5 Reasons the Fourplex Is the Perfect House Hack

by | BiggerPockets.com

House hacking is a common topic of conversation on BiggerPockets. And why wouldn’t it be? House hacking is an efficient, practical tool to reduce or eliminate what’s likely your largest monthly expense and accelerate your journey toward financial freedom.

For the uninitiated, house hacking is simply a co-living arrangement that generates income to offset your own living expense. While many house hacking strategies exist, each offers varying degrees of cost savings, expectation of privacy, risk mitigation, and upside potential. However, in my opinion, one such asset type is better than the rest.

Here are five reasons why the fourplex is the perfect house hack:

1. Greater Privacy

Many of my 20-something friends are faced with the following dilemma: spend 40 percent or more of their income to live alone or give up their privacy by partnering with roommates to share costs (and possibly bathrooms!) in a single family home or apartment rental.

The fourplex blends the best of both worlds if you live in one unit and rent the other three. Your tenants are effectively “roommates” that help share costs, but you all receive the added benefit of separate entrances, separate living spaces, separate lives.

If you have a family, significant other, or plan to have either, privacy is critical and makes a single living unit impractical and a fourplex attractive. Yes, the same privacy benefit holds true for a multifamily of any size, but we’re just getting started.

profitable-fourplex

2. Greater Cash Flow

One of the best features of the fourplex is that it will generally cash flow better than one- to three-unit properties—primarily because its price is usually lowest relative to the income it generates. Much of this comes down to a relative lack of demand for the product.

On one end of the spectrum, you have substantial demand from single family buyers, who represent the vast majority of the owner-occupied market, bidding up prices based on emotional factors, the view of the lake, or the strength of the school system.

A minority of them will look to a duplex, or maybe a triplex, to either offset costs or to be used as a multigenerational living arrangement. But the thought of managing three other units is generally intimidating enough to keep single family buyers away.

A quick way to see whether fourplexes are undervalued relative to one- to three-unit properties in your market is to keep an eye on the ratio of gross monthly rent to purchase price.

Where I invest in MidCoast Maine, the fourplex usually wins the one- to four-unit category. And while you might find a five-plus unit building with an even better rent/price ratio, my next point reveals why four units is the maximum number you should consider for a house hack.

Related: 5 Points to Seriously Consider Before Jumping Into That House Hack

3. Exceptional Financing Terms

A common reaction I receive from friends when I suggest house hacking a fourplex is, “There’s no way I can afford such a large building!”

However, they are usually unaware of several aspects of financing a fourplex that make them the perfect house hack.

First, conventional bank financing is available for one- to four-unit properties. This means a 30-year, fixed-rate term.

Unlike commercial loans required for properties of five units or more, your interest rate and corresponding payment will never change with conventional financing nor will you ever face a pre-payment penalty or balloon payment. Add the appeal of historically low conventional mortgage rates, and there has never been a better time to finance a fourplex.

Owner-occupied fourplexes can also be purchased with a modest down payment of 3.5 percent when utilizing an FHA loan. This type of loan is a government-insured product designed for low- to moderate-income borrowers without significant credit history.

Think about it: 3.5 percent of $500,000 is just $17,500. Or on a $200,000 fourplex, 3.5 percent is just $7,000—certainly within reach for most financially disciplined, working Americans.

And if you’re still thinking about house hacking a five-unit instead, know that your down payment on a $200,000 building just increased to at least 20 percent, or $40,000.

Another under-reported benefit of conventional financing is that 75 percent of the existing rents from the fourplex will be counted toward qualifying income on your loan application.

Let’s say three units are already rented at $1,000 each. The bank would add 75 percent of $3,000 ($2,250) per month, or $27,000 per year, to your qualifying income.

If you make $50,000 per year at your job, you’ve just given yourself a 54 percent raise toward qualification.

