How exciting does “buy one and get three” sound to you? That is essentially what you get when buying a triplex. With this investing strategy, you have the luxury of owning a building containing three separate dwelling units. You can rent out all three units or live in one to capitalize on a lower downpayment. If you are looking for tips on how to buy a triplex, you are in the right place. Below, we’ll cover what triplexes are, how to buy one and answer additional questions real estate investors have about incorporating triplexes into their investment strategy.

A triplex is a single building with three separate dwelling units. In most cases, they are all under the same roof. Some triplex buildings have the units built beside each other, while others are stacked on top of each other, forming a three-floor building. Depending on the triplex building design, there can be one or more shared walls. A stacked triplex typically gives the three units access to a shared elevator or staircase.

Each dwelling unit is independent of the other with its own unit number, utility meters, kitchen, bedrooms, living room, and a separate door leading outside. Though these units are individual, an investor buys the property as a whole, not by the unit. There are multiple strategies to use. You can rent out all three units. Live in one of the units and rent out the other two. Or, based on your market and goals, you could do a mix of long-term, mid-term, or short-term rentals.

When buying a triplex and living in one of the units, you’ll find more financing options, including downpayment assistance programs and lower interest rates. Living in one of the units as a house hack can be a beneficial strategy, especially for those starting out, as the rented units enhance your cash flow.

Let’s go through the pros and cons of buying a triplex.

Investing in a triplex is a smart option if you are interested in a multi-family property with a healthy cash flow. Compared to a single-family home (SFH) with a single rental income, a triplex gives you three rental income sources or two if you live in one of the units. Multiple income streams relieve the burden of mortgages and other expenses.

Purchasing a triplex makes practicing house hacking very easy. You could live in one of the units and rent out the other two. Aside from that, the rents paid by the tenants pay a large percentage, if not all, of the mortgage and other expenses. Also, an owner-occupied property can enjoy an FHA loan, which requires a lower down payment and a more favorable interest rate than commercial loans.

When learning about how to buy a triplex, you’ll soon discover a big pro is the vacancy risk is lower when compared to a single family home. When a single-family property is without a tenant, the rental income is zero, and you have to pay the mortgage out of your pocket. That’s a loss. With a triplex, you can’t have zero rental income unless all your tenants move out at the same time.

For example, if you rent each unit for $2000 and one of the units is empty, you still get to make $4000 to help cover the mortgage. Even if just one unit is rented out and you live in another unit, you’d still receive $2000, which would relieve the mortgage burden. Overall, the chances of having zero monthly income on a triplex are very low.

One of the perks of multi-family investing over single-family is that landscaping, exterior maintenance, roofing, and other general maintenance costs can be consolidated.

For example, it’s much cheaper to repaint a triplex than to repaint three single-family homes. Having only one building as opposed to many can greatly reduce a landlord’s maintenance costs.

Generally, purchasing a triplex is more expensive than a duplex or a single-family property since they contain extra units. Investing in a triplex might seem beyond the means of investors without enough savings to cover the down payment. Even if you are applying for a loan, a larger mortgage will be required. As a result, you may end up paying a high interest rate on the loan, which will affect your return on investment (ROI).

However, if you are willing to collaborate with other like-minded investors, you could pool resources to purchase a triplex.

A triplex’s tenants will come in at different times, so they would have different lease end dates. A prospective buyer may not be keen to take over existing tenants. Also, since a triplex is more expensive and sold to investors, it might be harder to exit your investment than with an SFH or duplex.

Another potential drawback of buying a triplex, is that you may lose privacy if you choose to house hack and live in one of the units. Though living in a triplex gives more privacy than an apartment building, you might have to share walls, the driveway and outdoor space with your tenant. Tenants will knock on your door directly for repair requests. There might even be a quarrel between your tenants; you can’t turn a blind eye to them. You must be ready to tend to matters that don’t directly concern you.

Triplexes have a higher turnover because many see them as short-term rental properties and view single-family homes as long-term rental properties. As soon as families living in triplexes get enough money to buy a single-family home, they move out.

Even though triplexes are very desirable investment options, the number of triplexes you will find on the market is notably less than single-family homes, duplexes, and fourplexes. Therefore, if you are specifically searching for a triplex, you will have difficulty finding them, especially if you don’t know the right places to look.

