Buying a duplex, triplex, or fourplex can be a good investment for both investors and residential homebuyers. 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 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. Visio Lending is a national lender that offers 30-year rental loans for multi-unit buildings with rates starting as low as 5.3% for prime borrowers. You can borrow up to 80% LTV and get prequalified in minutes.
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 Multi-Family 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 multi-unit 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 multi-unit properties include:
Live in One Unit and Generate Rental Income
If you are looking for a primary residence, buying a fourplex, duplex, or other small multi-unit 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 multi-unit investment properties without taking a deeper dive into larger apartment buildings. While screening tenants and managing renters in any kind of multi-unit 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 multi-unit buildings without getting overwhelmed.
Diversifies Rent and Consolidates Expenses Among Multiple Units
Also of interest to investors is how a multi-unit 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.
Multi-family 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 Multi-Unit 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 multi-unit 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 constantly on-call.
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.
On the other hand, even with a duplex, 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 multi-unit properties don’t always care for the property as much as with single-family rentals, so there is 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 greater 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
Multi-unit 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 re-rented, 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
Multi-unit buildings can obviously be much larger than two- to four-units. Buildings that are five- or more-units require commercial financing versus 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 are typically 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 Multi-Family Buildings vs Apartment Complex Management
A homebuyer or do-it-yourself 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 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, 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 lead sources as are for sale by owner (FSBO) sites that often have multi-family 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 you start making money from day one.
Use a Local Real Estate Agent
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. 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.
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)
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 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 cheap 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 multi-unit 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 a really good 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 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 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 gracefully back out of the offer or otherwise renegotiate the deal.
It’s important for investors or homebuyers planning to buy a multi-family 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:
Multi-Unit 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 multi-unit 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 U.S. 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 actually 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.
Expenses for a small multi-family 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.
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. 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:
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
= Net Operating Income (Cash Flow)
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
Potential Rent Roll (two of three units rented @ $600/month)
- Vacancy (10%)
= Gross Operating Income
= Net Operating Income (Cash Flow)
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 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 monthly carrying costs and a good price means you are making money going into the deal.
Determine Potential Value
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
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, she or he 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 and capitalization rate compare the financial performance of the building with the financial performance of other buildings in the area.
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, the replacement cost would be $200,000 (2,000 x $100).
6. Finance the Purchase
Financing for small multi-family properties is no 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 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 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% to 75% of the anticipated rental income that the property should generate as stated income when you’re qualifying.”
Conventional loan options for small multi-unit 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 multi-unit 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, Visio Lending could be a good fit. They offer terms of up to 30 years with rates starting at 5.3%, no balloon payments, and up to 80% LTV on purchases and 75% loan to value on refinances. Prequalify in minutes.
FHA Financing for Buying a Fourplex or Other Building
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 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 actually help you qualify.
FHA requires as little as 5% down on multi-family 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 Veterans Administration (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 multi-family 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 Department of Veterans Affairs 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 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.
Companies like RCN Capital can provide short-term financing if you need to rehab the property, plan to quickly resell it for a profit, or otherwise need bridge financing. You can receive a loan of up to $2.5 million in as quickly as 10 days. Apply online in minutes.
Since many multi-unit 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.
Visio Lending is a national lender that offers 30-year term loans for up to 80% LTV. There is no seasoning or debt-to-income requirements and strong borrowers can get prequalified in minutes.
7. Close the Purchase
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
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 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 immediately get them into an account separate from your personal funds or the account used for the property.
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 multi-unit 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 multi-family purchases can make good investments.
Proper financing is one of the most important factors when buying a duplex, triplex, or fourplex. Visio Lending is a national lender that offers 30-year rental loans for multi-unit buildings with rates starting as low as 5.3%. You can borrow up to LTV and prequalify in minutes.