Buying a duplex, triplex, or fourplex can be a good investment for both investors and residential home buyers. Purchasing small multi-unit properties requires some basic understanding of how to locate, finance, and manage multiple units. Those activities are only slightly more involved than for buying single-family properties but can lead to a profitable multi-unit investment.
Proper financing is one of the most important factors when buying a duplex, triplex, or fourplex. LendingOne is a national lender that offers fix and flip loans and 30-year rental loans for multi-unit buildings with rates starting as low as 5.39%. You can borrow up to 90% LTC and 80% LTV.
Buying a duplex, triplex, or fourplex can be broken down into 7 steps:
1. Determine Whether Buying a Duplex, Triplex, or Fourplex is Right for You
Whether you learn how to buy a duplex, triplex, or fourplex as an investor, or as a home buyer attempting to secure some rental income from your property, buying a small multifamily investment is a bit different than for a single-family property. Assessing the benefits and downsides at the outset is a good idea.
Benefits of Buying a Duplex or Small Multi-Family Building
There several reasons why duplexes, triplexes, and fourplexes are sensible purchases. Home buyers can live in one unit and generate rental income with the others; they provide a good way to start investing in multi-unit properties; and, for investors, they diversify the rents and consolidate expenses among multiple units.
You Can Live in One Unit of a Multi-Family Building and Generate Rental Income
If you are buying a personal residence, a duplex or other small multi-unit building will provide you with a place to live along with rental income. You can live in one unit while renting out the others to generate income.
It is fully possible, particularly with triplexes and quadraplexes that your rental income can pay your entire mortgage and maybe even a bit more. In effect, you can purchase a place to live, but have your tenants pay for it.
David Reiss, Professor of Law and Director, CUBE, The Center for Urban Business Entrepreneurship, Brooklyn Law School tells us:
“There are significant benefits that you can get from
buying and living in a duplex, triplex, or fourplex instead of a single-family home. For instance, you may be able to use the rental income from the additional units to increase the amount that you can borrow and that rental income can offset a big part of your monthly mortgage payment. You can also deduct more of your expenses, such as part of your insurance premium and a portion of your repair bills, as business expenses.”
buying and living in a duplex, triplex, or fourplex instead of a single-family home. For instance, you may be able to use the rental income from the additional units to increase the amount that you can borrow and that rental income can offset a big part of your monthly mortgage payment. You can also deduct more of your expenses, such as part of your insurance premium and a portion of your repair bills, as business expenses.”Duplexes, Triplexes, and Four-Unit Properties Are a Good Way to Start Investing in Multi-Unit Properties
Learning how to buy a duplex, triplex, or fourplex provides a good entry into multi-unit properties without taking a deeper dive into apartment buildings. While screening tenants and managing renters in any kind of multi-unit building is a bit different than with single-family properties, the leap isn’t insurmountable. Duplexes and the like provide a good transition from managing single-family properties to handling multi-unit buildings without getting overwhelmed.
Small Multifamily Investments Diversify Rent and Consolidate Expenses Among Multiple Units Compared to Single-Family Investments
Also of interest to investors is how a multi-unit building – even a small one – diversifies your income and consolidates maintenance costs across the units. Investors who own single-family properties are well aware, that if their property goes vacant, they are out 100% of the rent. That means $0 income to offset the mortgage and other costs! Multi-family properties help mitigate that issue. If one unit is vacant, there are others potentially still rented, so you have some income to cover expenses and perhaps even generate a small positive cash flow.
There’s also the benefit of maintenance costs being consolidated into one building as opposed to being spread among many. For example, if you own 4 single-family homes, that’s potentially 4 roofs to maintain. If you own a fourplex, you are only concerned with one.
Disadvantages to Buying a Duplex or Small Multi-Unit Building
While there are advantages to learning how to buy a duplex, triplex, or fourplex, there are downsides you must be prepared for. Even if the property is your residence, you are still a landlord. For investors, tenant turnover is higher and tenant care lower in multi-unit buildings than with single-family properties.
Even if The Property is Your Residence, You’re Still a Landlord
That stellar benefit as a home buyer – of living in one unit and generating rents from the others – has a flipside to it. That is, you’ll become a landlord responsible for tenants and managing the property. That means, you the homeowner must be prepared for things like advertising the property, screening applicants, collecting rents, handling repairs, and unfortunately sometimes evicting tenants. Even living next door to your tenants can pose challenges.
