Starting off with a multi

[Erik E.]

Hey everyone. I am looking to start investing with a multi unit property, most likely a 4-plex. I always see on duplex listings, "Live in one side, have a renter pay your mortgage" or something catchy to that effect. If you just want to live without a mortgage, that sounds good, but it seems too simplistic if this property is the start of a buy and hold portfolio. If you're planning on buying more investment properties in the future, what are some best practices you should put in place with your very first multi property while living there? Should you be keeping the rent money separate from paying down the mortgage and put it aside for future purchases? What are the pros and cons of having a business structure this early? Should I buy the property in my name or as a business entity? Side note: this will be a first time home purchase so it crossed my mind that the perks/programs for first time home buyers might be negated by any kind of business dealings, so that might be something to consider for anyone's response. Thanks in advance!

[Jack P.]

@Erik E.

Sounds like you're in the same place I was about 6 years ago.  Here're some of my lessons learned:

-All things being equal, I'd recommend 4-plex over duplex for a couple reasons. First, your first property is a learning experience. You'll learn much more about management, expenses, tenants, maintenance, and everything else with 3 tenants than you would with one. Think of it like this: a fourplex provides you 3 times the experience over a duplex (assuming you're living in one of the units), in the same amount of time. Second, your turnover has less of an impact when you have a vacancy. By living in one unit, a duplex is like having a SFR. When there is turnover, you're stuck paying the entire mortgage until it's filled. Eventually you may decide to use a management company. Having gained the experience through managing yourself, you'll be much better at providing oversight as the owner. There is some pain and suffering associated with self-management, but no more valuable learning experience. With a fourplex, the risk is minimal.

-I started a LLC to serve as the management company for my property thinking it would protect me from lawsuits, etc. In hindsight, now knowing a little more about the protections it actually offered under that structure, I was very naive, and it was completely useless. However, it was a great learning experience to set up the LLC, and the process of registering it with the state. I've since decommissioned the LLC, but am glad I went through the process. You won't have the option of putting the property in an LLC if you are using conventional lending. But, as @Ian Tvardovskaya mentioned, it's not really necessary at this point.  Just take out a good umbrella insurance policy to protect yourself (~$2MM or more policy usually runs less that $100/month).

-Definitely open up another bank account strictly for this property.  It helps with accounting.  I had my tenants pay their rent at the bank by depositing directly to the account.  That way their was a 3rd party handling the transaction and electronic record for everything.  Use that account to pay all bills, repairs, mortgages, etc.  Continue to build a sizable reserve to cover any costs associated with the property.  After that, pay yourself the profits.  It's up to you on how you want to account for your money.  I'm not too caught up in separating my rental income from my normal savings, 6 in one hand...

-Treat the purchase as a business transaction.  Only buy a property where you can make positive cash flow.  Don't get emotional about the property because you like the location, amenities, etc., just because you're going to live there.  If it doesn't make money on the bottom line, it doesn't make sense as an investment.  Really do your homework on the surrounding area.  

Finally, take it one step at a time, and don't get ahead of yourself.  Value the experience you gain by being an owner and manager on the first property, and use that to feed your next purchase decision.  You don't want to make a mistake with the first property, only to realize it after you've purchased your second and third property, and not given yourself an opportunity to learn from your mistakes.