Buying a Duplex, Triplex, or Fourplex—The Ultimate Guide

Buying a duplex, triplex, or fourplex can be a good investment for both investors and residential homebuyers. Purchasing small multiunit properties requires some basic understanding of how to locate, finance, and manage multiple units. Those activities are only slightly more involved than buying single-family properties but can lead to a profitable multiunit investment.

Proper financing is one of the most important factors when buying a duplex, triplex, or fourplex. CoreVest is a national lender that offers both short- and long-term loans for qualified investors. Rates begin at 5% fixed, and you can borrow up to 75% loan-to-value (LTV) ratio. Fill out a short contact form, and a representative will get you more details within 24 hours.

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Buying a duplex, triplex, or fourplex can be broken down into seven steps.

1. Consider What Property Type Is Right For You

Whether you’re buying a duplex, triplex, or fourplex as an investor or a potential homeowner attempting to offset your mortgage with rental income, buying a small multifamily investment property differs from buying a single-family property. Assessing the benefits and downsides at the outset is important in determining if it makes financial sense and if being a landlord is right for you.

Benefits of a Duplex or Small Multifamily Building

There are several reasons why buying a duplex, triplex, or fourplex makes sense. Homebuyers can live in one unit and collect rental income from the others. In this way, small multiunit properties provide a good entry into real estate investing, and investors can diversify rental income and consolidate expenses across multiple units.

Some benefits of buying multiunit properties include live in one unit and generate rental income; duplexes, triplexes, and fourplexes as beginning investments; and diversifies rent and consolidates expenses among multiple units.

Live in One Unit and Generate Rental Income

If you are looking for a primary residence, buying a fourplex, duplex, or other small multiunit building will provide you with a place to live along with rental income that can be used to pay the mortgage and living expenses. You can live in one unit while renting out the others to generate income.

It is possible, particularly with triplexes and fourplexes, that rental income can cover the mortgage and possibly other expenses. In effect, you can purchase a place to live and have your tenants pay for you to live there as the property increases in value and builds equity. Some owners later buy another home to live in and rent out their former residence, increasing profits.

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.”

Duplexes, Triplexes, and Fourplexes as Beginning Investments

Buying a duplex, triplex, or fourplex provides a good entry into multiunit investment properties without taking a deeper dive into larger apartment buildings. While screening tenants and managing renters in any kind of multiunit building is a bit different from single-family properties, the differences aren’t significant. Duplexes and the like provide a good transition from managing single-family properties to handling multiunit buildings without getting overwhelmed.

Diversifies Rent and Consolidates Expenses Among Multiple Units

Also of interest to investors is how a multiunit building—even a small one—diversifies income and consolidates maintenance costs across the units. Investors who own single-family properties understand if their property experiences vacancy, they are out 100% of the rent since it is only one unit.

Multifamily properties help mitigate that issue. If one unit is vacant, there are others potentially still rented, so there is still income to cover expenses and potentially continue to generate positive cash flow.

There’s also the benefit of rental property maintenance costs being consolidated into one building as opposed to being spread among many. For example, if you own four single-family homes, that’s potentially four roofs to maintain. If you’re buying a fourplex, you are only concerned with one roof.

Disadvantages of Buying a Duplex or Small Multiunit Building

While there are advantages to buying 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. Tenant turnover is higher, and tenant care lower in multiunit buildings than with single-family properties.

Living Next Door to Tenants

The benefit as a homebuyer living in one unit and generating rent from the others has a downside. You’ll have landlord responsibilities toward tenants and property management duties. That means you must be prepared for things like advertising vacancies, screening applicants, collecting rents, handling repairs, and sometimes evicting tenants.

Living next door to your tenants can pose challenges. If you’re clear about what this entails, you can be prepared and successful. If your vision is clouded by only seeing potential rental income without grasping the managerial side, it could end up being very stressful. On-site landlords must prepare for tenants knocking on their doors at inopportune times and feeling like they’re on-call constantly.

Higher Tenant Turnover and Less Tenant Care

Renters of single-family homes tend to treat the property as if it were their own home. They’re invested in their neighborhoods, active in local schools, and participate in community affairs. As a result, it’s not uncommon to see tenants in single-family units stay for several years and provide better care for the property.