The price of buying a triplex depends on several factors. Location, size, material, utilities offered, and condition affect the price at which a triplex will be listed.

One way to assess the cost of a triplex is to use the replacement cost, which is the cost per square foot for building a triplex in a specific location with the same features.

According to Fixr, the average cost per square foot to build a triplex ranges between $95 and $220, depending on the location and layout of your unit. Fixr estimates it costs an average of over $787,500 to build a triplex in the US. This price can vary based on the size of your units and the amenities included.

Zillow data shows that the average triplex with four bedrooms and three bathrooms in New York costs between $600,000 and $1.8 million.

Comparative analysis is the most reliable way to arrive at an estimate. You can use any of the off-market property search tools to find the prices of triplexes in your area.

The first step towards buying a triplex is sorting out your finances. Depending on whether the triplex will be your primary residence, you have different financing options.

Conventional Financing

Conventional financing is suitable for owner-occupants and investors. Conventional mortgages conform to underwriting guidelines established by the government-sponsored mortgage giants Fannie Mae and Freddie Mac. For mortgage approval, a down payment of 5% is needed if you intend to live in one of the units. Otherwise, a 25% down payment will be required.

When you’re looking for a mortgage lender, be sure to ask about the maximum loan amount they will approve.

Many conventional lenders consider the number of units in your home when determining what maximum loan amount they will approve. Generally, multi-unit homes would have higher loan limits than single-family homes.

For example, a Riverside County, Calif., homeowner can borrow up to $442,750 for a single-family residence but up to $851,450 for a four-unit property.

FHA Loan

An FHA loan allows investors with low credit scores to take out a loan with as little as 3.5% down. To qualify for an FHA loan, you have to make the triplex your primary residence. To get an FHA loan with 10% down, you’ll need a credit score between 500 and 579. For an FHA loan with 3.5% down, you’ll need a score of 580 or higher.

VA Loan

VA loans are not intended for investment properties, so you can only finance a multi-unit property if the qualifying applicant plans to live in one of the units. VA loans are suitable for those serving in the military, veterans, and their spouses.

HUD Multi-Family Loans

For seasoned real estate investors with solid financial standing who are willing to submit to annual audits, a HUD loan of up to $1 million can be obtained to buy a multi-family investment property.

Owner Financing

Owner financing is a suitable option for buyers who don’t have a good credit score. Instead of getting the usual mortgage loans, the property owner finances the deal, so you can buy a house without having to wade through the hassle of getting pre-approved for a loan. The seller often lists a higher property price or charges higher interest rates because of the risk involved.

There are different ways to search for a triplex property. One way is to find a real estate agent or join a real estate investment network like Realwealth to get alerts about great deals in our top-performing real estate markets or a market you’d like to buy in. You could also do a quick “Triplex for sale near me” Google search.

Another way is to drive around your city and look for “For Sale” signs on triplex buildings. You could also talk to multifamily real estate agents and find out if they know any triplexes on the market. In addition, let your friends, family, and other real estate investors know you are looking to buy a triplex.

Location is a crucial factor in real estate investing. After crossing the big hurdle of finding a triplex building, you have to check out the building’s location and condition. You don’t want to invest in a triplex in a city with a negative population growth.

The condition of the property is also significant. If it is too damaged, move on. The time and financial costs may not be worth it.

Compared to single-family buildings, triplexes are more complex and sometimes poorly built. Utilities that should be present in individual units might be shared; this will pose serious problems in the future and may even cost you tenants. A professional house inspector will provide a detailed state of the building and what needs to be repaired. Also, a thorough inspection will come in handy during the negotiation. If the building has severe problems, you should back out of the deal.

A real estate pro forma is a detailed financial analysis of a property showing data including rental income, vacancy rate, repair expenses and the net income for the property.

To evaluate a deal’s feasibility, you must also develop your own pro forma and compare it with the seller’s pro forma. A pro forma should contain the gross rental income (how much will the property make if it was 100% occupied?), vacancy allowance (what is the cost of vacancies?) and other income sources.

It should also contain operating expenses and NOI (Net operating income, i.e., gross income – operating expenses before taxes). You can verify the seller’s pro forma from their accounting records or property tax returns.

