{"id":47290,"date":"2013-08-28T05:33:37","date_gmt":"2013-08-28T11:33:37","guid":{"rendered":"https:\/\/www.biggerpockets.com\/renewsblog\/?p=47290"},"modified":"2024-06-18T04:44:42","modified_gmt":"2024-06-18T10:44:42","slug":"2013-08-28-flip-duplexes-triplexes-4-plexes","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/2013-08-28-flip-duplexes-triplexes-4-plexes","title":{"rendered":"5 Reasons To Flip Duplexes, Triplexes and 4-Plexes"},"content":{"rendered":"<p>There are tons of articles, courses, bootcamps, and forum posts related to flipping single family homes both on <a href=\"https:\/\/www.biggerpockets.com\" target=\"_blank\">BiggerPockets<\/a> and all sorts of other websites.\u00a0 For many people it makes complete sense.<\/p>\n<p>Most families want to live the American Dream. They want to buy a 3BR\/2BA house (or 5BR\/6BA McMansion) in a beautiful neighborhood, move in with their 2.3 kids (average for statistical purposes &#8211; I am not advocating having 0.3 of a kid), and gradually pay off their mortgage (or walk away from the house when they get tired of paying).<\/p>\n<p>With such a big market for single family homes, it is natural for all the rehabbers and flippers out there to cater to this large demographic.<\/p>\n<p>But let me propose an alternative.\u00a0 In today\u2019s economy, it seems like fewer and fewer people (although there are still a lot of them out there) are interested in \u2018the American Dream\u2019.\u00a0 I think there are a couple of reasons for this:<\/p>\n<ul>\n<li>Many people have been burned in the past couple of years by buying homes that proceeded to sink in value dramatically<\/li>\n<li>People have a hard time believing a home is their \u2018best investment\u2019 and are starting to see primary residences as liabilities more than assets<\/li>\n<li>The work force is becoming much more mobile thanks to technology. \u00a0They like the flexibility of renting<\/li>\n<li>Younger workers have ever-increasing college debt loads that make them uneasy about taking on more debt like mortgages<\/li>\n<\/ul>\n<p>Admittedly many of these observations are my own personal viewpoint from reading the news, but I am seeing it in my rental business and talking to friends and co-workers as well.<\/p>\n<p>These same reasons though, provide a great market for people to <a title=\"How to Buy a Small MultiFamily Property: A Step by Step Case Study\" href=\"https:\/\/www.biggerpockets.com\/blog\/2013\/04\/09\/how-to-buy-a-small-multifamily-property\/\" target=\"_blank\">buy residential multifamily properties<\/a>.<\/p>\n<h2>Why Flip Small Multifamily Properties<\/h2>\n<p><em>If there are a lot of potential buyers, doesn\u2019t it make sense to become a seller?<\/em><\/p>\n<p>Most of my purchases, for both flips and longer-term rental properties, have been multifamily residential units &#8211; from duplexes to 4-plexes.\u00a0 I do not have any experience in commercial multifamily properties, and this article is not meant to include apartment buildings.\u00a0 Nor am I saying that the multifamily residential properties are the \u2018cat\u2019s meow\u2019 (hat tip to <a title=\"5 Lessons Crazy Cat GIFS Can Teach Us About Entrepreneurship (Prepare to Smile\u2026)\" href=\"https:\/\/www.biggerpockets.com\/blog\/2013\/08\/26\/5-lessons-crazy-cat-gifs-can-teach-us-entrepreneurship-prepare-smile\/\" target=\"_blank\" rel=\"noopener\">Brandon the \u2018Cat Man\u2019<\/a>) and the only type of property to flip.<\/p>\n<p>But I have made a lot of money flipping several duplexes, and also renting duplexes, triplexes and 4-plexes.<\/p>\n<p>Let me explain why I think these properties are so great to rehab and flip:<\/p>\n<h3>1. \u00a0Exit Strategy<\/h3>\n<p>Experienced single family rehabbers and flippers will tell you to always plan your exit strategy well.\u00a0 That\u2019s great advice.\u00a0 Part of that strategy is to determine the ARV or \u2018After-Repaired Value\u2019.\u00a0 You need to know what you can sell the place for fully-fixed up in order to figure out a good offer price and rehab budget that ensures you make money.<\/p>\n<p>But they also ask &#8211; \u2018What if I\u2019m wrong on what I can sell it for?\u2019<\/p>\n<p>Say the market takes a dive, or your rehab budget increases due to some unforeseen large repair?