Thoughts on Duplex, Triplex, and Fourplex

[Stoney Fred]

I am a member of Lifestyles Unlimited and they don't recommend these for purchase. Can anyone explain to me better why they aren't a great deal to get started? Financing is great if you can live in one and seems it its easier to get started and get some cash rolling in and be a landlord on a small scale level.

Thanks for your input.

[Ben Leybovich]

Interesting. Stoney - @Lynn Dee Murrow is right, sort of. When we speak of something called "forced appreciation" it is certainly more advantageous to pursue 5 units and above. 4 and under, or anything that can be financed with a Fanie/Freddie type note sold on the secondary market, is valued with what is called Comparative Market Analysis (CMA) - just like the singles. On the other hand, commercial buildings are valued as a function of income, usually CAP Rate valuation. I've written about this quite a lot on the BP Blog.

Thus, I agree that the bigger buildings offer a lot more expandability since by improving the NOI we can back into a higher valuation. However, larger projects must be financed commercially, which to a small investor means going to a local commercial lender who will hold the note on the books. This, as you can imagine, requires a relationship, which in turn requires that you have some track record. From this stand point, commercial deals may not be doable for a new player.

Besides, on the exit strategy, it is a lot easier to sell a 4-plx rather than 20 units - different kind of buyers...Yes, I agree that from a stand point of tax deferred exchange a 4-plex hardly warrants the legal bill, but it affords easier exit in other ways. Something to think about, although Lynn does make solid points!