If you’re clear on the situation going in, you can be successful. On the other hand, if your vision is clouded by seeing only rental income, without also grasping the managerial side, it could end up being a very stressful situation.
Tenant Turnover is Higher and Tenant Care is Lower with Duplexes and Small Multi-Family Rentals Than Renting Single-Family Homes
Renters of single-family homes tend to treat the property as if it were their own home. They’re invested in their neighborhoods, may be active in local schools, participate in community affairs, and so forth. As a result, it’s not uncommon to see tenants in single-family units stay for several years.
On the other hand, even with a duplex, renters have more of an “apartment mindset”. They are more transient, which means higher tenant turnover, and more difficulty with unpaid rent. Tenants in multi-unit properties also don’t tend to give as much care to their places, so expect more maintenance and repair than with a single-family rental.
2. Consider Whether It’s A Duplex, Triplex, or Fourplex You Want to Buy
As simple as it sounds, deciding whether to buy a duplex versus a triplex or fourplex does take some consideration. It’s a function of two things: rent roll and management responsibility. The more units you have, the greater the income, but the more intensive it will be to keep the building full and handle tenant issues.
How to Decide Among Buying a Duplex, 3-Unit, or 4-Unit Building
They come in a variety of formats and names: doubles and triples, over-and-unders, quadplexes and fourplexes. Ultimately, the size of the building you select – whether it’s a 2-unit, 3-unit or 4-unit building will ultimately be based on how you balance the two factors of rental income and managerial responsibility.
Don’t just see dollar signs; make sure you also consider the three M’s – marketing, maintenance, and management in the equation.
Why Four Units or Less Makes Sense When Deciding to Buy A Multi-Unit Building
Multi-unit buildings can obviously be much larger than 2-4 units. However, when you get into buildings that are 5-units or larger, much of the landscape changes. Financing the purchase of larger buildings requires commercial lending versus residential lending and managing a larger building generally moves beyond the do-it-yourself route.
More Than 4 Units Means Commercial Lending Versus Residential Lending
Home buyers and residential investors will be able to use the more familiar residential lending for duplex, triplex, and fourplex purchases. On the other hand, someone pursuing, say, a 12-unit apartment building will need to know how to finance it with a commercial loan.
There’s nothing inherently wrong about commercial lending. It’s just that a commercial loan is a different animal than a residential mortgage, with much more emphasis on the financial performance and potential of the property rather than on the qualification of the buyer.
Managing Small Multi-Family Buildings Versus Managing Larger Complexes
A home buyer or do-it-yourself manager can easily handle the management responsibilities of a duplex, triplex, or fourplex. Once the building gets larger than 4 units, the ability to manage it yourself becomes an issue. Leveraging property management software, hiring a property management firm or even an onsite manager enters the equation. Even lenders recognize this and will look for how a property is managed in the loan application for a larger building.
3. Buying a Duplex, Triplex, or Quadplex Begins With Locating a Property to Buy
Locating a duplex or other small multi-family building to buy is not difficult. In most cities, they are prevalent. You can search on your own, use a local real estate agent to help you, or if you are an investor turn to local real estate investors associations (REIAs) for leads.
Search for a Duplex or Small Multi-Unit Property on Your Own
One of the best reasons to search for properties yourself is that since the building is not handled by a real estate agent, the seller is not paying a real estate commission. That’s a good point for negotiation since real estate commissions would otherwise run 3% to 7% of the sale price – money you might be able to negotiate off the asking price.
If you prefer to search for properties yourself, you have many options. Craigslist is almost always useful. Other real estate websites such as Zillow are great leads sources as are for sale by owner (FSBO) sites that often have multi-family properties listed.
If you are looking to uncover potential bargains and want to investigate FSBO’s or even the foreclosure route, Redx can supply you with for sale by owner leads and even for rent by owner listings which are a great source landlords who potentially want to sell. Redx can also supply listings of preforeclosures which can be a great source of discounted properties.
Use a Local Real Estate Agent to Help You Buy the Duplex, Triplex, or Fourplex
The mainstream real estate industry provides access to the biggest pool of properties available for sale. And, it’s not just single-family buildings; it includes all manner of duplexes, and other small multi-family units as well. Many agents are comfortable working with small multi-units, so it’s just a matter of asking the office which agents handle those types of buildings.
Every real estate agency has access to one or more multiple listing services (MLS) which contain all the properties for sale, across every agency that belongs to that multiple listing service. Often, an MLS in one county or area will link to those nearby, helping expand your search area.
