Duplex,3, or 4 unit?

[Drew McCrory]

Hello everyone,

I am a new investor trying to figure out my gameplan before i jump into the world of real estate investing. Hopefully some of you with more experience or insight can help me form my decision. In 6 months, I will be able to get a VA loan which means I won't have to pay any money down. I plan on house hacking by living in 1 unit and renting the rest until I save up enough to do it all again. I've narrowed my search down to 2 markets, however I cant decide wether to go for 4 units or just a duplex to start.

Starting with a 4-unit sounds more appealing to me because it seems there will be a better chance at higher cashflow, however I know the maintenance, Cap ex, vacany, etc.. will be more unpredictable and im nervous managing all that on my first property might be more than I can handle. 

Starting with a duplex or 3 unit is enticing because the numbers get more predictable as you have less units, as well as management gets easier. I don't mind working hard managing, and definetly plan on doing this long term, just cant decide wether to start small or just go for a 4 unit. especially with having the VA loan- no money down.

Hopefully some of you can shed some light on this topic for me through your own experiences/knowledge. Thank you in advance!

P.S I do plan on managing on my own, however, I will be inputting a 7% management fee in my analysis when prospecting just in case. 

-Drew

[Will Fraser]

Welcome to the wild, exciting world of RE investing, Drew!  In my opinion, going straight to the 4plex is the winning strategy.  Life tends to be a constant game of meeting and changing expectations and when you take the first step in RE investing as, "I'm going to move into this 4 unit" you're stepping off with a great foot AND you are using the "silver bullet" of low down-payment financing the best it can be used.

The primary additional benefits I find with 3- and 4- unit properties is diversification and economy.  In my market (Oklahoma City)  you can live "cost free" (tenants cover full cost of principal, interest, taxes, insurance, and any covered utilities) in a 4-plex all day, sometimes in a 3-plex, and occasionally on a duplex.   What that means AFTER my owner-occupied stage is that the property is breaking even at 25% vacancy!  You should be able to keep vacancy significantly below that, so we're looking at very cash-flow positive property once you move to something else.

So, why not jump in with the most efficient use of the loan and the opportunity, have built in diversification and cash-flow?  If it's going to be a bear, it might as well be a grizzly!

One last thought:  I'd recommend factoring 9-10% for property management.  This is likely to vary from market to market, but I'm seeing an increasing trend of PM companies offering 7-7.5% fees and their clients run to my company in droves because . . . well . . .  you get what you pay for?   If the numbers on the investment work at a 10% management fee and you can find a stellar PM at 7%, or even less, then that optimizes your numbers even more!

-Will