Even with a duplex, however, renters have more of an “apartment mindset.” They are more transient, which means higher tenant turnover. It is sometimes more difficult to collect unpaid rent. Tenants in multiunit properties don’t always care for the property as much as with single-family rentals, so there are more maintenance and repairs than with single-family rentals.

2. Choose Between a Duplex, Triplex, or Fourplex

Deciding on buying a duplex, triplex, or fourplex takes some consideration. The choice is dependent on balancing rental income needs and management responsibilities. The more units, the higher the potential income, but the more intensive it will be to keep the building rented, handle tenant issues, and manage maintenance and repairs.

Balance Rental Income and Management

Multiunit properties come in a variety of floor plans and names: doubles and triples, over-and-unders, quadplexes, and fourplexes. Ultimately, the size of the building you select—whether it’s a two-, three- or four-unit building—will be based on how you balance rental income and managerial responsibilities. Don’t just see dollar signs—make sure to consider marketing, routine, preventative, and emergency maintenance, and property management duties.

Buy a Duplex and Live in One Unit

Homebuyers sometimes buy a duplex and live in one unit to offset living expenses with income from the other unit. Buying a duplex for this purpose can save money on housing expenses. If the rented unit becomes vacant, the owner loses that income until it is rerented, so they would want to have several months reserves if their finances can’t sustain a vacancy. Buying a triplex apartment building can offset some of this vacancy loss.

What Is a Triplex Apartment Building?

A triplex apartment building includes three separate living units. It can be one or more stories tall, depending on the building’s layout. A triplex apartment building can also be one unit with three floors and be connected to other units like row houses and townhomes. Triplex apartment buildings are a good investment for living in one unit, maximizing rental income and minimizing expenses since at least one income-producing unit can be rented at any time.

Financial Sense of Four Units or Less

Multiunit buildings can be much larger than two- to four-units. Buildings that are five- or more-units require commercial financing vs residential financing. Managing a larger building generally moves beyond do-it-yourself, requiring hiring a property management company or on-site property manager.

Commercial Lending vs Residential Lending

Homebuyers and residential investors can use traditional residential lending for buying a duplex, triplex, or fourplex. Someone pursuing a 12-unit apartment building will need to know how to get an apartment loan. Apartment loans are commercial loans, which are different from residential mortgages, with much more emphasis on the financial performance and potential of the property rather than on the buyer’s qualifications.

Commercial real estate loans typically are used for large multifamily properties consisting of five or more units. They usually carry higher interest rates and fees, with a shorter loan term of 20 years or fewer, which raises the monthly mortgage payment. Commercial loans can be used for any-sized property, but make the most sense for properties with five or more units due to their cost and shorter term.

Small Multifamily Buildings vs Apartment Complex Management

A homebuyer or do-it-yourself (DIY) landlord can typically handle the management responsibilities when buying a duplex, triplex, or fourplex. Buildings larger than four units are more challenging to self-manage. Leveraging property management software, hiring a property management firm, or on-site manager enters the equation. Lenders will look for how a property is managed in the loan application process, including the investor’s experience in buying and managing a larger building.

3. Locate a Duplex, Triplex, or Fourplex

Locating a duplex or other small multifamily building to buy is not difficult. In most cities, they are prevalent. You can search on your own, use a local real estate agent, or if you are an investor, turn to local real estate investors associations (REIAs) for leads.

Search for a Duplex or Small Multiunit Property on Your Own

One of the best reasons to search for properties yourself is that since a real estate agent does not handle the building, 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 lead sources as are for sale by owner (FSBO) sites that often have multifamily properties listed.

If you want to purchase a one- to four-unit turnkey rental property, check out Roofstock. Roofstock has custom filters, so you can find a property based on your budget and desired location. Membership on its site is free, and investors can find one- to four-unit homes that are already leased so that you start making money from day one.

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Use a Local Real Estate Agent

The mainstream real estate industry provides access to the biggest pool of properties available for sale. It’s not just single-family buildings; it includes all manner of duplexes and other small multifamily units. Many agents are comfortable working with small multiunits, 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.

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. However, 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 REIAs

If you are an investor seeking a small multiunit property, consider joining your area’s 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 multifamily buildings available or know 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 property’s financials.

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 higher rents along with tenants who will take better care of the unit. Both the better location and the stronger rental performance of those properties will give a greater chance of appreciation for the building.