For comparative market analysis, review similar buildings nearby that have recently been sold are compared to estimate the value of a building. Using a website that lists properties, you can get an estimate of how much a triplex should cost, so you can avoid overpaying. A seasoned real estate agent can help you with a comparative market analysis (CMA) as well.

However, it is important to note that a comparative market analysis does not inform you of essential metrics such as cash flow or ROI.

Before investing in any real estate property, analyzing the potential return on investment is crucial. An investor has to be satisfied with metrics such as NOI, property expenses, cash flow, cap rate, and vacancy rate before making an offer to purchase a property. To calculate these metrics, you can use an online investment calculator. If you prefer to do the calculations yourself, here are quick explanations of the key metrics.

• Cash Flow: It is the difference between the property’s monthly rental income and the monthly expenses.
• NOI: Net operating income is the amount left after subtracting expenses from the gross rent.
• Capitalization Rate: The cap rate is the ratio of the net operating income (NOI) over the property’s value. An investment property with an NOI of $10,000 and a value of $100,000 would have a cap rate of 10%.
• Cash-on-Cash Return: Cash-on-Cash Return measures the returns investors make per year on a property in relation to the amount they paid on their mortgage that year. It’s important to note that this measure only applies to investments that involve long-term debt borrowing.

If you are satisfied with the potential return of a triplex building, it is time for you to make an offer. Keep in mind that other investors are also after the same building. In a competitive market, you’ll need to act fast and be prepared to make some concessions to win the deal. You should submit an offer as soon as you are satisfied with the analysis.

As said earlier, triplexes are less common than single-family homes and duplexes, so they are difficult to find. Searching online for a single family home is popular, but when it comes to a scarce property like a triplex, you would have an added advantage if you hire a real estate agent who is familiar with the market in your target market.

You can take your real estate investing business to the next level with the help of your local REIA (Real Estate Investors Association). There will be plenty of opportunities to network with potential business partners, investors, cash buyers, sellers, private lenders, agents, wholesalers, mentors, and various real estate industry professionals.

Attending REIA Meetings will allow you to learn, grow, network, and build relationships with all types of real estate professionals in your local market. You’ll also get information and partnership opportunities for new SFH, duplex, triplex deals or multi-family deals.

Craigslist offers many filtering options to help you narrow your search. The ‘housing’ section can yield potential results. You can take your search further by using relevant keywords that adequately describe the property of your interest.

Real estate investors use the term “driving for dollars” to describe driving around specific neighborhoods looking for off-market properties that their competitors haven’t found yet. Even though driving for dollars isn’t the most efficient way to search for properties, many real estate investors use it as a supplemental marketing strategy for finding potential deals.

All you have to do is choose a target location, prepare for the drive, look for triplexes with signs of distress, and take notes and pictures. After the drive, research each property and contact its owner.

Using a real estate listing website has become a popular method to search for properties. You can search for triplexes in your target location using sites such as Zillow, Realtor, and Foreclosure. These websites make things easy by allowing filtering options like location and price range that help you narrow down your search.

Also, the websites are very useful for comparative market analysis since you can view many properties on a single page.

RealWealth is a real estate investment club that has helped over 80,000 members build wealth with passive real estate investing since 2003. We connect our members with top-performing turnkey property teams selling real estate, including single-family and multi-family rental properties across the country in markets such as Florida, Ohio, Georgia and Texas. As a member, you’ll also get access to a RealWealth Investment Counselor who can share tips on how to buy a triplex and other investment properties, help you create a plan for building your real estate portfolio and connect you with network of investing resources, including attorneys, CPAs, lenders and more. View multi-family pro formas and available inventory here.

Final Thoughts on How to Buy a Triplex

Like any investment, triplex investing comes with its upsides and pitfalls. You have less privacy and a more challenging exit strategy than with a single family home, but the upside is that you enjoy higher cash flow and reduced vacancy risk.

Whatever your investing goals, it’s important to plan them out carefully. In addition, it’s wise to talk to a seasoned real estate investor who can help you navigate the waters of buying a triplex or single family. Realwealth Investment Counselors offer guidance and support to all of our members. Plus, when you join we give you everything you need to succeed, including real estate investing education, industry connections, investment opportunities with the top turnkey teams nationwide. Join RealWealth today and start lookin at investment properties and sample real estate proformas.