How to Buy a Fourplex and Why You Should

How to Buy a Fourplex and Why You Should

Agnes A. Gaddis

Do you know that you can buy a fourplex anywhere in the US at 0% down with a VA loan or 3.5% down with an FHA loan? Did you know it’s also a great option for passive real estate investors looking to maximize their cash flow potential?

Many investors believe that owning large multifamily properties is a smarter real estate investing strategy than owning single family homes. Other investors swear by single family homes. Fourplex investing is somewhere in between, which makes it a great option for investors looking for the best of both worlds.

This article will show you how to buy a fourplex, the pros and cons of buying a 4-plex, your financing options, what you should know when buying a 4-plex for the first time and more.

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What is a 4-plex?

A fourplex is a multifamily home, usually designed to house four separate families under one roof. In some parts of the US, it’s called a quadplex.

In a standard fourplex, each residence has its own entrance, kitchen, and bathroom, but there is often a common building entrance. Each unit can be built side by side or stacked on top of one another.

A fourplex can generate the same rental income as four separate rental properties while also allowing the owner to deduct the cost of their mortgage. Fourplexes are frequently purchased as investment properties and many times the owner will choose to occupy one unit and rent out the remaining three.

If you choose to be an on-site owner, you’ll be responsible for managing the building and dealing with tenants. As such, a fourplex is not always a passive source of income. Fourplex buyers can usually obtain a residential mortgage loan, which has lower interest rates than a commercial loan.

Instead of buying a fourplex, you could also build one if you have the means. In markets with too little inventory, building a fourplex may be the best option. The cost of building a fourplex generally ranges between $190,000 to $648,000. However, in more expensive markets, costs can exceed $1 million.

What should you know before buying a fourplex?

When buying real estate, whether it’s a single-family home, a commercial unit, or an apartment building, there are a number of factors to consider, and buying a fourplex is no exception. To make your real estate investing venture as smooth as possible, we’ve compiled a list of things you should know before buying a 4-plex.

1. Location

The success or failure of your real estate investment is largely determined by its location. You should consider investing in areas with high rental demand.

Conduct extensive real estate market research and concentrate your efforts on areas that have a thriving economy, a strong job market, and a growing population.

You can locate a fourplex on your own, with the assistance of a real estate agent, or through your local REIA (real estate investors association). We can also help connect you with property teams around the country that sell fourplexes with property management in place. Join our network for free to learn more about this type of passive investment opportunity.

2. Expenses

Here are just a few expenses you’ll need to prepare for when buying a fourplex.

  • Property taxes
  • Mortgage payments
  • Insurance
  • Fees for property management, if outsourced, or maintenance costs if you manage it yourself.

Consider each of these in your calculations so that you don’t get any surprises. It is important to calculate your expense ratio, i.e., total operating expenses/total operating revenue, to make sure you aren’t paying more for the property than it is worth.

3. Utilities

One of the first things you’ll need to decide on when renting out a fourplex is how to manage utility bills. Most real estate investors prefer to install separate meters for each unit. Based on a survey by Fannie Mae, median annual energy use was 26 percent higher when owners paid for all energy costs. Other landlords divide costs by the number of units with a buffer added for the renter racking up the most utility costs. Some landlords also outsource utility billing to payment companies. Whatever arrangement you choose, make sure to clearly spell out the details in your lease.

4. The Numbers

As with any investment, you want to make sure you’re getting a good deal. As mentioned before, the most significant choice you’ll make for your 4-plex investment is choosing the right location. Your location determines the rent you’ll charge, appreciation rates, and expected vacancy rates. It also determines the quality of tenants your property will attract. Once the location box has been checked, it’s time to assess the building’s potential ROI.

  • What’s your expected rental income?
  • What are the operating expenses?
  • What is the building’s cap rate? Cap rate is net operating income divided by property value. For leveraged investments, you’ll use cash on cash return.
  • What are the comps? Check prices of comparable properties in the neighborhood.

Is buying a fourplex a good investment? Pros and Cons

Fourplexes are attractive to real estate investors for many reasons, including their low price relative to potential profit. They can be profitable investments when they’re in the right location and when they’re properly managed. They can also become a big property management headache for inexperienced investors who don’t have expert assistance. Before approaching an investment like this, you should think about the advantages and drawbacks.