Unless there’s economic development in the area, cheaply-priced properties in bad areas won’t appreciate, and buildings bought at low prices usually need extensive upfront and ongoing repairs. Rents will not likely increase, and tenant problems like unpaid rent and property damage are common. Knowledgeable investors have a good rule of thumb: if they wouldn’t want a family member to go there after dark, they probably don’t want to buy there.

Inspect the Building’s Condition

It’s certainly possible to buy a duplex or other small multiunit property in rent-ready condition. Of course, they will likely be at market price. Rent-ready properties include turnkey real estate, and sometimes come fully rented with property management services.

On the other hand, buying a foreclosure or fixer-upper may offer an excellent deal. Buying below market price builds equity. 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 essential to have a professional building inspector or contractor look at the property you are considering. Multiunits are more complex than single-family dwellings: sometimes they aren’t built properly; often, they have shared utilities and other systems, which can pose problems. Plus, 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 upon your approval of the inspection. If you’re informed about serious issues, you can back out of the offer gracefully or otherwise renegotiate the deal.

Evaluate the Seller’s Pro Forma

It’s important for investors or homebuyers planning to buy a multifamily building to examine the property’s financial data, including rental and other income, expenses that will transfer with the property, and net income for the property. This financial information is often referred to as a seller’s real estate pro forma.

Buyers should also create their own pro forma and compare it with the seller’s pro forma to evaluate the feasibility of the deal. Buyers will want to get one or more years of financial history from the seller and verify this information from their accounting records or tax returns.

Some items in the real estate pro forma include multiunit building rental rates, calculate the vacancy rate, gross operating income, property expenses, net operating income (NOI), NOI for a fully rented three-unit building, and NOI for an owner-occupied three-unit building.

Multiunit Building Rental Rates

Investigate the current rental rates for the building and the property’s location by looking at similar units for rent. You can find comparable rentals on websites like Craigslist, Zillow, Apartments.com, local newspapers, and property management company websites.

Determine whether the current rents are competitive and cover building expenses, particularly if you are living in one unit. Don’t make the mistake of impulsively purchasing a property you can’t afford, plan on living in one unit, and depending heavily on income from the other unit to cover expenses they can’t afford.

Calculate the Vacancy Rate

Some types of properties and locations experience frequent tenant turnover, which can impact income, maintenance, and financing. To find the local vacancy rate, call local lenders who loan on multiunit rental properties, and ask what they use for a vacancy rate. Also, ask local investors. Compare this information with your vacancy rate calculations.

The current average United States vacancy rate is approximately 7%. This is an average of all vacancies and may not reflect the vacancy rate where your property is located. Calculating the vacancy rate is important for financial success. Some types of properties and locations experience frequent tenant turnover. High-turnover areas can affect rental income, increase maintenance workload, and impact financing.

Gross Operating Income

Gross operating income refers to the actual rent and other income collected from the property. Don’t simply multiply the per-unit rent by the number of units. It’s what comes in that matters after subtracting vacancies and credit losses. Credit loss includes a tenant’s bounced checks and other uncollected rent. With proper tenant background screening, loss is limited but should be included when calculating rental property gross income.

Property Expenses

Expenses for a small multifamily building include property taxes, insurance, advertising, maintenance, utilities, property management fees if you outsource, and professional services like legal or accounting. Include mortgage payments, including interest. Also, include seasonal expenses. Some months have higher costs than others. It’s good to be aware of when the budget might be hit harder than at other times.

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. Calculating the NOI will show you how profitable the prospective property may be.

Let’s consider an example of net operating income (cash flow) for a three-unit building, with each unit rented for $600 per month:

NOI for a Fully Rented 3-Unit Building

This property has $520 per month in positive cash flow. Keep in mind that all three units are rented, though we accounted for a 10% vacancy rate based on local data. 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.

NOI for an Owner-Occupied 3-Unit Building

In this case, even though there’s negative cash flow and a $20 per month loss, keep in mind the owners are living there virtually cost-free since rental income is paying building expenses. Owner-occupied landlords may want to consider installing coin-operated laundry, paid storage, and other potential sources of income to offset rental income loss from the owner-occupied unit.

5. Make an Offer

Negotiation is part of buying a fourplex or other multiunit property. Negotiation is usually easier than with single-family properties because sellers aren’t as tied emotionally to them as with their homes. Getting a good deal on a rental may not seem important, but price affects monthly carrying costs, and a good price means you are making money going into the deal.

