Why Invest in a Fourplex?Nov 10, 2020
You might be asking yourself, why should I go for a fourplex instead of single-family? Or how is a fourplex better than a duplex or a triplex? Simply put, a fourplex gives you the highest number of doors possible with conventional financing.
Within Fannie Mae and Freddie Mac residential loans, an investor is able to obtain a conventional loan that has some of the best interest rates, the lowest down payments, and the lowest bar of investor experience required. You can even obtain an FHA loan on this type of investment property, but we can dive into that more later.
All investors have the ability to obtain up to 10 residential conventional loans. So you can either use these loans to acquire 10 doors, or 40. No brainer, right? More doors provides an investor with more streams of income and a lower vacancy rate.
But now we'll take this a step further.
Let's assume you're married and both you and your spouse have a solid income (either a traditional W-2 job or 1099). In this example, you run a business where your spouse is also on the LLC as a managing member and a declared ownership percentage. You can allocate income to your spouse who may even be a stay at home parent. If your spouse is an active part of your investment strategy, this is an option that can help him/her qualify for loans as well. So if your wife is a stay at home mom, for example, she'd still be able to qualify for her own conventional financing using this strategy since she is a partner with your parent LLC.
So now that both you and your spouse qualify for conventional loans—how many doors are you able to get? Eighty doors! All purchased within an optimized, 30-yr fixed rate loan. It boggles our mind why a buyer would ever put both spouses on the loan if they can avoid it and qualify individually. Only put both spouses on the loan if you absolutely have to... otherwise you are wasting your buyer power and investment potential.
You should also avoid putting both names on a loan so that one name is on the hook for credit on every property you own. Of course the goal is to diversify and avoid and bad assets. But it happens. By separating the properties per spouse you limit exposure financially by limiting loans to a single individual. This strategy helps you scale your real estate portfolio while also reducing potential downside. Don’t worry, you can still keep your spouse on title without having them on the loan. From the outset, always ask a lender during the beginning approval process if you'll be able to qualify on your own. You can thank us later.
Brandon Turner's "House Hacking"
Brandon Turner is the host of one of the most popular real estate investor forums and podcasts in the industry, BiggerPockets. Together, they've coined the term "House Hacking", a creative strategy for using owner-occupied loans to purchase multifamily investments. Keep in mind, this is NOT loan fraud and should never be used as such. You can only properly "house hack" when you live in the property. If you don't, then this is real estate fraud and is very serious.
When done correctly, house hacking allows you to buy a fourplex for as little as 3.5% down via an FHA loan. In some areas nationally where they are looking to stimulate an area, there might even be additional grants available to assist with your down payment. You also have the option of buying a multifamily property with a VA loan with 100% financing.
The point here is that purchasing a fourplex, especially as a first-time investor, can seem overwhelming. But when approached tactfully, the barrier to entry is not as difficult as you might think.
Why Every First-Time Buyer Should Invest in a Fourplex
Time to dive deep on the numbers and why investing in a fourplex as a first-time investment is ideal.
Let’s assume you purchase a fourplex for $400,000 and either live in one of the units, or maybe have your college-aged kid live in one of the units. This would be a great opportunity for them to gain some financial experience as well! Assuming rents at 1% of the purchase price per month, you’d be receiving $3,000/mo from the three other units in the building (of course this is market specific and only outlines the principles).
The mortgage on this property will be approximately $2,150/mo and depending on the condition of the property, we would assume 30% of the gross potential rents as the expenses to maintain the asset (taxes, maintenance, vacancy, reserves, insurance, etc). This adds up to $1,200/mo in expenses.
So total hard & soft costs are approximately $3,350/mo in this example. That means out of pocket costs to live is $350 per month for a place costing others $1,000 per month to rent. The initial value of this example gives yourself a $7,800 raise per year. And that's just scraping the surface!
You can also calculate additional value in depreciation. Depreciation of an asset enables you to write off the building value over 27.5 years in straight line depreciation (there's an advanced way to do cost segregation and take even more benefit during the first five years).
The vertical building we will assume is $320,000 and that is 80% of the purchase price—which is within the tolerance of the IRS guidelines. This gives you an additional tax benefit of writing off $11,637 per year for depreciation. You will also be able to write off approximately $24,000 in interest payments for the loan. After-tax benefits of writing off an additional combined $35,637 at a 30% tax rate is like putting in your pocket $10,691 in saved taxes annually.
Summary: Owning this fourplex allows you to make an additional $7,800 each year by turning a payment of $1,000/mo into $350. An additional $10,691 in saved taxes gives you a total cash positive of $18,491 per year of true bottom line income.
The potential returns of living in a fourplex are great! And to think that we didn't even cover the benefits of appreciation, value add, and other ways to increase value in the fourplex! Yet in just one year, the benefit of ownership already exceeded the needed down payment on this property.
So why would you ever buy a home that is even half the price at $200,000? If you gift the down payment for this home, yes, it is half. But the payment is still $1,200 per month and there is no income. And once you move, you don't have the continuous residual income you would have with a fourplex in your portfolio.