BiggerPockets Real Estate Podcast Summary Episode Title: The Ultimate Underrated Rental Property of 2025 (for Small Investors)
Host: Dave Meyer
Guest: Brian Burke
Release Date: March 26, 2025

Introduction

In this insightful episode of the BiggerPockets Real Estate Podcast, host Dave Meyer engages in a compelling discussion with seasoned real estate investor Brian Burke. The focus centers on identifying the untapped potential within the small multifamily property market, specifically properties ranging from 5 to 25 units. Together, they explore why this asset class is emerging as a "sweet spot" for small investors in 2025, dissecting market dynamics, investment strategies, and the nuances of underwriting and financing these properties.

1. The Sweet Spot: 5 to 25 Unit Properties

Brian Burke posits that the 5 to 25 unit property range represents a lucrative yet overlooked segment in the current real estate landscape.

• Imperfect Market Dynamics:
  "You have this kind of like, imperfect market in the small multifamily space." (02:19)

  Unlike large multifamily properties (100+ units) dominated by institutional investors, the small multifamily sector is populated by "mom and pop" landlords, offering a fertile ground for opportunity amidst market chaos and dislocation.

• Comparison with Smaller and Larger Multifamily:
  Brian explains that while 2 to 4 unit properties face intense competition from house hackers and owner-occupants, properties in the 5 to 25 unit range benefit from reduced competition and retain some operational efficiencies absent in even smaller units.

2. Market Timing and Current Opportunities

Brian delves into the timing of investing in small multifamily properties amid market fluctuations.

• Market Cycle Position:
  "I can tell you that it topped out in the second quarter of 2022 and it's been on a downslide ever since." (11:02)

  He suggests that the market for small multifamily properties may be approaching its bottom, creating a prime entry point for investors willing to navigate through current discomfort.

• Future Projections:
  Brian introduces his own forecasting sayings:

  • "End the dive in 25" – Indicating the market's downturn will stabilize.
  • "It gets fixed in 26" – Suggesting recovery begins.
  • "Investor heaven in 27" – Projecting a robust market with attractive deals and rent growth.

  These projections emphasize a window of opportunity lasting several years, rather than a fleeting moment.

3. Property Classes: A, B, C

The discussion shifts to evaluating different property classes within the small multifamily spectrum.

• Risk and Reward Alignment:
  "If you have a high tolerance for risk... buying class C properties might be for you." (16:54)

  • Class C Properties: High risk and management intensive, suitable for investors eager to learn and handle operational challenges.
  • Class B Properties: Moderate risk, balancing between hands-on management and stability.
  • Class A Properties: Low risk, minimal management required, ideal for hands-off investors seeking steady returns.

Brian stresses aligning property class selection with one’s risk appetite and management preferences to optimize investment outcomes.

4. Underwriting and Deal Analysis

Brian offers a robust framework for evaluating potential investments beyond traditional metrics like cap rates.

• Beyond Cap Rates:
  "Forget about cap rate. What you really want to think about is the cash flow and replacement costs." (18:50)

  He advocates for focusing on cash flow, considering all operational expenses, and ensuring that the purchase price is below the replacement cost.

• Evaluating Income Property:
  Emphasizing the importance of accurate income assessment, Brian advises:

  • "If it doesn't have income, it's not a good deal." (19:00)
  • Incorporate capital improvements and amortize big-ticket items to assess true profitability.

• Risk Assessment:
  "All investments have risk, but not every risk is worth the investment." (19:20)

  Investors should evaluate whether the projected returns justify the inherent risks, especially when large cash infusions are required.

5. Financing Smaller Multifamily Properties

The conversation transitions to the intricacies of securing financing for small multifamily investments.

• Commercial vs. Residential Debt:
  "Once you get over five units, it's considered commercial. That means the lending guidelines are different." (26:13)

  Brian outlines the distinctions:

  • Residential Loans: Typically 30-year fixed rates, lower down payments.
  • Commercial Loans: Often adjustable rates with balloon payments after shorter terms (3, 5, 7 years).

• Securing Favorable Financing:
  "If you’re under the 5 million mark, you can find really compelling financing from local community banks." (27:30)

  Establishing relationships with local banks can yield more favorable loan terms, including fixed-rate options and longer maturities, which mitigate refinancing risks.

• Managing Refinancing Risk:
  "You manage the risk with a longer maturity." (28:32)

  Opting for loans with longer maturities, such as 10 years, reduces the pressure of refinancing during market downturns and provides a more stable investment horizon.

6. Strategic Approach: Building vs. Buying

Brian and Dave explore strategic portfolio building, weighing the merits of investing in single-family homes versus small multifamily properties.

• Economy of Scale vs. Diversification:
  "The benefits are, instead of 20 roofs to maintain, you have one roof to maintain." (32:00)

  Investing in multifamily properties consolidates maintenance and management efforts, offering operational efficiencies that scattered single-family investments lack.

• Balanced Hybrid Approach:
  Brian recommends a diversified portfolio that includes both single-family homes and small multifamily properties to balance geographic diversification with operational consolidation.

• Personal Experience:
  "At one point I had 120 rental houses and at one point I had 4,000 apartment units. I think it was easier to manage the 4,000 apartment units than the 120 rental houses." (33:46)

  Drawing from his extensive experience, Brian underscores the operational benefits of larger multifamily holdings over numerous single-family properties.

Conclusion

Brian Burke articulates a compelling case for small multifamily properties (5 to 25 units) as an underrated yet highly strategic investment avenue in 2025. By navigating market cycles wisely, aligning property class choices with personal risk tolerance, and leveraging favorable financing through local banking relationships, small investors can harness significant returns. Additionally, embracing a balanced portfolio that blends single-family and multifamily investments can optimize both diversification and operational efficiency.

Key Takeaways:

• Identify the Sweet Spot: Focus on 5 to 25 unit properties amidst an imperfect market.
• Market Timing: Invest strategically during market downturns to capitalize on future recovery.
• Align with Property Classes: Choose property classes based on risk tolerance and management preferences.
• Effective Underwriting: Prioritize cash flow and comprehensive expense analysis over cap rates.
• Secure Favorable Financing: Build relationships with local banks for better loan terms and manage refinancing risks through longer loan maturities.
• Balanced Portfolio Building: Combine single-family and small multifamily investments to maximize both diversification and economies of scale.

This episode serves as a valuable guide for small investors seeking to expand their real estate portfolios intelligently and effectively in the evolving market landscape of 2025.

Notable Quotes

1. Brian Burke on the Small Multifamily Market:
   "You have this kind of like, imperfect market in the small multifamily space." (02:19)

2. Dave Meyer on Competitiveness of Smaller Units:
   "But 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." (04:38)

3. Brian Burke on Market Timing:
   "The best time to buy anything is when it's most uncomfortable to do so." (10:58)

4. Brian Burke on Underwriting Focus:
   "Forget about cap rate. What you really want to think about is the cash flow and replacement costs." (18:50)

5. Brian Burke on Financing:
   "The best financing that you can find out there Anywhere is the 30 year fixed, fully amortized loan." (26:54)

6. Brian Burke on Portfolio Strategy:
   "I personally advocate for a kind of a balanced hybrid approach where you might have... five, 20 unit buildings in, and those could be in different locations." (32:00)

This comprehensive summary encapsulates the depth and breadth of the conversation between Dave Meyer and Brian Burke, providing actionable insights and strategies for real estate investors aiming to leverage the small multifamily property market in 2025.