Determine Potential Value

Because multiunit properties ultimately are 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 multifamily building’s value. These include comparative market analysis, income analysis, and replacement cost valuation.

Comparative Market Analysis

A comparative market analysis looks at similar buildings (“comps”) that have recently sold to help arrive at a value. If you are working with an experienced real estate agent, they can help you with a comparative market analysis. It’s important to note that this method does not consider the income the building generates, which is important. It only looks at what similar buildings have sold for and their market histories.

The Income Approach

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 (GRM) and capitalization rate compare the financial performance of the 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 rebuild a similar property fully. So, if the cost-per-square-foot in your area is $100/square foot, and the building you are considering has 2,000 square feet, the replacement cost would be $200,000 (2,000 x $100).

6. Finance the Purchase

Financing for small multifamily properties is no more difficult than financing a single-family dwelling. Many of the same options are available to you, including conventional financing, Federal Housing Administration (FHA), and US Department of Veterans Affairs (VA) loans, state programs, short-term financing, and seller financing. Additionally, the income derived from renting the units will help you qualify for investment property loans.

Jason Reed, with RE/MAX Results, also known as the Duplex Doctors, acknowledges the value of rental income in qualifying for the purchase:

“By choosing a duplex (or small multifamily) over a single family home, buyers are also offered the potential to qualify for more. Many mortgage lenders will consider up to 70% to 75% of the anticipated rental income that the property should generate as stated income when you’re qualifying.”

Conventional Financing

Conventional loan options for small multiunit buildings are prevalent and relatively easy to obtain. As a buyer, your creditworthiness 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 multiunit loans are $620,200 for buying a duplex, $749,650 when buying a triplex apartment building, and $931,600 when buying a fourplex.

If you need financing to purchase an investment property, CoreVest could be a good fit. Their single rental property loans offer terms up to 30 years, with up to 75% LTV, and can be used on residences that house one to four families. The lender requires a 600 minimum credit score.

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FHA Financing for Buying a Fourplex or Other Building

It’s a common misconception that the FHA will only lend on single-family homes intended for one’s primary residence. What’s not common knowledge is that the FHA will finance buildings containing up to four 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 help you qualify.

FHA requires as little as 5% down on multifamily purchases, with loan limits in most areas of the country of $403,000 for buying a duplex, $487,000 for triplex apartment buildings, and $605,500 for buying a fourplex.

VA Financing for Buying a Duplex or Other Property

Similar to the FHA, the VA will lend on buildings containing up to four units, if the buyer intends to live in one unit. Also similar to the FHA, net income from the building will be added to the total 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 multifamily purchases. Current VA loan limits start at $484,350. In 2020, a bill that the president signed into law will remove the cap and allow the VA to back loans that exceed the conforming loan limit, despite the number of units.

State Financing Programs

State programs, even for first-time homebuyers, 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 two-unit to four-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, including affecting your ability to qualify for permanent financing. Rehab and similar 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 by refinancing or selling the property.

Seller Financing

Since many multiunit buildings are investment properties and not someone’s home, there’s a good possibility you can convince the seller to consider owner financing. Owner financing is when the seller becomes the lender, taking monthly principal and interest payments instead of getting the full proceeds from the sale at closing. Owners typically finance up to 10 years and may ask for a slightly higher rate than conventional loans.

Sellers may agree to provide 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 the Purchase

There are three considerations when closing on small multifamily properties that are different from closing on single-family properties, which are the title company or escrow agent should be familiar with small multiunit deals, the day of the month you close matters and be sure to have security deposits transferred to you at closing.

Select a Title Company or Escrow Agent

Most title companies or escrow agents can confidently handle the closing on a multifamily 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 multifamily 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 multiunit properties and always get title insurance to protect you.

The Closing Date

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. You will also pay closing costs on your loan, which can range from 2% to 6% of the loan amount.

Security Deposit Transfers

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 were your money. Security deposits technically belong to the tenants unless they are required for unpaid rent or damage to the property.

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 totals clearly specified and get them immediately into an account separate from your personal funds or the account used for the property.

Bottom Line

Buying a duplex, triplex, or fourplex can be a good investment for either investors or residential homebuyers. Learning how to buy a duplex or other multiunit investment requires some real estate savvy and is a bit more involved than buying single-family homes. If you are prepared for more work than with a single unit, small multifamily purchases can make good investments.