Fantastic Four-plexes - a great place to start and stay?

[Steven Davis]

First of all, I am a new real estate investor. My general strategy is buy-and-hold. I live in crazy California, so my real estate world is pretty bizarre.

But, I think that a first time investor should think about starting with a 4-plex. Even in other parts of the country. 

In fact, I think this approach works even better elsewhere.

Why?

Income security

As others have said, if you have a single family home, you are paying the mortgage if the place is vacant. So, you are OK are in trouble.

As the building gets bigger, you start having diverse revenue streams. If you start with the 50% rule (operating costs at 50% of revenue) and you want to be sure to cash flow... assume another 25% for your mortgage and taxes....

and with a 4-plex, you're covered:

• 2 units to pay for operations.
• 1 unit for your mortgage.
• 1 unit for profit.

If you've done your math right, you can probably live with a 25% vacancy rate. You won't be smiling much, but you should be OK.

Less competition

The big real estate guys aren't going to be interested, but, more importantly, almost no one who wants to live in a single family home is going to want a four-plex. They MAY go for a duplex and the oddly configured triplex.

But, with a 4 plex, things are getting pretty quiet.

Again, as a buy and hold person, this is a good thing. Fewer people looking at the market gives you more flexibility on price and lets you enjoy that income stream.

Low overhead

Four-plexes are pretty basic buildings. They do not have pools. They do not have weight rooms. They do not have on-site staff.

If you're lucky, they have a laundry room. (maybe if you're unlucky?)

Low operating costs, basic expectations.

As I've looked at properties, at least so far, I've found that once buildings get big, they start having big overhead. I don't know where the break point is (and it probably varies by market), but these little buildings are simple.

And simple is good.

Old buildings

"They don't make them like they used to". 

A lot of new and newer buildings are pretty shabbily made (1970s, I'm looking at you). No one makes four-plexes and small apartment buildings anymore. Everything is either single family/mother-in-law/duplex or BIG.

Many of these buildings were made before WW2. They just don't build them like this anymore. The buildings are solid and they are going to last.

... and they're simple.

No fancy stuff to break.

Maybe a bit of architectural character that you can charge more for. Maybe not. 

(Hit me with your asbestos lecture now)

Old school owners

Many of these buildings have been owned by the same individuals or families for decades. They would have been on BiggerPockets if there was even an Internet when they got started investing. 

There may not have even been color TV.

The owners are like you.

They appreciate individual real estate investing.

They'll likely appreciate you.

Or, their heirs may have no interest in this quiet gold mine that they were given and want the cash NOW to buy some silly Internet stock or a fancy car.

Interesting neighborhoods

Along with old buildings come old neighborhoods. Sometimes, they've become interesting, sometimes, they've become "interesting".

Either way, there can be potential. Most likely, they are close to "downtown". If there is a downtown. You've got a real shot at convenience as a selling factor for your renters. 

Extra points for urban renewal and gentrification.

And, as you are already likely "downtown", you are going to face fewer prospects of new multi-unit residential properties nearby.

More -plexes and mixed use buildings

This is an area that I have to explore further. Other small, legacy multi-unit residential and mixed commercial/residential properties seem to have similar potential. Unloved, old school owners, downtown, ....

What do you think?

Mostly, I hear people talk about 4-plexes when they are talking about their first home or first investment property. 

Real estate investing with training wheels.

But, to my mind, there is a market that starts with 4-plexes that sits in a sweet spot of income and security.

Am I off-base? 

Let me know what you think.