Owner occupied - Duplex vs. 3 Family

[Felicia Mancuso]

What are some pros/cons for the owner of: owner occupied Duplex vs. owner occupied 3 family home? I can think of many obvious pros/cons but would appreciate feedback from investors who have been there, done that!

[Matt Lefebvre]

Hi @Felicia Mancuso, this varies a little depending on the market, but seeing as you're over in Worcester and I'm up here in NH, we have pretty similar market conditions (though prices certainly differ).  

The biggest difference between a 2 unit and a 3 unit when it comes to owner-occupants is cash flow.  Its very rare in my market to find a two-family building that supports itself and actually makes a decent profit after an owner-occupant moves out of the property.  I find more frequently with three-family properties or four-family properties that one can usually break-even when you're living in one unit and renting out the others, and once you move out, you end up positive in terms of cash flow.

The next big difference is ability to "repeat" the owner-occupied process through the same type of financing. Typically an FHA loan is used to owner-occupy a multifamily for a low downpayment (3.5% minimum). However, you can't infinitely rinse and repeat buying multifamilies with this strategy... you have to "improve your quality of life" by purchasing a new property. For example, moving from a four-family building to a side-by-side duplex is an "improvement" in your quality of life because you have less neighbors and you're in an arguably nicer home. Unfortunately the government doesn't view increasing your cash flow as an increase in QOL. So you can move down the chain from 4 to 3 to 2 to 1... but can't move up the chain from 2 to 3 to 4 using the same low downpayment loan product.

Lastly, I would say that the property values for 3s vs 2s can be important to know. For example, most properties in my market don't increase in value at exactly the same rate for every extra unit... So a duplex isn't double the price of a SFH and a triplex isn't double the cost of a duplex... normally as unit count goes up, price per unit goes down... meaning you can afford to buy more at a better price.