Should I buy a 4 unit or 6 unit?

6 Replies

Hey Guys!

I'm new to the site and Real Estate investing and wanted to got some input on a question I have.

I currently have 2 duplexes and I believe I am ready for something bigger. I know you can get traditional financing with apartment building up to 4 units but I am curious if I should buy a 6 or 8 unit?

What one do you recommend and why?

Once you get to 5-units and above you're into the commercial realm. Pretty much everything is more expensive with less attractive terms - financing, insurance, trash removal, etc. However, if you buy it right the added income can offset those higher operating costs and some of your expenses may actually be reduced if you look at "per unit" cost: 1 furnace, 1 roof, 1 parking lot to plow, etc. To me, usually the more units under one roof the better, but like anything else it comes down the the results of your overall analysis for each particular property.

I like the idea of “scale”, so more units on one property appeals to me.

Originally posted by @Ryan Murdock :

Once you get to 5-units and above you're into the commercial realm. Pretty much everything is more expensive with less attractive terms - financing, insurance, trash removal, etc. However, if you buy it right the added income can offset those higher operating costs and some of your expenses may actually be reduced if you look at "per unit" cost: 1 furnace, 1 roof, 1 parking lot to plow, etc. To me, usually the more units under one roof the better, but like anything else it comes down the the results of your overall analysis for each particular property.

 All true.  Analysis of the deal is key.

Can I make a suggestion that may be a good compromise of both?  Look for 4-plex clusters.  Sometimes Sellers will have 16 units, but they are all deeded and zoned 1-4 unit (4 4-plexes), so they can be purchased with conventional financing.  Look for Sellers with multiple parcel #s associated with their sale.  This is a good indicator that the units are all separate, but being sold together.   Even if the SELLER holds them under 1 commercial loan, it doesn't mean you have to buy them as a commercial loan.  You can opt to buy each 4-plex individually, but then have all 16 units after closing.  Then, you have the increased units you wanted with the more desirable financing.

Also, when you go to sell, you can choose to sell them as a package, or only sell 1 at a time.  So, it gives you flexibility.

Just be aware of expenses. As stated above, run them through your deal analyzer to make sure they make sense. Sometimes 4-plexes can have HOA fees. If you are multiplying that by 4, it may not make sense.

Those are great ideas! What do you guys use for deal analyzing? I have read "The weekend Millionaire" and got some great things on how to analyse a deal but i'm curious as to what you all use?

@Jacob R. Crosby The rental property calculators available here (under the "Tools" tab at the top of this page) are a great way to quickly analyze a potential deal. Like any analysis, the data that comes out is only as good as the data that goes in. Compiling accurate expense numbers can require some sleuthing on your part but if you take it one step at a time it's not that overwhelming.

Utility info can be obtained from the seller and verified through each utility provider. Property taxes are public record and can be found on most municipal websites. Estimating Repair and CapEx numbers can take a bit of market intuition but generally 5-11% per each depending on the current condition of the building is a good starting point.

Income (rents) are usually either provided by the seller or can be adjusted/estimated by you or someone more familiar with that particular market. Using the BP calculators you can plug in what info you have for a quick overview and then drill down and refine and verify the numbers if you have a property that appears to have some potential. 

You can also post numbers here so we can swoop in and steal your deal..ah, I mean..help you analyze if you want some help :-)

@Ryan Murdock sweet thank you! How many different properties do you have? I noticed your up in Bangor, I'll be up there next weekend for a conference haha

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