Deciding between a 3 unit and a 5 unit

7 Replies

I am deciding between a 3-family property consisting of 3BR units and a 5-family property that are all 2BR units. They are roughly around the same price and profit about the same per month. Utilities are separated and paid by tenants in both.

Anybody have any advice on deeling with 5 units versus 3? I think the 2BR units would be more in demand, but then you have 5 units to maintain and more tenants to keep happy.

Hypothetically on a larger scale, what if it was an 8 unit property with single bedrooms. Easy to fill, but more maintenance calls?

Obviously, there are a lot of factors that come into play in a discussion like this ... but strictly speaking, the more units, the more opportunity for profit gains, and the more insulation you have from vacancy.

Also, the condition of the properties could be a factor.  Old everything? New everything?  A neighborhood vs. D- neighborhood ?

One last thought ... a 3-unit is generally subject to less financing restrictions than a 5-unit, which would likely require a commercial loan.

The biggest difference to me, as @Jeremy Pace alluded to is residential property vs commercial.  Yes in general, 3 BR units will turnover less often than 2BR and certainly 1BR units.  3 BR also usually means kids, too.  While I don't discriminate, obviously, kids can be as bad as pets in my experience.

Commercial property appraises, finances and is insured differently. I like that commercial property is not only valued based on comps and I like that the financials can stand on their own instead of my credit. With commercial I also hold title in an LLC, not personallly and it fits well with financing and insuring. I also like that commercial property has less competition from other buyers and owners are more sophisticated and more open to creative purchase solutions. That also potentially means less appreciation potential though, in theory. Commercial property is easier to value add through improvements in the property, income and expenses, and management. I would go with a commercial property if I had some mgt experience and could do it financially.

Wow, both are great answers. Thank you both for your insights.

Originally posted by @Brian Gibbons :

Staying away from federal regulations over 4 units there's no Dodd Frank

So there's no CFPB either

 I wouldn't consider that to be a negative thing! ;)

If you study creative financing in commercial more than four units you can do amazing things as compared with being restricted to four or less

Talk to a CCIM commercial real estate agent and they'll talk to you about what you can and can't do for 5+

Many residential investors have gotten out of residential and into commercial 5+ for that very reason

I have owned duplexes with 3 bedrooms and I have owned 15+ units.  I treated my duplexes like an apartment in that I rented out each of the bedrooms to different renters.  This meant that not only did my three bedroom duplexes cash flow well, if one tenant left, I had no loss of income.  

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