How I Bought 4 x Fourplexes in 12 Months – (Part 1)
In the last 12 months my brother and I purchased 4 x 4-unit rental properties in a small town in Texas. These were all off market properties (not listed publicly for sale on the MLS), all purchased from the same owner, all in the same neighborhood, and all bought “under market value”.
Oh yeah, and we did all this while both holding full-time day jobs!
This is a long story, so I’m splitting this post up into multiple parts:
- Part 1 (this post): Why I choose to invest in ‘multi-family’ real estate
- Part 2: The timeline and $$ numbers of each fourplex
- Part 3: Ongoing operations, management, accounting etc.
- Part 4: Lessons learned along the way
OK, let’s get into it…
Why Multi-family Investment Properties?
Pre-work: Research, Learning, Education:
I never had formal education or training… It all started with reading books. Yep, boring old books. Out of the 30 or so Real Estate Investing Books I’ve read, the following 2 were the most influential to me and easiest to consume:
- The ABC’s of Real Estate Investing – Ken McElroy
- Investing in Duplexes, Triplexes and Quads – Larry Loftis (I read this in 2014 and it ultimately led me to choosing multi-family real estate as a strategy)
If you’re new and want to get into real estate investing, start by reading these books. Everything I have learnt about real estate investing comes from reading books, online research, making phone calls to strangers and asking good questions.
Benefits of Small Multi-family Investment Properties:
Single Family Home = 1 house/unit only.
Small Multi-family properties = 2, 3 or 4 units only.
Large Multi-family properties = Anything 5+ units.
Financing Small Multi-family is Easy:
In the USA, any property with 1 – 4 separate living spaces is classified by lenders as “residential” property. Anything with 5 or more units is considered “commercial” property. Banks and lenders typically offer much more favorable loan terms for people purchasing “residential” properties. A fourplex is treated just like a single family home.
If you are moving into the property as your primary residence, you will usually get offered the lowest available interest rate and lower down payment options. Even if you are moving into only 1 of 4 units, you still can qualify as “owner occupied” financing. This is HUGE for people who are house hacking.
Fannie/Freddie Loans “Golden Tickets”
Most banks allows each person to have up to 10 x residential Fannie/Freddie loans in your personal name. These are the best loan types for new real estate investors. (Yes, you can have 10 x loans in your name and 10 x loans in your wife or husband’s name)
As soon as you step into 5+ unit properties you need to finance using commercial or private loans, which can be a little more complex. Commercial loan terms depend more on experience, personal relationships with banks, and the actual assets that you are lending against.
Multiple Rent Streams:
Vacancies hurt a lot. If you own a single family investment property, and that family moves out, you have 100% loss of rent until you find a new tenant. Whereas with multi-family properties, losing one tenant only hurts you partially. If you own a duplex and one tenant moves out, you only have 50% loss of rent until you find a new tenant. A fourplex = 25% loss of rent with 1 unit vacant.
With vacancies not hurting so bad, you’re under a little less stress to find new tenants immidiately. So you can search longer and hold out for higher quality tenants, vs. being pressured to accept just anyone to fill a house that may have been empty for a while..
Also, if you’re planning to do any renovations or interior upgrades, this can be done one unit at a time while the remaining units continue to be rented out. With a single-family house, you will have no rental income for the entire time you are renovating. Again, you’re under a little more pressure to rush renovations with single-family homes.
*It’s important to note that the accumulative vacancy factor/risk is still the same for any size property you purchase. You will experience the same amount of vacancies as everyone else. But, the higher the unit count, the less likely it is you will experience multiple vacancies at the same time.
1 x Roof, 1 x Yard, 1 x Insurance Policy:
Major repairs and disasters can be a huge setback for investment properties. Simply put, the less ‘structures’ you own, the less major repairs you will need overtime.
With the 4 x Fourplexes I just bought, if I hold onto them for my entire life, I will eventually have to replace 4 x roofs. Compare that to the guy with 16 x small single family rental homes – he will eventually need to replace 16 x roofs! He also has 16 x lawns to mow, driveways to shovel, and insurance policies to maintain.
Important note: It’s not all roses… Multiple units within one structure tend to have a lot more small repairs. Fourplexes have 4 x more toilets, 4 x more light bulbs, and 4 x more kitchen appliances than single family houses. Definitely keep this in mind when calculating maintenance costs on new purchases.
“Small leaks can sink big ships over time”
When buying a single-family home in a nice neighborhood, you’re competing against everyone else who wants to buy that house too. This includes the thousands of local families that want to move into the neighborhood and use the house as their primary residence. The better the neighborhood, the more competition you have.
Usually, with multi family properties, you’re only competing against other investors. Better yet, if you’re buying in small towns outside of major cities, there’s even less competition and less investors interested. Most people haven’t even heard of the town in Texas that I invest in. (And, I like it that way!)
But aren’t other investors more savvy and experienced than me?…
Yes and No. Experienced investors can be very ruthless in competition. But that’s not necessarily a downside for new investors. Ever read the book David and Goliath by Malcolm Gladwell? Read it. Think outside the box. It’s not what you know, it’s who you know. And keep this in mind when you are making friends in real estate:
“Everybody pulls for David. Nobody roots for Goliath”
Even as a beginner in real estate, I beat out a lot more experienced investors because of the personal relationships I’ve built. More on that later.
Lastly, the extremely savvy investors have typically graduated to buying larger apartment complexes. Measly little 1 – 4 unit properties are small potatoes for major league real estate investors.
Easier To Emotionally Evaluate:
There are tons of metrics to consider when evaluating a new investment property. Above all, everything needs to add up to making good return on investment. If you’re not making money, there’s no use investing in the first place.
But, as humans, it’s very easy to think with our emotions, instead of using our investing brain.
When looking at single-family home it’s very easy to picture yourself living there. Real estate can be romantic. “Spacious
kitchen, nice bathroom, my kids would enjoy playing in this yard, etc…” All this type of thinking makes people over-pay for properties. It makes people overlook the core mathematics. (I’ve gotten emotional about real estate before, and it cost me a lot)
With multi-family properties, it’s more difficult to picture yourself living there. It’s about the raw math and numbers. It’s hard to fall in love with a Fourplex.
So, why doesn’t everyone just buy multi family investment properties?
I’m writing about this because it’s my personal primary wealth building strategy. But it doesn’t have to be yours! I’ve come a long way since my first real estate investment, which was a small townhouse.
For Part #2 of the story, click here: Part #2: Investment Timeline and Numbers.