Start House Hacking with a Duplex or 4-Plex?

Question

Hello Fellow Investors,

I am interested in doing the House Hacking by starting with a Multi Family Property. It would be my first home purchase as Primary Residence. And I want to get the benefit of qualifying for the highest loan amount with the least down payment. My preferred location will be Alameda, CA.

My question is should I start with a Duplex as it is my first investment and learn the process with one tenant or should I look for a 4 Plex and have multiple tenants? Does it even matter?

Any advice for a newbie will be helpful.

Jonathan Bombaci · Answer

A 3-4 family should definitely beat the snot out of a 2 family from a cashflow perspective. If you can qualify and have the $ for downpayment and reserves then yeah go bigger with your FHA or other first time home buying loan.

The other thing to keep in mind is most lender will understand if you start with a 4 family, then go buy a 2 family, since the SF with white picket fence is the “American dream”. A 2 family is more closer to that in their mind than a 4-plex. So you can buy the 3-4 family now then a 2 family in a year or so and still get favorable owner occupied residential financing. It’ll be much harder trying to convince an underwriter that you’re moving from a 2 family to a 4 family if you decide to go that path.

Best,

Jon

Marcus Auerbach · Answer

Depends also what your market is offering. Milwaukee for example has a very large inventory of duplxes, as far as I know the largest in the country. The 3 families are usually junk: a duplex with a cobbled together third in the attic, which comes with a lot of issues. Most of our quads are affordable housing, built in clusters, no garages, which is just everyone's cup of tea to live. We work with a lot of house hacker's every year (many repeat) and not one has chosen a quad.. But your housing stock might offer very different options, so see what you have to work with first!

Also, you can make a good argument for higher rents per unit make a better investment, better rent to operating cost ratio etc. House hacking is a financialno brainer to get started as an investor, but it's also very important that you have a good experience with your first one, otherwise there will never be a second one. And if you are worried about ROI, CoC or cash flow, keep this in mind: the worst house hack in town still beats buying a single family home.

Charles Clark · Answer

Bom dia, I hope all is well with you. As I tell my client, if you know your goal is to get more, then maximize the units you can get each loan you are approve for. With my first purchase I was only looking at duplexes and planning on buying another duplex right away. After realizing that I could purchase a four unit with my residential loan, I started analyzing quads from that moment on and it was the best decision. One loan can either get you 2 doors or 4 doors.

However, I do want to share that my fiancé started investing with me at the same time and did not want to buy a four unit but knew buying a multi fam was important. So we are house hacking a duplex because it was better for us from a living situation. With that being said, go for the quad unless your living situation dictates otherwise. As @Marcus Auerbach stated, the worst house hack is better than buying a SF liability.

Feel free to contact me if you have any other questions.

Beleza

Ben Einspahr · Answer

@Jalpan Jangiani, None. From a pier cash on cash prospective, SFH house hacks will give you a much better return, whether that is renting by the room or SFH with separate mother-in-law.

But most importantly, the biggest speed bump is lending. Google the FHA self sufficiency test. This applies to 3 and 4 units properties you are wanting to purchase as a primary residence. It states 75%  of the rental income must exceed your PITI. And those rental comps come from your lender, not you. So STR income will not apply. To offset that ratio you will need to put more down. by the time you ahve put more down, you might as well purchase it as an investment property.

In the years I have been doing this, only  10-12% of HH'ers are duplex's. 0% are 3-4 units. These states are coming for the Denver Metro Area.

Last thing is lending first, analyze second. Connect with an investor friendly lender to put together a business plan. Once you know your buying power, then start analyzing .

Naomi S. · Answer

Agreed with the above on lending! I am currently doing a house hack in Alameda and have a couple fourplexes here. I've managed some of my properties, however you could consider hiring a property manager to delegate the management. If you bake the cost of management into your cashflow calcs then getting a duplex vs fourplex won't really feel different if you're going to outsource the work. There are many unique lots in Alameda and you can find some awesome gems here.

Matt K. · Answer

One thing to consider is what you want out of your standard of living...because you'd be living in one of the units.

Generically speaking a duplex is going to feel more like a home .... potentially be a bit bigger living as well and more chance of private outdoor space.

The 4 plex is more likely to be an old Victorian split up...and some units could have a funky/cramped layout. The outdoor space is more likely to be taken up by off street parking.

You will likely want some funds set aside for repairs...deffered maintenance, old appliances, questionable previous construction....

I do love Alameda, lived there for a bit and some of the well done Victorians are amazing. You'll also have good tenant pool with the Coast Guard base over there...

Erik Browning · Answer

It doesn't matter, it is property, lease, and deal specific. You could have higher cash flow with a duplex if the location is sick. Focus on the existing leases, market rents, and property location. Plug those numbers into the BP rental calculator to see where you're at. You can do this!

Rick Albert · Answer

First of all, this is awesome! I grew up in Alameda. I still have family there.

It has been a minute since I studied the real estate market but with it being high priced, it might be tricky to do an FHA loan with a 3-4 unit because of the self sufficiency test. Basically 75% of the rents for all units must cover the PITI. Run the numbers to see if it is realistic. If so, go for it. If not, go duplex.

What's great about Alameda is the quality of life and the fact there is no more land to build. This provides a unique opportunity for rent growth and appreciation.

Good luck!

Jonathan Taylor · Answer

@Jalpan Jangiani I started where you are now. The questions that would help us help you are:

How much down payment can you comfortably afford? Are there properties in Alameda where this is realistic?

Look into the NACA loan program as that is what I used. A rare but difficult program that allows for lower downpayment on owner occupied multi units. Reno funds can be included as well. It's been 4 years since I was through the program so I am not fully up to date on current programs but would be a good start for you.

Hope that helps

Brock Mogensen · Answer

Either works. I would tell your agent that you are looking for properties in the 2-4 unit size range.  Whatever you find first (that is a good deal): duplex, triplex, or fourplex..go with that one.

Start House Hacking with a Duplex or 4-Plex?

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