On the flipside, using an agent and the MLS means that agent commissions will be involved in the sale. As a buyer, the commission doesn’t typically come out of your pocket; it comes out of the seller’s. But, the commission will be factored into the sale price. Additionally, agents know their market, and they know how to determine property values; so prices for agent-listed properties tend to be priced at market value.
Turn to Local Real Estate Investors Associations (REIAs) to Help You Locate a Small Multi-Unit Building
If you are an investor seeking a small multi-unit property, consider joining your area’s real estate investors association (REIA). These are organizations of fellow real estate investors who meet to learn, network, and often share properties for sale. Investors often have duplexes, fourplexes and other multi-family buildings available or know of someone who does.
4. Evaluate the Potential Duplex, Triplex, or Quadplex Purchase
Once you find a building for sale, you need to evaluate the potential purchase. An evaluation includes assessing the building’s location, inspecting the building’s condition, and evaluating the numbers for the property.
Assess the Building’s Location
It’s probably obvious for the homebuyer considering a place to live, but investors should also be paying attention to properties located in solid neighborhoods. Homebuyer and investor alike should be looking in communities with good schools, shopping, and services – in short, places where people want to live.
Better located properties provide a stronger base of tenants, which means stronger rents along with tenants who will take better care of your property. Both the better location and the stronger rental performance of those properties will give you a greater chance of appreciation for the building.
Don’t be lured by cheap-priced properties in bad areas; those are rarely a good situation. Unless there’s economic development in the area, properties won’t appreciate, and the buildings bought at cheap prices usually need extensive upfront and ongoing repair. Rents will not likely increase, and tenant problems like unpaid rent and property damage rampant. Knowledgeable investors have a good rule of thumb: if you wouldn’t want a family member to go there after dark, you probably don’t want to buy there!
Inspect the Building’s Condition
It’s certainly possible to buy a duplex or other small multi-unit property in rent-ready condition. Of course, those will likely be at market price.
On the other hand, a foreclosure or fixer-upper may offer a really good deal. Buying at below market price builds equity when you buy the property. However, you’ll have to spend time and money getting it ready to rent. That’s an expense itself, but so are lost rent and the payments you’ll have to cover until tenants are in the property.
Hire a Professional Inspector
It’s important to have a professional building inspector or contractor look at the property you are considering. Multi-units are more complex than single-family dwellings: sometimes they were not built properly; often, they have shared utilities and other systems which can pose problems; and, there can be varying conditions from one unit to the next along with potential issues with common areas.
You’ll want a detailed inspection report of what needs to be repaired. The inspector’s report will be a good negotiating tool in the purchase. Any offer you make should be contingent up your approval of the inspection – that way, if you’re informed there are serious issues, you can gracefully back out of the offer or otherwise negotiate the deal.
Evaluate the Numbers for the Property
Investor or homebuyer – because rental income is involved, anyone planning on buying a multi-family building must examine the numbers. These include the rental rates, income potential, expenses, and net income for the property.
It’s a good idea to get 1 or 2 years of this information from the seller in the form of their official books or tax returns.
Rental Rates For the Multi-Unit Building
Investigate the rental rates for the building and the area where the property is located. Determine whether the rents for your subject property are competitive. Determine to what extent rents will cover the expenses of the building, particularly if you are living in one unit.
Don’t make the mistake of impulsively purchasing a property and then ending up with losses you can’t afford. That happens often to people who buy high-end duplexes and plan on living in one unit but overly depend on keeping the other unit rented to cover payments they couldn’t otherwise afford.
Investigate the Vacancy Rate for the Building
How often do the units tend to stay rented? If you are in a high-turnover area, it’s going to noticeably affect the income from the property – and will also increase your workload. High vacancy rates can also affect your ability to finance the building if it stretches the numbers too thin.
Gross Operating Income
Gross operating income refers to the actual rent collected from the property. Don’t simply multiply the rent x number of units. It’s what actually comes in that matters – after subtracting for vacancies.
Look at the Building’s Expenses
Expenses for a small multi-family building include property taxes, insurance, advertising, maintenance, management expenses (if you hire that out), and professional services like legal or accounting work. Don’t forget to include the interest cost of your mortgage; the ability for the rents to cover your debt service is important.
Also look at the seasonality of expenses. Some months (perhaps winter in your area), will have higher costs than others. It’s good to be aware of when the budget might be hit harder than at other times.