Pros of buying a fourplex

1. Financing advantage

A fourplex is the largest type of property that can be purchased with a residential property loan; duplexes and triplexes are also multi-family homes that can be purchased with a residential property loan. However, any complex with five or more units is considered a commercial property.

2. Easier management

Unlike single-family property owners, fourplex landlords can consolidate building tasks such as pest control, maintenance, and landscaping. Property management is also simplified by renting out three or four connected units.

3. Tax benefits

Fourplexes have lower property taxes than four separate single family rental properties, making them a profitable investment. A fourplex can generate the same or more cash flow as four single-family investment properties, or three if the owner lives on-site.

Fourplex owners may be eligible for tax breaks on all expenses incurred by their fourplex living units, with the exception of the unit in which the owner resides.

4. Vacancies carry a lower risk.

Investing in a fourplex is a relatively low-risk investment, so if you’re looking for a way to boost your net worth without taking on too much risk, consider it as a secondary source of income to help you save for retirement.

A fourplex owner will lose 25% of their rental income if they lose a tenant, which is a lower risk than a single-family home or duplex property owner, who will lose 50-100% of their rental income.

Cons of buying a fourplex

1. Higher turnover

Tenant turnover is usually higher in starter living spaces, such as fourplex units than in single-family or duplex properties.

Tenants have a fraction of the space because fourplex buildings are typically built on land the same size as a single-family home. In markets where families are looking for long-term homes rather than starter homes, fourplex owners may struggle to keep all units occupied. When the market conditions allow, your tenants may prefer to move into a single-family home.

2. More responsibility

If you choose to self-manage, you’ll be responsible for managing your fourplex and finding tenants when vacancies arise. This is especially true if you choose to live in one of the units – when you share the same roof with your tenants you can expect them to knock on your door regularly with issues. If you’re looking for a more passive investment, it is possible to hire a property manager. You can do this even if you choose to live on-site. Just make sure the property is generating enough returns to make the added costs worth it.

3. Higher fees

Having a fourplex means paying higher insurance premiums than if you only had a single-family home. Because there are more things that can go wrong with a fourplex, the insurance company views it as a higher risk.

Your property taxes may increase if the value of your home rises in your neighborhood. If this occurs and you are unable to pass the costs on to your tenants, you will be responsible for the costs. If your expenses rise but your income does not, this can be a problem.

4. It can be difficult to sell

A fourplex is harder to sell than a single-family home. There aren’t as many people looking to buy fourplexes as there are single-family homes, so you may need to make more improvements to the property to attract buyers.

6 Tips for Financing a Fourplex Investment

1. Buy a fourplex with an FHA loan

If you’re looking to buy a fourplex with 3.5% down, the best way to do this is to use an FHA loan. Note that if you’re going to buy a fourplex with an FHA loan you must plan to live in one of the units.

FHA loans are popular with first-time homebuyers because they allow 3.5% down payments for those with credit scores of 580 or higher. Borrowers must, however, pay mortgage insurance premiums, which protect the lender in the event of a default.

Keep in mind that when buying a 4-plex with an FHA or any other type of loan, the lower your credit score, the higher the interest rate you’ll pay.

2. Use owner financing

For people who cannot get traditional financing because of their employment, previous foreclosures, or tightening lending criteria due to economic factors, owner financing is a viable financing option.

Instead of paying the bank, the buyer pays the seller in monthly installments. Before owner financing begins, both the buyer and seller must agree on a specific interest rate and terms. Owner financing is only viable if the owner owns the home free and clear or if they’ve almost cleared off their mortgage liability. Generally, first-time investors should tread with caution here.

3. Take advantage of home equity loans

If you already own a home and have equity in it, you might want to consider borrowing against it to fund your investment.

A home equity loan is relatively easy to obtain and you may be able to borrow up to 80-90 percent of the total equity in your home.

In many ways, qualifying for a line of credit is similar to qualifying for a traditional mortgage. The bank will check your credit score and confirm that you have enough income to repay the loan.

