Two 4plex or one 8-unit?

[Chingju Hu]

I'm thinking about getting two 4plex or one 8unit, and want to discuss the pros and cons for each. Let's assume that the total ROI is the same.

Two 4plex pros is the diverse location, risk is lower (if one location is better than another) (feels like 2 baskets for 8 eggs), and I can buy one after another based on the result of the first one, cons is that there will be 2 roofs to replace in the future, 2x repair, 2 locations to run, 2 loans.

Pros for 8 unit is that it's commercial, can increase NOI to increase value, only one location to run, one property manager, one roof to replace, one loan,...etc, cons is that if something goes wrong in this apt, it's an expensive one (1 basket for 8 eggs), and maybe it's more competitive to buy a good 8-unit.

How do you think, BiggerPocket? Same questions for two duplex vs one 4plex

[Stacy Spencer]

There is a lot that goes into this equation including how long you plan to hold the properties, how many loans you already have, cost of the buildings, exit strategy and more. But for a real down-and-dirty comparison, I recommend getting loan quotes for both so you have concrete information on your two scenarios including closing costs, LTV and other terms. I also recommend getting insurance quotes for both options. Finally, check into the details on zoning - that can have a huge impact on future value and exit strategies.

I've purchased both, so a few thoughts for you to consider:

• The two quads will allow you to use traditional Freddie/Fannie mortgages which include low interest rates and lovely 30 year terms. However, closing costs can be higher and you have to jump through traditional bank hoops. Also, if you already have a number mortgages, your LTV changes and I believe you max out at 10 loans. If you're close to that max, you may not want to waste the loan given a similar return on both options.
• Commercial loans have generally had shorter terms (they may amortize over 30 years but require balloon payments in 5 or 10 years) and higher rates, but I've also been able to have lower closing costs and better LTVs (every situation and lender is different though).  If you don't have a commercial loan yet, there may be some value in establishing one and also your business credit score vs. relying on your personal credit.  This really depends on where you are in your business though.
• If the loan amount is high enough, perhaps you can get the Fannie Mae Multi-Family small loan program which would allow the best of both worlds on the 8-unit.
•  Other expenses:  Insurance is generally more expensive for commercial properties and provides a less generous benefit.  However you need to weigh 2 policies with 1 and see if the premium is actually lower.  (Be sure to understand the terms as well, especially as relates to partial losses.  Many people only cover up to their purchase price but if you have less than replacement value policy, many residential policies will allow 100% policy value pay out on partial losses but many commercial policies prorate any loss based on the value of the policy compared with the cost to rebuild.  You could end up with only 45% or some other prorated amount of coverage if you're not careful in understanding the terms.)
• Capital expenses (repairs):  My personal experience has been that I really only save on roofing by buying one 8-unit vs. 2 quads.  Most other capital expenditures (bathrooms, furnaces, A/C, windows, doors, etc.) are really per unit and should be a wash under either scenario.  Exteriors (siding/stucco/brick) are tricky -- having to reside an 8 unit will be more costly than 1 quad and you likely won't have to deal with both quads at the same time; but sometimes you can do a buildings exterior repairs in sections or just one side.  I haven't really found a significant cost difference in capital expenses for my quads vs. my 5 or 8-plex.
• Refuse differences?  Where I have my properties, the per unit for refuse removal is the same for 2 quads vs an 8-plex but my area has only 3 units or less as 'residential'.  Check the refuse removal for both options and include that in your analysis
• Zoning - Look at the zoning for each building.  If a building is in a mixed zoning area it may give you more future exit strategies (e.g. I have an 8 unit on a busy street which can also become retail stores or mixed residential/retail if I choose in the future).  Also look to see if zoning changes are allowed.  Some areas will allow buildings to deconvert to fewer units but will not allow expansion.  

The other items I had were already covered by others so you should have plenty to consider in your evaluation.  ;-)