If you consider the general rule of thumb that says you can afford four times income, existing rents would increase your buying power by $108,000 for this hypothetical fourplex!

happy family at desk signing papers with real estate agent

4. Maximized Economies of Scale

A huge advantage of the fourplex is that they provide the best economies of scale available to conventionally financed property.

Consider this: for properties of similar location and condition, regular expenses on a per-unit basis are likely to be lower on a fourplex compared to one- to three-unit properties. For example, if insurance on a 2,500-square-foot duplex is $100/month ($50/unit), then the premium on a 3,500-square-foot fourplex might be $150 ($37.50/unit).

The same tends to hold true on expenses like taxes, lawn care, and snow plowing.

In addition, at some point in time, you are going to have a vacancy. If you’re house hacking a duplex and your tenant moves out, your income goes to zero. For the period of time that the unit is empty, you have completely lost the benefits of house hacking.

However, if you house hack a fourplex and you have one vacancy, you still have income from two units to help offset your expenses while you work to fill the third unit. There is tremendous downside protection afforded by a fourplex, as it is very unlikely that all three of your income-producing units would be empty at one time.

The fourplex also maximizes the multiplier effect of community upgrades that increase rent. For example, let’s say you install raised beds in the backyard so that your residents can garden in the summertime. That project might cost you the same to build whether you do it at a duplex or a fourplex.

However, the new amenity might enable you to charge an extra $20 in rent to one unit (if you house hack a duplex) or $20 to each of three units (if you house hack a fourplex). If the project costs $1,000 either way, that’s a nice 24 percent annual return with a duplex—but a whopping 72 percent annual return with a fourplex!

Related: The ROI on the First Year of My House Hack: 82%

5. Training Wheels for Commercial Multifamily Buildings

Finally, the fourplex will provide a valuable opportunity to employ many of the same strategies and tactics used in large commercial multifamily while doing so from a relatively safe position of a smaller asset, limited capital at risk, a fixed debt obligation, and perhaps even a homestead exemption.

First, you’ll build your “core four” team members (agent, property manager, contractor, and lender) before you even look at any property—just like the “big boys.”  Sure, you’ll likely start out being the property manager while you house hack. But you know that eventually you’ll move out and move up and wouldn’t think of buying in a market unless you first know there are a couple of good managers who can eventually take over. Every big player in commercial multifamily starts first by building a team.

Second, you’ll conduct a market analysis, evaluating similar metrics employed by the most successful multifamily syndicators. You’ll research demand drivers that affect your market’s trajectory, such as employment opportunities, the quality of the schools, the crime rate, and population trends. Every successful multifamily operator buys into a market before they buy a building, and you will, too!

When it comes to due diligence, you’ll bring in the experts to look at the roof, HVAC, foundation, and more. You’ll know the limits of your own expertise and rely on others to fill the gaps—similar to the savviest of multifamily investors.

Finally, you’ll crunch the numbers just like the pros. Yes, your bank will look at comparable sales data, but you’ll look at cash flow and rate of return. You’ll sift for opportunities to add value and increase rents, as well as opportunities to reduce expenses and vacancy.

You may even employ the BRRRR method and eventually refinance your invested capital out of the building completely—the Holy Grail of investing to which all large multifamily operators aspire.

The bottom line is that if you can successfully house hack a fourplex, you’re well on your way to becoming a successful commercial multifamily investor, as well. The money the house hack saved you might even go toward a down payment on a larger building, further accelerating your real estate journey.

And if the house hack experience reveals that future multifamily investing isn’t for you, that’s okay, too! In the meantime, you’ve saved a lot of money, developed valuable life skills, achieved personal growth, and own a cash-producing asset.

The experience will be irreplaceable, and no matter what you do next, you’ll be miles ahead of the crowd!

If you’ve been considering house hacking but have yet to pull the trigger, what’s stopping you?

Comment below!

