single family homes. You can even find them for your duplexes and fourplexes. But that's not a thing in the small commercial multifamily space. Once you get over five units, you can sometimes find bank financing, especially if you have a relationship loan. If you've got a relationship with a local community bank, you might find some really attractive financing. I have that 11 unit building I told you about in New York. I had a local bank that financed it for me on a 25 year fixed rate, fully amortizing loan. And so, you know, in the smaller space, you can find that debt out there.

• 30:05Speaker 01

  When you get into bigger multifamily, that gets even harder to find, especially when you get over 5 million. You know, those, those loans are really. Difficult to find. They usually will have some type of prepayment penalty. They'll have shorter maturities, like five, seven or 10 years. At that point, you have to pay them off or refinance. So it does get a little complicated as the loan size goes up. But if you're under that five million mark, you can find really compelling financing from local community banks. That's my starting point for that size.

• 30:35Dave Meyer?

  All right. That's really, really good to know. I guess the question is, assuming you can't get one of those great fix rate debts. Assuming you're getting a more traditional kind of loan, five, seven years, something like that. How do you underwrite that? Because do you just assume that you're going to get a refinance at some point? Because that seems to be one of the major problems that operators have been facing over the last couple of years, that they weren't able to refinance. So like, how do you manage that risk?

• 31:02Speaker 01

  You manage the risk with a longer maturity and that's the reason that a lot of operators are having that challenge right now as they got too short of a maturity. There was a period right after COVID where a lot of buyers, especially of larger multifamily, were buying with three-year bridge loans. And these loans were intended to buy a property, fix it up, you know, raise the rents and then get a new loan. That was the reason that you would get those loans, but they kind of got repurposed where these syndicators were using this debt as a crutch because they couldn't raise enough equity. So they would use these high leverage loans to juice their returns and require them to bring less cash to the table.

• 31:44Speaker 01

  But the trade off was is that they had three-year maturities and that might work when it works. But if the music stops and there's no place left to sit, that's, that's when things go wrong. So the, the challenge of that refinance is when rates go up, values fall. That refinance is very difficult. Outside of that, assuming that rates stay level or maybe they only go up a little bit and values do not fall, the refinance is certainly doable, especially if you've owned the property for a while. And that's why the longer term maturities really pay off. If you get a loan with a 10-year maturity, it's pretty sure that you'll be able to refinance in 10. Years, the market should have gone up by then. And if it did go down, it should have had enough time to come back by that point.

• 32:29Speaker 01

  And if it went down right before it was refi time, it already went up for eight or nine years. And you should still be in pretty good shape. It's the really short terms that will get you because three to five years is the blink of an eye in this business. It may seem like a long time, but once you buy a property, you'll find three to five years goes by really quickly.

• 32:48Dave Meyer?

  Thank you, Brian. You've really demystified the underwriting process for me a little bit. It really doesn't seem very different from all of the regular residential underwriting that I've done. And hopefully everyone listening to this sees that this really isn't all that complicated. If you could underwrite a single family home or duplex, you can make some small adjustments and be able to underwrite these types of deals as well. But I want to sort of just talk about just strategically, Brian, if you think this is a good asset for just regular investors. You know, the average bigger pockets listener, someone who's, you know, going to buy a handful of units over the course of their lives to support their financial freedom.

• 33:28Dave Meyer?

  Like, is this a better option than buying a bunch of single families or two or three triplexes or something like that? Why or why not?

• 33:37Speaker 01

  Well, I think it's a, it's a different approach. It's hard to say that one is necessarily better over the other because it's, a lot of this depends on your own individual circumstances. Now, with the larger the properties you get, the more units you have concentrated in one location. Now, that comes with advantages and disadvantages. The advantages are, let's say you have a 20 unit apartment building and you have 20 single family homes. Well, in the 20 unit apartment building, instead of 20 roofs to maintain, you have one roof to maintain. Instead of 20 property managers, because they're all in different places, you have one property manager. Instead of having to hire a landscaper to mow 20 lawns, there's one landscaper mowing, you know, one lawn.

• 34:16Speaker 01

  So you do get economy of scale, but the trade off is you get some operational complexity. You know, you get big enough, you might have to have an onsite person. You know, in California, if you have more than 15 units in one location, you have to have. Have a quote unquote onsite manager. So you know, that adds some complexity to, you know, the, the business instead of just being really simple. So there's trade offs. The financing is a little more complicated in the larger stuff, but I'm a believer in economy of scale. I'm a believer that in, you know, real estate investing, your journey takes you to larger properties. And I don't mean, you know, more square footage on a

• 35:00Speaker 01

  house. I mean, larger properties and others, more units in one location, because that economy of scale is what gets you cash on cash return, which eventually gets you retirement and single family homes can do it, but it's very operationally complex to have a lot of scattered houses in a lot of different places. So I, I personally advocate for a kind of a balanced hybrid approach where you might have instead of, you know, a hundred single family homes, maybe you have five 20 unit buildings in, and those could be in different locations. That's fine. You get kind of the best of both worlds by having some geographic and portfolio diversification, yet also some consolidation to capture economy of scale.

• 35:45Dave Meyer?

  All right. I like it. I mean, I, we, you, you and I both are, I think friendly with Chad Carson. I asked him the same question. He said the exact opposite. If you all listen to this thing, he was like, go buy 75 single family homes. But I think I personally, I'm more of your belief because I've, I started with small multifamily. I have some single family and then I went sort of to the opposite where I invest in syndications and like the kind of stuff you do, which is, you know, hundreds of units, but I'm trying to fill out that sort of like middle spot that I, I don't have diversification and an ownership over. So that's pretty interesting.

• 36:16Speaker 01

  At one point I had 120 rental houses and at one point I had 4,000 apartment units.

• 36:22Dave Meyer?

  Wow.

• 36:22Speaker 01

  I think it was easier to manage the 4,000 apartment units than the 120 rental houses.

• 36:27Dave Meyer?

  That's amazing.

• 36:28Speaker 01

  He might've pulled that off really well, but I don't know. That's just me. I mean, everybody's, everybody's different.

• 36:35Dave Meyer?

  I'm curious about timing though, Brian, because I totally buy the diversification aspect, but is this something new people should consider? Do you recommend sort of building your way up to it?

• 36:46Speaker 01

  I recommend building your way up to it as you're scaling to larger properties. I mean, it doesn't mean you have to buy a single-family house before you buy a duplex, but if you're going to skip single-family homes and go straight into multifamily, I would suggest starting with something that's in the one to four category, just because of the ease of finance and just learning and kind of getting your feet wet. And then I would go into that kind of five to 15 unit space. There's not a lot of difference in five to 15 units. You get over 15 units, you know, kind of in that 16 to 25, that starts to get a little bit more complicated. It might, it might behoove you to start in that

• 37:24Speaker 01

  five to 15 beforehand. I personally, I think I had a duplex first and then I went straight to a 16 unit and it was complicated for me to figure out. So I really always recommend climbing the ladder is a much easier way to get on a roof than to jump up on top of it. So, you know, no problem with starting small and working your way up.

• 37:48Dave Meyer?

  That's good advice. I like that saying. You're full of good sayings today, Brian. I like that story.

• 37:52Speaker 01

  I'm trying.

• 37:53Dave Meyer?

  All right. Well, thanks again, Brian, and thank you all so much for listening to this episode of the BiggerPockets Podcast. If you enjoyed this episode as much as I did, please make sure to give us a five-star rating either on Spotify, Apple, or wherever you're listening. We'll see you next time.