{"id":109586,"date":"2019-04-15T12:00:48","date_gmt":"2019-04-15T18:00:48","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=109586"},"modified":"2023-04-14T07:07:53","modified_gmt":"2023-04-14T13:07:53","slug":"house-hack-fourplex-perfect","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/house-hack-fourplex-perfect","title":{"rendered":"5 Reasons the Fourplex Is the Perfect House Hack"},"content":{"rendered":"<p><iframe loading=\"lazy\" src=\"https:\/\/playlist.megaphone.fm?e=BIGPOC8724999154&amp;light=true\" width=\"100%\" height=\"200\" frameborder=\"0\" scrolling=\"no\"><\/iframe><br \/>\nHouse hacking is a common topic of conversation on BiggerPockets. And why wouldn&#8217;t it be? House hacking is an efficient, practical tool to reduce or eliminate what\u2019s likely your largest monthly expense and accelerate your journey toward <a href=\"\/renewsblog\/2016\/03\/28\/financial-freedom\/\" target=\"_blank\" rel=\"noopener noreferrer\">financial freedom<\/a>.<\/p>\n<p>For the uninitiated, <a href=\"https:\/\/www.biggerpockets.com\/real-estate-investing\/house-hacking-strategy\" target=\"_blank\" rel=\"noopener\">house hacking is simply a co-living arrangement<\/a> 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.<\/p>\n<p>Here are five reasons why the fourplex is the perfect house hack:<\/p>\n<h2>1. Greater Privacy<\/h2>\n<p>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.<\/p>\n<p>The fourplex blends the best of both worlds if you live in one unit and rent the other three. Your tenants are effectively \u201croommates\u201d that help share costs, but you all receive the added benefit of separate entrances, separate living spaces, separate lives.<\/p>\n<p>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\u2019re just getting started.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-75411\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2015\/10\/profitable-fourplex.jpg\" alt=\"profitable-fourplex\" width=\"702\" height=\"337\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2015\/10\/profitable-fourplex.jpg 702w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2015\/10\/profitable-fourplex-300x144.jpg 300w\" sizes=\"auto, (max-width: 702px) 100vw, 702px\" \/><\/p>\n<h2>2. Greater Cash Flow<\/h2>\n<p>One of the best features of the fourplex is that it will generally cash flow better than one- to three-unit properties\u2014primarily 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.<\/p>\n<p>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.<\/p>\n<p>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.<\/p>\n<p>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.<\/p>\n<p>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.<\/p>\n<p><em><strong>Related: <\/strong><\/em><em><a href=\"\/renewsblog\/considerations-house-hack\/\" target=\"_blank\">5 Points to Seriously Consider Before Jumping Into That House Hack<\/a><\/em><\/p>\n<h2>3. Exceptional Financing Terms<\/h2>\n<p>A common reaction I receive from friends when I suggest house hacking a fourplex is, \u201cThere\u2019s no way I can afford such a large building!\u201d<\/p>\n<p>However, they are usually unaware of several aspects of financing a fourplex that make them the perfect house hack.<\/p>\n<p>First, conventional bank financing is available for one- to four-unit properties. This means a 30-year, fixed-rate term.<\/p>\n<p>Unlike <a href=\"https:\/\/www.biggerpockets.com\/loans\" target=\"_blank\" rel=\"noopener noreferrer\">commercial loans<\/a> 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.<\/p>\n<p>Owner-occupied fourplexes can also be purchased with a modest down payment of 3.5 percent when <a href=\"\/renewsblog\/fha-guidelines\/\" target=\"_blank\" rel=\"noopener noreferrer\">utilizing an FHA loan<\/a>. This type of loan is a government-insured product designed for low- to moderate-income borrowers without significant credit history.<\/p>\n<p>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\u2014certainly within reach for most financially disciplined, working Americans.<\/p>\n<p>And if you\u2019re 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.<\/p>\n<p>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.<\/p>\n<p>Let\u2019s 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.<\/p>\n<p>If you make $50,000 per year at your job, you\u2019ve just given yourself a 54 percent raise toward qualification.<\/p>\n<p>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!<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-108925\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2019\/03\/arizona-house.jpg\" alt=\"happy family at desk signing papers with real estate agent\" width=\"702\" height=\"336\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2019\/03\/arizona-house.jpg 702w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2019\/03\/arizona-house-300x144.jpg 300w\" sizes=\"auto, (max-width: 702px) 100vw, 702px\" \/><\/p>\n<h2>4. Maximized Economies of Scale<\/h2>\n<p>A huge advantage of the fourplex is that they provide the best economies of scale available to conventionally financed property.<\/p>\n<p>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).