 

About Author

Mike Roy

Mike Roy is a multifamily real estate investor, licensed real estate agent, active house hacker, and personal finance/early retirement enthusiast. He earned a Master's Degree from the University of Massachusetts before embarking on a decade-long corporate sales career that included attaining his "dream job" in professional sports with the Tampa Bay Rays. It was there he learned that even the job of your dreams demands that you trade your precious time, family relationships and personal freedom for money. Mike's search for a better way forward brought him to BiggerPockets in 2012. Soon after, he began his own journey toward financial independence through income producing real estate, a goal he accomplished in 2019 at the age of 38. Mike spends his newfound freedom on his most meaningful pursuits: being a loving, attentive husband and father; continuing to learn and grow as a real estate investor; and guiding others toward financial independence through personal finance mastery and acquisition of income producing real estate.

32 Comments

  1. Julian Mares

    My wife is the hold up. We lived on the NW side of Chicago going on 11 yrs. And with bouncing around from one duty station to the next when I was in the Navy, she is more than ready to just settle into her single family home with no neighbors for at least arms length. I know my mil benefits would strive with the house hack method, but as they say, happy wife, happy life.

      • Ajay Kumar

        Hi Mike, great article!

        I have a few cash-flowing SFH’s under my belt and want to broaden my portfolio. Using Redfin, I found no 4-plex properties in Dallas and surrounding cities?! Is there a portal you can recommend more suited to finding them? Or is an experienced realtor my best bet?

        Thanks!
        Ajay

        • Mike Roy

          Hi Ajay – Thanks very much!

          I’m not familiar with Dallas but have observed that multifamilies tend to be less prevalent in the South than where I’m from in the Northeast. That said, you can filter Zillow and Redfin to populate only multifamily properties. Sorting by number of beds or by square feet is a shortcut way to try to filter fourplexes toward the top of your search results. Further, you can try using keywords such as 4-unit, 4-plex, fourplex, etc.

          You can also work directly with a local realtor to send you MLS listings of four unit properties. Good luck!

  2. Adam Britt

    Any tips you have on finding a 4 plex? I would absolutely love to house hack an any-plex. However, they are nearly impossible to find near the Hoover/Birmingham AL area. I can’t locate any even that ARENT for sale! And the multi family places I do find are typically in the worst possible areas that I wouldn’t take my wife to for anything.

    Thoughts or tips for locating some in reasonable locations? I suspect I could always do the local real estate meetings and use that magic network. Unfortunately they always meet on work days and during work hours …

    • Mike Roy

      Hi Adam – Some town assessors have online databases that allow you to filter by property type so you can see precisely how many multi families exist in the town.

      Not every part of the county offers significant multifamily inventory though. While the 4-plex is my ideal vehicle, you have to live where you want to live and work with what the market gives you.

  3. Anthony Pinto

    Mike, great article! I’ve been trying to advocate for MFHs and specifically quadplexes since I got into REI. You did this beautifully and succinctly. I am house hacking a quadplex myself in Portsmouth, VA (renting out two units and Airbnb-ing the third) and I love it. We aren’t cashflowing yet but when we move out, that’s quite a bit of extra money we now have in the pocket! To add on to some of the comments above, I have an automatic email generator from Redfin and Realtor.com that send my MFH deals as they come on the MLS. That’s how I found a triplex in the area that I had under contract in about 36 hours from first view. That being said, don’t underestimate the power of a well-connected realtor or wholesaler in your area.

    Again great article and I hope you’ve inspired more people on BP to look towards MFHs and quads on their way to financial freedom!

    • Mike Roy

      Hi Beatrice – You’re more likely to find small multifamilies in areas with an older housing stock. They’re quite common in many parts of the Mid-Atlantic and New England where I spend most of my time, as well as larger metropolitan areas in the Midwest.

