Did you know that you can buy a duplex, triplex or fourplex with some of the most common residential mortgage loans available? You can purchase your first multi-family real estate investment, up to four units, with as little as 0% down with a VA loan, or 3.5% down with an FHA loan. Now, rates are changing every day -- and I’m a real estate agent and not a loan originator -- so, make sure to seek a loan originator out to get specifics.
I hear it every day, “Buy a fourplex and live for free!”
The idea behind it is that you can buy a fourplex, a four unit multi-family investment, have three tenants pay the mortgage and you can live in one for free. I've even heard people say that two units will pay the mortgage, one unit is profit and you will also get to live for “free.” This is what we call a unicorn, and how many of those have you seen around?
Let's talk about some of the pros and cons of purchasing a fourplex. We are here to go over some of the facts and help prepare you to make the best decision possible. Let’s start with the cons.
The reality of buying a fourplex is that most of the loan types require you to live in the property for one year. With that being said, most people who live in their own investment property choose to live there for free and don't pay themselves rent. That means that you must operate the building, and pay for all expenses with the income generated off of three units instead of four. That's a 25% reduction in income from the beginning.
Next, the potential investor must ask themselves: "What is more important, time or money?" Managing multi-family properties takes both of these resources. Things like maintenance, unit restoration after a tenant moves out, evictions, non-paying tenants, snow plowing and shoveling, updates to the property, the list goes on... A lot of first-time investors take these roles on themselves, which then become a part-time job. This is great if you are always available and live on site. Here's the catch, what if you are out of town or can't be there in person? These are things you need to consider contracting a second set of hands for, which will have an impact on your cash flow.
For example, let's take a recent sale of a fourplex here in Anchorage, Alaska. The fourplex sold for $450,000 and had a monthly mortgage of about $2,800. The buyer owner-occupied and the three additional units were rented at $1,200 per month. That’s $3,600 per month in gross income, which is only $800 per month after debt service totaling $9,600 annually. That doesn't include any other expenses like utilities, repairs, insurance or vacancies. Even by taking on repairs and other tasks yourself, there are still some expenses you can not get out of. Realistically, people tend to break even or have negative cash flow with their properties in the first couple of years, if they don’t get their numbers right.
Let’s refer back to the residential loans people use to purchase their first multi-family investment property. A lot of people take advantage of these loans because of the low barrier to entry on a great investment. However, this typically means that that individual also does not have much money set aside for reserves and updates. This really comes into play when vacancies start to take place, and you are stuck with a partial or full mortgage payment when you were least expecting it. Ensure that you have enough money in reserve to cover these times and major updates before they happen.
Now, you may be reading this and second-guessing your decision to move forward on a fourplex. But, there are several benefits to buying and owning a multi-family property, especially one that doesn't take too much to get into.
Self-managing your own building is a great way to build experience for the future. It is also something that banks look at when you want to start investing in bigger multi-family properties. The self-managed building will save you a lot of money. By bootstrapping the first couple of years, you can truly start building a lot of equity in your investment. Most of the money you are looking at making with this first deal is through equity and appreciation. Equity occurs by letting other people pay your mortgage, and appreciation through the long-term hold of your property as the value of your building increases.
Another, often overlooked, benefit of owning multi-family real estate is the tax write-offs. As the owner, you can write off depreciation, operating expenses, insurance, and interest. And, there are more write-offs depending on your situation, so always make sure to find a good CPA.
If you have made the decision to invest, then I would highly suggest finding a networking group or real estate investing club. Here you will find like-minded people who have been where you are and know how to handle situations. This will be a wealth of knowledge and a great opportunity for you.
To summarize, before you decide to make the decision to purchase a multi-family real estate investment, make sure you have considered all of your options and know what you are getting into. Multi-family investing is very rewarding and a great way to start building wealth.
If you have any questions or want to learn more about multi-family investing reach out to Matthew Lindsay at firstname.lastname@example.org or call 907-302-1011.