Hey everyone. I am looking to start investing with a multi unit property, most likely a 4-plex. I always see on duplex listings, "Live in one side, have a renter pay your mortgage" or something catchy to that effect. If you just want to live without a mortgage, that sounds good, but it seems too simplistic if this property is the start of a buy and hold portfolio. If you're planning on buying more investment properties in the future, what are some best practices you should put in place with your very first multi property while living there? Should you be keeping the rent money separate from paying down the mortgage and put it aside for future purchases? What are the pros and cons of having a business structure this early? Should I buy the property in my name or as a business entity? Side note: this will be a first time home purchase so it crossed my mind that the perks/programs for first time home buyers might be negated by any kind of business dealings, so that might be something to consider for anyone's response. Thanks in advance!
You have a lot there, let me try and work through it.
Duplex v. 4-plex - You will have 3 tenants instead of 1. Yes, that means 2 more monthly checks but it also means 2 times the work, at least. If you're living in the 4-plex it also means you have to share the place with 3 other people instead of 1. A duplex may be small but learning in a controlled environment is invaluable.
Best practices - Get a good lease and follow it. Treat your property like a business and tenants like people. Be kind, understanding, and listen when tenants have issues, but understand the bank doesn't accept excuses and neither can you.
Money Separate - personal choice. I would open a separate bank account to help you track what you are spending, making, and see the little costs associated with a rental property. Your first time home buyer mortgage will have a good rate so probably not in a hurry to pay that back if you have to use hard money at 12% for the 2nd property.
LLC - probably makes the first time home buyer loan more difficult if not impossible. Honestly, an LLC is not necessary for the first property. Keep good records of your expenses and income from the property to give to the accountant and they can handle the rest. You can always transfer the property into an LLC later - or have an attorney do it at the same time they set up the LLC.
Hope this helps!
Hey Ian. I know it was a bunch at once, thanks for keeping up with it though. I am on the fence about duplex vs. 4-plex, for the same reason you mentioned. I think that might simply come down to what is available in the area that I would like to live in, since there seem to be more duplexes than 4-plexes, but we shall see. As for the business structure, I have heard many people will roll their first or second properties they they purchased into a business name at a later date. I know I need to just jump in a get going (within reason) but I don't want to be kicking myself for the next 30 years for doing it "wrong"! :-) Great info, thanks for the response!
Alot of the duplexs I see out here also say stuff like that but the rent just covers the mortgage usually. It won't cover any other expenses. Run the numbers yourself.
Whether to place the property in your name or a business name will be up to you. The type of loan you will get will also matter. First time home buyer FHA/VA loan is the way I went and I (obviously) recommend. This definitely will mean that your property will be in your name. Remember to run the numbers as if you don't live there. That way when you move you know about how much CF it will have.
Best practices, this is something that might change depending on your experiences. So first thing is to inform your tenants whether inherited or new your expectations. I told mine something along the lines of "This is a business, and you are the customer. And I am here to provide a nice place to live at a fair price. And if any issues arise please contact me to get it resolved." I would also set up systems where your tenant can pay you, don't go door knocking for rent. Checks thru mail, Cash thru banks. I would prefer electronic payments, but I don't have tenants who know how to use the internet very well. When I do I am thinking of using programs like Cozy, or similar. Fix problems as they arise. There are more but when you start you will learn the way you like to run things. I am still learning.
I would keep your rent money in a separate account and use the card to that account for easier tracking of maintenance costs. I think its up to you whether or not you have your rent pay your mortgage directly. I personally have my W2 paycheck pay for as much as possible (I am renovating my unit, so my W2 can't pay for everything all the time). I am trying to place 3 months of operating costs into a savings account and 3 months into a higher interest money market account. I am still trying to figure out the best practice here, but this is my current focus.
If you are going to get an FHA/VA loan with the one year living requirement I would say go for the quadplex. It might have a few more moving parts because the extra tenants, once it is settled out it can run quite smoothly. I have spent only a couple hours a month on tenants on average, with most of it being in the first 3 months.
I also am planning on starting my first LLC in January. I have no rush there.
I hope I answered your questions to the furthest extent as possible. If not , or if I was confusing let me know. I am also new and still learning. Gain as much knowledge as you can, but don't let the fear of not knowing everything stop you. I feel people learn the most by doing. Plus if you have experience in something it is easier to tie someone's comments to it, which makes learning easier. I still wouldn't know the difference between a ball valve and a globe valve if I never needed to, but it made renovating my house that much easier.
Hey @Christopher Wedde , thanks for the information! I'm originally from NH, but looking to start investing in the Norfolk, VA since I will be moving down there soon. Seems like we're pretty much on the same page with things, best of luck to you in your investing!
Sounds like you're in the same place I was about 6 years ago. Here're some of my lessons learned:
-All things being equal, I'd recommend 4-plex over duplex for a couple reasons. First, your first property is a learning experience. You'll learn much more about management, expenses, tenants, maintenance, and everything else with 3 tenants than you would with one. Think of it like this: a fourplex provides you 3 times the experience over a duplex (assuming you're living in one of the units), in the same amount of time. Second, your turnover has less of an impact when you have a vacancy. By living in one unit, a duplex is like having a SFR. When there is turnover, you're stuck paying the entire mortgage until it's filled. Eventually you may decide to use a management company. Having gained the experience through managing yourself, you'll be much better at providing oversight as the owner. There is some pain and suffering associated with self-management, but no more valuable learning experience. With a fourplex, the risk is minimal.
-I started a LLC to serve as the management company for my property thinking it would protect me from lawsuits, etc. In hindsight, now knowing a little more about the protections it actually offered under that structure, I was very naive, and it was completely useless. However, it was a great learning experience to set up the LLC, and the process of registering it with the state. I've since decommissioned the LLC, but am glad I went through the process. You won't have the option of putting the property in an LLC if you are using conventional lending. But, as @Ian Tvardovskaya mentioned, it's not really necessary at this point. Just take out a good umbrella insurance policy to protect yourself (~$2MM or more policy usually runs less that $100/month).
-Definitely open up another bank account strictly for this property. It helps with accounting. I had my tenants pay their rent at the bank by depositing directly to the account. That way their was a 3rd party handling the transaction and electronic record for everything. Use that account to pay all bills, repairs, mortgages, etc. Continue to build a sizable reserve to cover any costs associated with the property. After that, pay yourself the profits. It's up to you on how you want to account for your money. I'm not too caught up in separating my rental income from my normal savings, 6 in one hand...
-Treat the purchase as a business transaction. Only buy a property where you can make positive cash flow. Don't get emotional about the property because you like the location, amenities, etc., just because you're going to live there. If it doesn't make money on the bottom line, it doesn't make sense as an investment. Really do your homework on the surrounding area.
Finally, take it one step at a time, and don't get ahead of yourself. Value the experience you gain by being an owner and manager on the first property, and use that to feed your next purchase decision. You don't want to make a mistake with the first property, only to realize it after you've purchased your second and third property, and not given yourself an opportunity to learn from your mistakes.
A lot of people on the forum like Multi's. When I purchased my first rental unit had a lot of trouble finding decent cash flow on those. Fast forward a few years, collected 4 rentals condos and still find it hard to make numbers work on Multi's a lot depends on your area. I prefer not to live by my tenants and potential tenants, not even in the same zip code.
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