Keep in mind, however, that by tapping into your home’s equity, your primary home will become the collateral for the new loan. This means you could lose your primary home if you default on your payments.

4. Consider a portfolio loan

Portfolio loans are one of the preferred alternative financing options for multifamily properties because of the larger loan amounts.

Portfolio loans are mortgages that are held by the mortgage company and not sold on the secondary market. Small business owners get a portfolio loan when they cannot qualify for a traditional mortgage or when they want to finance multiple properties on the same mortgage loan.

Because portfolio loans are exempt from federal regulations, lenders can set higher debt-to-income, loan-to-value, and loan-to-size limits. Higher values, on the other hand, may be accompanied by higher interest rates and fees.

This is suitable for investors who want to finance multiple properties at the same time or who do not qualify for a conventional mortgage.

5. Use a conventional loan

Conventional loans are available from traditional banks and lending institutions, with terms ranging from 15 to 30 years.

Fixed or variable interest rates are available on conventional mortgages. While qualification requirements are strict, with a minimum credit score of 680 and up to 12 months of cash reserves. If you plan to live in your fourplex for up to a year (house hacking), you can lock down low single family interest rates compared to higher interest rates on investment property loans.

6. Try a VA loan

For service members and veterans who qualify, a VA loan is a no-brainer over other, more traditional mortgage types.

Because VA loans are backed by the US Department of Veterans Affairs, they are only available to active duty military personnel, veterans, and their surviving spouses.

VA loans typically have lower interest rates and no down payment requirements. However, these mortgages come with some restrictions and fees. Those who are eligible should budget for funding costs and reserve funds.

Those who meet the criteria can purchase a primary residence with up to four units with no money down. Investment properties are not eligible for VA loans. For this reason, if you’re looking to buy a fourplex with a VA loan, you should plan to live in it for at least a year.

Bonus Finance Question: Is it possible to buy a fourplex with no money down?

Yes. You can buy a fourplex with no money down using a VA loan. Also, many down payment assistance programs will help you cover the 3.5% required for an FHA loan down payment. The Chenoa Fund is one of them, as are many state-sponsored programs.

How to Buy a Fourplex Investment Property for 4x profit

If you want to generate the most profit from your fourplex investment property, it’s essential to choose the right location, choose the right financing strategy and know how to find good tenants that’ll help pay your mortgage and expenses. Here are a few tips for how to buy a fourplex to maximize your profit potential:

1. Research housing markets

When looking for a strong housing market, you’ll want to find a market that has population growth, job growth, but is still affordable. These are signs of a market primed for growth. Check out our list of the best places to buy rental property today here.

2. Look for inventory

You can use the MLS or a local realtor to find inventory in the market where you’d like to buy. You can also work with a real estate investment club, like RealWealth. We’ll connect you with property teams that sell fourplexes with property management in place around the United States.

3. Do your due diligence before you buy

Research net operating income and make sure to follow the 1% rule to ensure you’ll make a profit. Aside from financial analysis, due diligence should include lease audit, certificate-of-occupancy status check, contract review, and property review, among others. Always inspect the property.

4. Find a good property manager or team to help with maintenance issues.

If you are utilizing an FHA loan and living in one of the units, hiring a full-time management company may not be necessary. You may be able to rent the additional units on your own using platforms like Zillow, Zumper, and Apartments.com and run your own credit checks (this is essential, by the way!), but it will be really helpful to have a team around you that can help with maintenance issues that come up. In other words, you need to know who you can call at 3 a.m. when a pipe bursts. You’ll also need someone who can handle day-to-day maintenance that may be out of your wheelhouse. If you want your fourplex to be a completely passive investment, you’ll need to hire a reliable property management company that can handle it all for you.

Conclusion

In this article, you’ve seen how to buy a fourplex via different financing options. Buying and living in a fourplex is a lower-risk way of getting into real estate investing. By living in the building, you can keep a close eye on your investment and learn the ins and outs of managing a rental property.

Buying a fourplex is also a great option for passive real estate investors who want to maximize their cash flow and appreciation potential by owning four doors under one residential loan.

How to Buy a Fourplex and Why You Should