  4. Rob Massopust

    HI MIke:
    You are preaching to the choir on this. I believed in this so much its how I started my career 20 years ago. I bought and BRRRR’d many 2-4 units over the years. But the economic benefits are tough these days to make most 4 units make any sense what so ever especially in high cost areas [regular areas might still work and I agree but in my market its a sad state of affairs.]
    The biggest misnomer that a 4 unit is a good investment is the simple fact of Cost per sq foot and Cost per unit.
    Because units are so in demand [ I guess everyone sees how good of an idea it is to house hack and investors are searching for any kind of yield it drives the price up and Cap rates down. Investors are happy with a 3% return or less. Takes out all the fun.
    It is much cheaper these days to buy a SFR or a condo on a $sqft basis.
    So that is what I am doing I switched from buying 4 units to condos for a myriad of reasons.
    1. CP$ft and CPU is cheaper
    2. Easier to buy
    3.Easier to rehab, manage
    4. Easier to qualify – once you buy a $1,400,000.00 4 unit and put 3.5% down the PMI will kill any kind of benefit so you have to put quite a bit down. Condos much easier to make it work so just start buying 4 condos
    5. Condos are much easier to sell, wider pool of investors and owner occupieds.
    4 Units are only going to sell to another investor so limits your exit strategy.
    The other strategy we are looking at is buying a SFR and doing a ADU conversion or addition, this works better as a cost per foot and gives you more options to live in usually a nicer neighborhood.

    • Mike Roy

      That will depend on the loan product and specific lender. If you have 20% to put down, conventional financing from a local bank will probably result in the lowest closing costs. FHA with a sub-20% down payment will require an upfront Mortgage Insurance Premium, so closing costs are higher.

  5. Ray Seaman

    Mike – excellent article!

    This is actually what I’m doing right now. I bought a fourplex here in Tallahassee last year and am living in one of the units while renting out the other three. I agree it’s a really great way to get started in learning the ropes of real estate investing.

    • Mike Roy

      Hi Lawrence – If you buy as an owner-occupant, the minimum residency requirement is one year. You can also obtain convention financing as a non-owner occupant, but you’ll be required to put 25% down and will pay a slightly higher interest rate.

  6. Tom J.

    This point, “Another under-reported benefit of conventional financing is that 75 percent of the existing rents from the fourplex will be counted toward qualifying income on your loan application” was super useful. Thanks.

    Well-written, too. Woot!

  7. Jacob Morgan

    I own and live in a fourplex in downstate New York. They are quite common around here. I’m also looking for properties in the metro DC region though, and there is almost nothing available in the entire region until you start looking up towards Baltimore or places farther away from the commuting zone. It seems that in these areas, developers have found it more profitable to split the units up and then sell them separately as condos/attached units. It’s really hard to even find a “duplex” in that region that has both sides included.

    As for LIVING in the fourplex – I’d have to say from personal experience, it’s not my ideal spot. My building has two units upstairs and two downstairs and all are connected through an inner foyer/stairway hall. The noise is very noticeable here in a way that it wasn’t in a side-by-side duplex (configuration is really important if you live there) that I also own and once lived in. While it’s certainly a step up from an apartment share situation, it’s far less preferable if you are used to living in detached houses or are old enough to not have patience for the annoyances of shared living situations anymore. You really do not want to know what all of your tenants are up to all the time, but you will if you are a live-in landlord. My experience of doing this “hack” has suggested that it might be better for my sanity to just rent my own small house in the same area and then dedicate the entire fourplex building to rental income. That’s my plan going forward.

    • Mike Roy

      Fair enough, but keep in mind that a purchase of a non-owner occupied fourplex will require a 25% down payment. The appeal of house hacking the fourplex is the option of a low down payment and ability to greatly reduce or eliminate one’s housing expense. For those intent on starting their FI journey, house hacking a fourplex reduces barriers to entry and can accelerate one’s progress while offering a fair degree of personal privacy, albeit, less than that of a personal single family residence.

  8. Zack Rosenbaum

    Great post! I am looking into house hacking my first property in Columbus OH. Unfortunately due to my work location i am limited to the west side of Columbus and have had trouble finding any good deals on fourplexes. I am also worried that the market is at/nearing its peak and am debating if i should hold off another year or so to see what happens. Any advice?

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