Is there value in building a portfolio of 2-4plexes?

5 Replies

I am actively on the market for 2-4plexes in my area, with the intent of 1031'ing several of these into an apartment building (or some other commercial property) someday. I'm wondering what advantages there are in acquiring a portfolio of these smaller MFH (aside from serving as a warm up to make the switch to commercial), and if there's a case to be made to never make the switch to something larger?

One clear advantage is the relatively cheaper financing and availability to owner occupy. I've also heard second-hand that rent control is usually imposed on larger landlords. However, I expect that managing several addresses will result in more tenant/property manager headache and lower economies of scale on expenses. 

I have several investors that stick with fourplexes long past the time that they could move up to small apartment properties. Here are a few of the reasons I've heard from them:

  1. Better Financing - It's hard to pass up the residential loans, at least until both you and your spouse have both hit the 10 loan limit. The 5+ unit properties can be difficult to finance until your deals are large enough for agency debt.
  2. More Availability - It's much easier to find a fourplex in your target market than a small apartment property. It's often easier to pick up several fourplexes in the same time it would take to find one 10 unit property. 
  3. Diversification - You can own several fourplexes spread across your target market or across several markets as opposed to putting more eggs in fewer baskets.
  4. Liquidity - It's quicker and easier to both sell and refinance a fourplex than a larger apartment property.
  5. Appreciation - Many investors believe that fourplexes appreciate faster than larger apartment properties. I'm not sure I believe this, but I know many investors do.

I'm actually a big fan of helping clients move to larger properties when it's appropriate. However, there are always several factors to consider when making that decision.

Originally posted by @Eugenia K. :

I am actively on the market for 2-4plexes in my area, with the intent of 1031'ing several of these into an apartment building (or some other commercial property) someday. I'm wondering what advantages there are in acquiring a portfolio of these smaller MFH (aside from serving as a warm up to make the switch to commercial), and if there's a case to be made to never make the switch to something larger?

One clear advantage is the relatively cheaper financing and availability to owner occupy. I've also heard second-hand that rent control is usually imposed on larger landlords. However, I expect that managing several addresses will result in more tenant/property manager headache and lower economies of scale on expenses. 

Yes economies of scale are the name of the game for larger properties and commercial. Tripple Net commercial is even easier since all expenses are passed through to the tenant so financials and returns are very simple to calculate and predict. Also no rent controls to deal with just market cycles and conditions.

Rent controls and eviction moratoriums apply to all residential rental properties. They are all treated equally regardless of size.

 

Hello Eugenia,

My experience is 2-4 units are an excellent way to build a portfolio. More availability, better diversification (as opposed to one large apt. building), more options, better financing, house hacking opportunities, etc.

In my case, started out small with several condos, then did 1031 into duplexes. Did cosmetic and landscape reno's on duplexes and increased rents to market. Then 1031 the duplexes at profit into NNN QSR's, single family STR's etc.

No one clear path...

I will say, avoid states with rent control like the black death. They can literally "kill" your ability to renovate and profit from all your hard work.

Cheers & Best wishes!





Yes there is value because it gets you to the next stage even if it is at a slower rate. 

I owned a few duplexes and a house and was trying to get into apartments but had trouble making the jump. 

I considered not buying any more 1-4 units because it was fairly slow to grow this way, but I listened to a podcast that suggested it is OK to have small successes. Just because you are not hitting home runs doesnt mean you should give up on the smaller successes. 4 first base hits are still the equivalent of a run. I took this to heart and kept buying up houses, duplexes, and a quadplex. Eventually I got too busy and hired a property manager.  Last year I landed a small 16 unit apartment building and now I have a total of 30 units and only do a fraction of the work on them. 

It would be nice if we could all jump straight to 100 unit apartment complexes, but if you don't yet have the ability then it is better to build up slowly than keep waiting for a home run.