This is the first post I’ve written about buying rental properties, so you’ll forgive me if it looks a bit unpolished. I’ll try my best to not include too much real estate jargon, but I’m sure this will be one of my least popular posts.
In hindsight, one thing that I did right when buying my first rental property was buying a four-unit, multifamily home — they’re sometimes called fourplexes.
There were a few factors that went into making it a great starter investment.
Occupying one unit
It gave me a place to stay! Having walls around me and a lockable door kept me warm in the winter and largely mosquito bite-free in the summer.
More to the point, lenders and the federal government treat owner-occupied properties that are four units or less in the same way that they treat a single-family property. Thus, occupying one unit gave me flexibility when shopping for loans, since I could take advantage of owner-occupied loans and first time home buyer incentives.
It also means I get the friendly tax treatment that owner occupied homeowners get.
Buying something with five units or more would have required commercial financing, meaning I’d need to put more money down and I’d get a worse interest rate.
Instead, I got the better rate and rented out the other three units, which was enough to pay the monthly mortgage bill, including property taxes and insurance. So, depending on how you look at it, I either lived rent-free, or had one guaranteed tenant who was super-respectful of the property.
Buying in bulk
You can think of buying a fourplex with four identical units as buying small houses in bulk.
A fourplex cost about 2 1/2 times as much as a house of similar size to each unit. But the rent I receive from one unit in a fourplex is about 90% of what I would get renting out a similarly-sized home. So 2 1/2 times the purchase price, but approximately 3 1/2 times the revenue from rent? The numbers just make sense.
On top of that, because I have four identical units, I really can buy items at bulk prices, such as air conditioner filters and insulation.
Spreading the risk
Any rental property comes with the risk of a tenant leaving, of course. With a fourplex, when one leaves, I only have one vacancy and so am only down 25% of the rent. If I owned a single-family house, I’d be out 100% of my rent that month.
The same goes for expenses; one big repair in a single-family house could knock out a big portion of my revenue. One big repair in one unit of a fourplex isn’t fun, but it’s a small portion of the total.
Of course, I haven’t mentioned any of the downsides; chief among these is that having four times as many units offers the potential for four times as many headaches. But all in all, it’s proven to be a nice experience compared to buying a single family home as my first.
Alright, any thoughts?