4plex Vs. SFM for first time investor?

Question

First time investor...Came across a good opportunity to invest in a 4plex (with established tenants but inspection can only be done during the DD period).

I am feeling uneasy as I have always envisioned starting with a single-family home.

cons? Pros? Would banks treat the loan differently? Anything I should consider differently than I would purchasing a SFH? If the numbers indeed make sense should a first time investor go for a 4plex or start with something smaller at first?

TIA

Ryan Thomson · Answer

@Sophia Bahena my understanding is that if you are planning on moving in, an FHA loan you could still get a 4plex for 3.5% down. If you went with a conventional loan I think you have to put down at least 15% maybe more.For house hacking (moving in to one unit) my criteria consists of a couple things. First, it must allow you to cash flow or live for free while you live there. Second, It must have a good exit plan to cover your mortgage and make $200+ a month after you move out (often times much more) and do your next house hack (if your goals are to scale).Here is what I look for to make that happen:1. An easy way to split into multiple units: a walk out basement, an ADU, or a garage that could be converted to an apartment, multifamily - this allows for airbnb or more rental income to a long term tenant2. 4 or more bedrooms (or 3 bedrooms with the potential to easily add more) - you could get about $650-800 a bedroom in Colorado Springs

Saban Becirovic · Answer

As far as I'm aware, the down payment should be the same when purchasing from 1 to 4 units. If it was 5 or more units, then you would likely need to use commercial financing and that may require 25% down with different terms then a typical mortgage. However, everything still comes down to the lender you are using.

As far as what you should do, that is something only you can decide after analyzing both properties. I would suggest getting a little bit out of your comfort zone. The following quote came directly from Brandon Turner's Instagram and I believe it is spot on for any type of growth.

"I'm such a big believer that you have your comfort zone, your inability zone, and your STRETCH ZONE. Your "Inability zone" is
where you don't have the requisite skills or knowledge in order to progress towards a certain level (for example, I wouldn't tell somebody who's getting into real estate investing with zero knowledge, to go out and buy a 150-unit). Mastery doesn't happen overnight. The magic happens when we reach our "stretch zone"- it's where you take enough action and risk in order to gain experience and knowledge outside of your comfort zone, but not too outside of it that you're completely lost and don't
know what to do. For example, if your comfort zone is buying single family homes? Maybe your next step is to try a small multifamily like a duplex/triplex/fourplex!" -

Good luck with your ventures!

Nick Barlow · Answer

@Sophia Bahena 4Plex and get a property manager. I am extremely biased here-I only have MF properties and partner with PM teams-but you asked 🙂.

Set aside a percent of rents for capex/vacancy/repairs (I usually assume 25-30% separate of PM fees, PITI, and property specific costs like water, trash, etc).

If the deal doesn’t work out like the above-at rents currently in place, it’s not a “deal”…at least not for me and for my criteria.

In my opinion, it’s best to have $3000-$7000 in reserve, depending on costs for your area for roof or turnover-separate from you down payment too.

Good luck!

Jonathan Greene · Answer

Pros - more cashflow, protection of 3 other units if one stops paying, 4 units that can go up in rent each year, still only one roof

Cons - 4 of everything that can break (appliances, hot water heaters, furnaces, electrical boxes), 4 tenants to manage, existing tenants paying under market value

As a straight investment, your downpayment should be the same since you aren't house hacking either and you will get benefits on the 4-plex of more verified income. You have to really decide if you are up for 4 tenants as a first-time landlord. Cash is great, but 4 new tenants calling you all the time and complaining about each other is not.

Matthew Crivelli · Answer

If the numbers works I think it's a nice way to start up passive cashflow. Getting a 30Y fixed at 20% should be more than doable and It will cost you a lot less having 4 units all on one property vs. having to pay taxes and insurance on 4 SFR's.

Candyce Chen · Answer

Hi @Sophia Bahena

I truly admire your courage on considering a 4plex on your fist deal. Great way to start. Cash flow is generally better in 2-4 units vs. a SFH in the same area. Here are my 2cents:

1.  Tenants: established tenants have Pros & Cons. You might want to consider if the rent is below market rate, can you raise the rent in the future? Do your existing tenants have stable income to cover rent? Getting rid of all existing tenants - you might need to keep good relations  with them so they don’t trash the property when moving out. You can also reduce the rent and remodel each unit while tenants are in them.

2. Occupancy: SFH tenants tend to treat the property like their own and stay longer. 4plex might have a higher occupancy rate & turnover rate.

3. Pro Property Management or Self management: PM usually charges 1st month rent when it places a new tenant. For any repairs, some PM companies will charge a fee too. If you are first time self-manage, you might have to think about one vs. four toilets, appliances, house showings, and leases …etc.  Handymen and contractors are in short supply theses days- a property manager should have access to these resources to limit delays on any projects that need to be done.

4. Properties Age & condition: this will affect your future capital expense, cost.

5. Taxes: you can ask for taxes return record from the current property owner as one of the contingencies on the P&S. It will show clearly how much is the rent on schedule E.

6.  Utility sub-metering for 4plex: it might cost more to set up, but you will save more money in a long run. If it’s in a colder states with only one boiler, if might not be feasible. You can bring an experienced  general contractor during the home inspection.

7.  Leases: some states are better to take over without existing leases from current tenants if it’s month to month. Other states are better to take over with existing leases due to eviction laws.

You might want to check with a legal professional to make sure if this in your specific state.

8. Downpayment: anything less than 4 units should have similar loan terms. It should be the same DP for SFH & 4plex.

9. DOM: 4 months might seems long for a 4plex nowadays, you could check past 3-9 months sold history for duplex/triplex/quadplex in the same area. I would compare town size, rental history, property conditions, locations, listing price…etc to understand why this particular property is on the market for so long. Talking to some local PMs, realtor, handymen, and contractors might also provide good insights too.

10. Exit strategy: 2-4 U it’s have a more limited resell market- only other investors (or house hackers) will buy it and the resell is based on estimated cash flow. SFH has a larger pool of buyers because it can be sold to another investor, to somebody that wants to occupy it or for use as a STR.  In many markets, SFH will show more appreciation because the selling price is based on comp sales instead of cash flow.

Here is another post about the same topic. Best luck on your 1st deal on whichever one you choose to do. Happy Investing!!!

~ Candy C.https://www.biggerpockets.com/...

Joe B. · Answer

I’m in Wilmington down the street. If I was in your situation, 4plex 100%

Angel Dejesus · Answer

@Sophia Bahena

Hope you get the 4 units. The difference between both are just numbers.

Which ever you choose, Once you make the decision you’ll feel like it was the greatest decision you ever made.

Just envision yourself living the life you want and using real estate to do it. You’ll never doubt yourself again. We’ll never say never.

Just do it

Bud Gaffney · Answer

@Sophia Bahena 5! The more units the better, trust me.

Sophia Bahena · Answer

@Caleb Brown thank you for this info as i had no idea about the DP diff.

4plex Vs. SFM for first time investor?

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