Net Operating Income (NOI)
Net operating income is what’s left over from gross rent after paying the expenses. Typically, this goes by the name “cash flow”. Ideally, you want cash flow to be a positive figure, meaning you made money during that period. If it’s negative, it means the property cost you money during that period.
Let’s consider an example of net operating Income (cash flow) for a 3 unit building, with each unit rented for $600 per month:
Net Operating Income (NOI) for a Fully Rented 3-Unit Building
| Potential Rent Roll (3 of 3 units @ $600/month) | ||
| - Vacancy (10%) | ||
| = Gross Operating Income | ||
| - Expenses | ||
| = Net Operating Income (Cash Flow) |
This property is throwing off $520 per month in cash flow, which is not bad. Keep in mind that all 3 units are rented.
If the owners plan on living in one unit, the figures would be different because the property would only generate $1,200 in monthly rent (although expenses might be slightly lower, we’ll keep them the same for simplicity).
Net Operating Income for a 3 Unit Building With Owners Living in 1 Unit
| Potential Rent Roll (2 of 3 units rented @ $600/month) | ||
| - Vacancy (10%) | ||
| = Gross Operating Income | ||
| - Expenses | ||
| = Net Operating Income (Cash Flow) |
In this case, even though there’s a $20 per month loss, keep in mind the owners are living there virtually cost-free – the tenants are paying for the building!
5. Make an Offer on the Duplex, Triplex, or Fourplex You Want to Buy
Negotiation is part of how to buy a duplex or other multi-unit property. Negotiation is usually easier than with single-family properties because sellers aren’t as emotionally tied to them as with their homes. Getting a good deal on a rental may not seem important; but, price affects your monthly carrying costs and a good price means you are making money going into the deal.
Determining Potential Value When Buying a Duplex, or Other Multi-Unit Building
Because multi-unit properties are ultimately intended to rent, determining value is a bit more involved than for a single-family building. Several simultaneous methods are used to arrive at a multi-family building’s value. These include comparative market analysis, income analysis, and replacement cost valuation.
Comparative Market Analysis for a Duplex or Small Multi-Family Building
A comparative market analysis looks at similar buildings (“comps”) that have recently been sold to help arrive at a value. If you are are working with an experienced real estate agent, she or he can help you with a comparative market analysis. It’s important to note, though, that this method does not consider the income the building generates, which is important. It only looks at what other similar buildings have sold for.
The Income Approach for Determining Value
With the income approach, appraisers use a handful of calculations that use the building’s gross rent and net income along with rents for similar units in the area to determine the value of the building. Calculations like the gross rent multiplier and capitalization rate compare the financial performance of your building with the financial performance of other buildings in the area.
Replacement Cost
Replacement cost examines what it would cost to reconstruct a similar building. In simple terms, it uses the cost-per-square-foot to fully rebuild a similar property. So, if the cost-per-square-foot in your area is $100/sq ft, and the building you are considering has 2,000 square feet, then the replacement cost would be $200,000 (2,000 x $100).
6. Finance the Purchase of the Duplex, Triplex, or Fourplex
Financing for small multi-family properties is not much more difficult than financing a single-family dwelling. Many of the same options are available to you, including conventional financing, FHA and VA loans, state programs, short-term financing, and seller-financing. Additionally, the income derived from renting the units will help you qualify for the loan.
Jason Reed, with Remax Results, also known as the Duplex Doctors acknowledges the value of rental income in qualifying for the purchase:
“By choosing a duplex [or small multi-family] over a
single family home, buyers are also offered the potential to qualify for more. Many mortgage lenders will consider up to 70 – 75% of the anticipated rental income that the property should generate as stated income when you’re qualifying.”Conventional Financing When Buying Duplexes and Other Small Multi-Family Purchases
Conventional loan options for small multi-unit buildings are prevalent and relatively easy to obtain. As a buyer, your credit worthiness and income will be considered, but the financial performance of the building will play a helpful role in getting approved.
With conventional loans, expect to put 10% or more down. In most areas of the country, limits for conventional multi-unit loans are $543,000 for duplexes, $656,000 for triplexes, and $815,000 for fourplexes.
FHA Financing for Purchasing Duplexes, Triplexes and Quadplexes
It’s a common misconception that the Federal Housing Administration (FHA) will only lend on single-family homes intended for one’s primary residence. What’s not common knowledge is that FHA will lend on buildings containing up to 4 units, if the buyer intends to live in one unit. FHA also considers the net rental income in the qualification process. So, if you have a modest income the rents from the building can actually help you get qualified.