<\/p>\n<p>The same tends to hold true on expenses like taxes, lawn care, and snow plowing.<\/p>\n<p>In addition, at some point in time, you are going to have a vacancy. If you\u2019re 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.<\/p>\n<p>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.<\/p>\n<p>The fourplex also maximizes the multiplier effect of community upgrades that increase rent. For example, let\u2019s 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.<\/p>\n<p>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\u2019s a nice 24 percent annual return with a duplex\u2014but a whopping 72 percent annual return with a fourplex!<\/p>\n<p><em><strong>Related: <\/strong><\/em><em><a href=\"\/renewsblog\/numbers-house-hack\/\" target=\"_blank\">The ROI on the First Year of My House Hack: 82%<\/a><\/em><\/p>\n<h2>5. Training Wheels for Commercial Multifamily Buildings<\/h2>\n<p>Finally, the fourplex will provide a valuable opportunity to employ many of the same <a href=\"\/renewsblog\/2013\/04\/09\/how-to-buy-a-small-multifamily-property\/\" target=\"_blank\" rel=\"noopener noreferrer\">strategies and tactics used in large commercial multifamily<\/a> 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.<\/p>\n<p>First, you\u2019ll build your &#8220;core four&#8221; team members (agent, property manager, contractor, and lender) before you even look at any property\u2014just like the &#8220;big boys.&#8221;\u00a0 Sure, you\u2019ll likely start out being the property manager while you house hack. But you know that eventually you\u2019ll move out and move up and wouldn\u2019t 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.<\/p>\n<p>Second, you\u2019ll conduct a market analysis, evaluating similar metrics employed by the most successful multifamily syndicators. You\u2019ll research demand drivers that affect your market\u2019s 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!<\/p>\n<p><a href=\"\/renewsblog\/due-diligence-ultimate-guide\/\" target=\"_blank\" rel=\"noopener noreferrer\">When it comes to due diligence<\/a>, you\u2019ll bring in the experts to look at the roof, HVAC, foundation, and more. You\u2019ll know the limits of your own expertise and rely on others to fill the gaps\u2014similar to the savviest of multifamily investors.<\/p>\n<p>Finally, you\u2019ll crunch the numbers just like the pros. Yes, your bank will look at comparable sales data, but you\u2019ll look at cash flow and rate of return. You\u2019ll sift for opportunities to add value and increase rents, as well as opportunities to reduce expenses and vacancy.<\/p>\n<p>You may even <a href=\"https:\/\/www.biggerpockets.com\/guides\/brrrr-method?itm_source=ibl&amp;itm_medium=related&amp;itm_campaign=guide\" target=\"_blank\" rel=\"noopener noreferrer\">employ the BRRRR method<\/a> and eventually refinance your invested capital out of the building completely\u2014the Holy Grail of investing to which all large multifamily operators aspire.<\/p>\n<p>The bottom line is that if you can successfully house hack a fourplex, you\u2019re 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.<\/p>\n<p>And if the house hack experience reveals that future multifamily investing isn\u2019t for you, that\u2019s okay, too! In the meantime, you\u2019ve saved a lot of money, developed valuable life skills, achieved personal growth, and own a cash-producing asset.<\/p>\n<p>The experience will be irreplaceable, and no matter what you do next, you\u2019ll be miles ahead of the crowd!<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-91220\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/08\/blog_ads-02.jpg\" alt=\"\" width=\"700\" height=\"85\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/08\/blog_ads-02.jpg 700w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/08\/blog_ads-02-300x36.jpg 300w\" sizes=\"auto, (max-width: 700px) 100vw, 700px\" \/><\/p>\n<p><em>If you&#8217;ve been considering house hacking but have yet to pull the trigger, what&#8217;s stopping you?<\/em><\/p>\n<p><strong>Comment below!<\/strong><\/p>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>While many house hacking strategies exist, each offers varying degrees of cost savings, privacy, risk, and upsides. In my opinion, one such asset type is better than the rest. Take control of your personal finances and propel your journey toward financial freedom by house hacking a fourplex. <\/p>\n","protected":false},"author":20895,"featured_media":101076,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[5524,7119],"tags":[],"class_list":["post-109586","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-real-estate-investing-for-beginners","category-biggerpockets-daily"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/109586","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/20895"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=109586"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/109586\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/101076"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=109586"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=109586"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=109586"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}