\u00a0 The good gurus (and many other experienced flippers) will tell you to have an alternative exit plan &#8211; i.e &#8211; be able to rent it out if it doesn\u2019t sell.<\/p>\n<p>With single family homes, many times the rent will barely cover the mortgage payment, including insurance and taxes.\u00a0 Any maintenance items and you might be losing money for that month.\u00a0 You certainly are not making much money.<\/p>\n<p>Residential multifamily properties, on the other hand, can be cash cows.\u00a0 Often you can cover the mortgage payments with rent from one or two units and receive pure profit from the other units.\u00a0 If your multifamily flip doesn\u2019t sell, it certainly won\u2019t break your heart.\u00a0 Rent it out and make some money!<\/p>\n<p>When I flip a duplex, I will put a renter in one unit.\u00a0 That way the buyer won\u2019t have to find a renter and can start receiving rent as soon as they buy the unit.<\/p>\n<p>But there is another advantage to putting a renter in all units but one.\u00a0 Having at least one renter in the building will help defray the mortgage payment for you the rehabber while you are waiting for the property to sell.\u00a0 With a single family flip, the building has to stay empty while it is on the market &#8211; and the flipper has to make the entire mortgage payment.<\/p>\n<h3>2. \u00a0Marketability<\/h3>\n<p>Many areas are seeing a rise in rental rates.\u00a0 The foreclosure crisis has turned tons of people from homeowners to renters.\u00a0 This can make it more difficult on single family flippers.\u00a0 Their market has shrunk over the past couple of years due to the fewer and fewer people who can qualify for a mortgage.<\/p>\n<p>But higher rents mean higher selling prices for investment properties.\u00a0 This is the main contributing factor for commercial multifamily, but it is also a very attractive portion of selling residential multifamily properties.<\/p>\n<p>Single family buyers are not going to pay more because rents are higher in a particular area, but duplex to 4-plex buyers will.<\/p>\n<p>I also hear about flippers trying to sell their homes by advertising monthly payments instead of sales price &#8211; like car dealers.<\/p>\n<p>\u2018Move into your new home for 3.5% down and just $997 per month\u2019<\/p>\n<p>What if you could say:<\/p>\n<p>\u2018Move into your new home for 3.5% down and $100\/month\u2019? Or \u2018$0 per month\u2019?<\/p>\n<p>Think the second place might sell faster?\u00a0 I would rather buy those terms than a single family.\u00a0 There are many adventurous souls out there who would be fine with doing a little property management in exchange for having the tenants pay their mortgage.<\/p>\n<p>There are lots of opportunities for buying a residential, multifamily property, rehab it, and sell it to an owner occupant for a price that allows that buyer to live practically mortgage payment free.<\/p>\n<h3>3. \u00a0Residential Financing<\/h3>\n<p>Buying and selling commercial multifamily properties involves using commercial financing.\u00a0 From what I understand, commercial financing involves<\/p>\n<ul>\n<li>Commercial lending rates that are higher than residential<\/li>\n<li>Higher closing costs and fees than residential<\/li>\n<li>Higher down payments and possible requirements for equity partners due to higher purchase prices<\/li>\n<li>Fewer government backed programs to encourage ownership<\/li>\n<\/ul>\n<p>The government wants to help Joe and Sally Homeowner &#8211; the don\u2019t give a hoot about \u2018The Donald\u2019. \u00a0 So they have all sorts of programs such as FHA loans, VA loans, HUD sales, HARP programs etc. to encourage people to get into home ownership.<\/p>\n<p>Guess what?\u00a0 All those programs also apply to single family homes AND buildings with up to 4 units. \u00a0 So either a flipper or an end buyer can have all the advantages of a commercial property\u00a0 &#8211; better cash flow,\u00a0 spreading risk over multiple units etc. but also keep the advantages, and lower costs of a residential property.\u00a0<b>\u00a0<\/b><\/p>\n<h3>4. \u00a0Market to Investors AND Homeowners<\/h3>\n<p>Once you rehab a residential multifamily property, you can market it to both homeowners and investors.\u00a0 This can create a larger market and potentially drive the price up.<\/p>\n<p>Many successful investors started their careers by buying a duplex, living in one half and renting out the other half.