FHA requires as little as 5% down on multi-family purchases, with loan limits in most area of the country of $352,000 for duplexes, $426,000 for triplexes, and $530,000 for four-family buildings.
VA Financing for Purchasing Duplexes and Small Multi-Unit Properties
Similar to the FHA, the Veterans Administration (VA) will lend on buildings containing up to 4 units, if the buyer intends to live in one unit. Also similar to the FHA, net income from the building will be added to your household income to help qualify for the loan.
If you are qualified you may be able to obtain a VA loan for $0 down, even on multi-family purchases. VA loan limits range from a low of $417,000 to a high of $1,094,000 (depending on location) despite the number of units.
State Financing Programs for Purchasing Duplexes and Small Multi-Family Buildings
State programs, even for first-time home buyers, typically follow the lead set by FHA and VA. If you are considering using something like a first-time homebuyer loan in your state, chances are you may be able to use it on the purchase of a 2-unit to 4-unit building, if your intent is to live in one of the units. Net rental income will be added to your income to help qualify for the loan.
Many state and local financing programs are low or no-down payment, and interest rates are competitive with FHA and VA loans.
Short-Term Financing
Short-term financing is used when rehabbing a property, the property is empty or has low occupancy rates affecting your ability to qualify or you otherwise can’t qualify for permanent financing for some reason. These loans will provide a short-term financing solution until you can obtain permanent financing. They have higher rates, are often interest only, and need to be paid off relatively quickly via a refinance or even sale of the property.
Companies like LendingOne can provide short-term financing if you need to rehab the property, plan to quickly resell if for a profit, or otherwise need bridge financing. Loans are available for up to 90% of the total cost. Getting prequalified online is easy.
Seller Financing
Since a multi-unit building is an investment property and not someone’s home, there’s a good possibility you can convince the seller to do owner financing. Basically, owner financing refers to the seller taking monthly payments instead of getting the full proceeds from the sale at closing.
Sellers may agree to owner financing because the monthly payments are a potential source of interest income. If the seller doesn’t need all their cash at the time of the sale, the long-term income may be attractive, particularly if you offer above-market interest. Additionally, you may find the sellers flexible with the terms, which can help keep the purchase manageable.
7. Close on the Purchase of the Duplex or Small Multi-Family Building You Are Buying
There are three considerations when closing on small multi-family properties that are different from closing on single-family properties: 1) the title company or escrow agent should be familiar with small multi-unit deals; 2) the day of the month you close matters; and, 3) be sure to have security deposits transferred to you at closing.
Select a Title Company or Escrow Agent Familiar with Duplexes and Small Multi-Unit Deals
Most title companies or escrow agents can confidently handle the closing on a multi-family property. Yet, because rents and security deposits are involved, the closings are a bit more complicated; so, it doesn’t hurt to interview a few settlement companies to ensure you find ones with experience handling multi-family buildings.
Settlement companies go by many names – title companies, escrow companies, or escrow agencies. In some states, attorneys are used for real estate closings. Whatever the case is in your state, be sure they have experience with multi-unit properties and always get title insurance to protect you.
The Day of the Month You Close Matters
Because you are acquiring a rental property, a portion of the current month’s rent accrues to you at settlement. If you close right after the first of the month, the majority of the month’s rent will be transferred to you at closing; that can mean hundreds of dollars transferred to you the day you take title.
Be Sure to Have Security Deposits Properly Transferred to You at Closing
Security deposits should also be transferred to you at settlement. However, unlike rent which goes in your pocket, security deposits are merely yours to safeguard. Don’t make the mistake of using tenants’ security deposits as if it was your money. Security deposits technically belong to the tenants until they may be required for unpaid rent or damage.
Most states require landlords to keep security deposits in a trust account separate from all their other finances. Make sure security deposits are assigned to you at closing (and their total clearly specified), and immediately get them into an account separate from your personal funds or the account used for the property.
The Bottom Line
Duplexes, triplexes, and fourplexes can be good investments either for investors or residential home buyers. Learning how to buy a duplex or other mult-unit investment requires some real estate savvy a bit more involved than with buying single-family homes, but not beyond a beginner’s capabilities. If you are prepared to be a bit more involved in the purchase and management than with a single unit, these small multi-family purchases can make good investments.
Proper financing is one of the most important factors when buying a duplex, triplex, or fourplex. LendingOne is a national lender that offers fix and flip loans and 30-year rental loans for multi-unit buildings with rates starting as low as 5.39%. You can borrow up to 90% LTC and up to 80% LTV.
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