\u00a0 The building allowed them to:<\/p>\n<ol>\n<li>Save money for their next investment because their tenant was paying their mortgage.<\/li>\n<li>Introduce them to property management in a very simple manner because their rental was about as close as it could get to their home.<\/li>\n<\/ol>\n<p>Even is someone doesn\u2019t want to become a real estate tycoon, they like the idea of living rent-free or almost rent-free.\u00a0 In these days where everyone is trying to cut back, a residential multifamily will seem like a great option.<\/p>\n<p>On the other hand, it is possible to sell a fully-rehabbed multifamily to an investor for a healthy profit, and still provide the investor with a nice monthly cash flow.\u00a0 Buying a fully-rehabbed property with cash flow from Day 1 can be very attractive to many investors, especially ones that don\u2019t have a lot of experience with rehabbing.<\/p>\n<h3>5.\u00a0 Tax Advantages<\/h3>\n<p><i>Please Note &#8211; I am not a tax professional and this should not be construed as tax advice<\/i><\/p>\n<p>Buyers of multifamily residential properties, especially buyers who live in one unit, can take advantage of both homeowner and investor tax deductions.<\/p>\n<p>Although the person who lives in their multifamily cannot take depreciation for the entire building, they can take a portion of the depreciation depending on how many units there are.\u00a0 They can also take a portion of the expenses as deductions.<\/p>\n<p>The buyers also receive the mortgage deduction and all other deductions that a home owner receives, including having a portion of proceeds from the sale being tax free.<\/p>\n<p>In addition to the buyers, there is also a good tax incentive for flippers who buy multifamily residential.\u00a0 I have actually rehabbed some of these properties and held them for a year.\u00a0 I rent out all units in the building and then \u2018encourage\u2019 one of the tenants to move out at the end of the year.\u00a0 This is normally pretty easy because I buy most of mine near a local university so the tenants don\u2019t stay more than a year in many circumstances.<\/p>\n<p>Then I sell the property.<\/p>\n<p>By doing this, I have several advantages over a traditional flip:<\/p>\n<ul>\n<li>I receive a year\u2019s worth of cash flow, adding to my profits<\/li>\n<li>It allows me to spread the rehab over a longer period of time, to make sure I get all the \u2018kinks\u2019 out.\u00a0 I also don\u2019t need to have all the rehab money up front.<\/li>\n<li>I can sell after a year and receive the long term capital gains tax rate, which is a lot better than the regular rate most flippers must pay<\/li>\n<\/ul>\n<p>As both the real estate and rental markets continue to improve, duplexes through 4-plexes can take advantage of both types of investing &#8211; rentals and flips.\u00a0 The tried and true advice of always trying to find the best deal still applies, but these kinds of multifamily investments may be a great way to increase your profits.<\/p>\n<p>What do you think? Have you ever flipped a small multifamily property? Share your comments or questions below!<\/p>\n<p><span>Photo: <a href=\"http:\/\/www.flickr.com\/photos\/68785404@N00\/6321627874\/\" target=\"_blank\" rel=\"noopener\">simple pleasure<\/a> <\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>There are tons of articles, courses, bootcamps, and forum posts related to flipping single family homes both on BiggerPockets and all sorts of other websites.\u00a0 For many people it makes [&hellip;]<\/p>\n","protected":false},"author":1280,"featured_media":174153,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[5525],"tags":[],"class_list":["post-47290","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-flipping-houses"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/47290","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\/1280"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=47290"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/47290\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/174153"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=47290"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=47290"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=47290"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}