4 Things to Remember When Shopping for Multiplex

41

This wasn’t my title.

It was Saturday and I was still busy answering questions on the article I published the previous Tuesday which has gone absolutely ballistic!  I really didn’t think I’d be able to write anything for this week, and I texted Brandon Turner to this end.  Brandon responded with a topic “Things to Remember when Shopping for a Multiplex.”  He said: “Just do it…”

I laughed – I could write 50,000 words on the topic and barely scratch the surface; how do you think I know this?  But, the reality is this:

I know Brandon Turner well enough to realize that the kind, gentle, “teddy bear” persona on the forums is just a façade which dissipates into smoke when someone crosses him.  In fact, he grows two more heads and breathes fire out of all three…seriously, he does!

(Note from the Editor [Brandon]: Ben has clearly discovered my secret. Yes, I am a dragon who happens to like good real estate deals…)

So, here it is – 4 Things to Remember When Shopping for Multiplex.

How to Purchase Real Estate With No (or Low) Money!

One of the biggest struggles that many new investors have is in coming up with the money to purchase their first real estate properties. Well, BiggerPockets can help with that too. The Book on Investing in Real Estate with No (and Low) Money Down can give you the tools you need to get started in real estate, even if you don’t have tons of cash lying around.

Click Here to Download

It’s Scary – But, There is a Method

I’ve met a lot of people who, for the lack of a better phrase, are afraid to buy a multiplex.  You think I am going to poke fun of them or diminish their fears in any way?  Not a chance – people are right to be afraid.  A multiplex is a “business in a box” with numerous moving parts and lots of ways to mess up.  Folks are right not to take the notion of purchasing a multiplex lightly.

I want to tell you, however, that there is a method to this madness, which is the topic for today.  My intent for this article is not to get sucked into the infinite minutia, which, for me is easy to do, but to provide you with a bird’s eye view with a few broad strokes of the rhetorical brush which will give you some peace and confidence about buying a multiplex.

Knowing that I could go on forever, which means that the comments from last week’s article would go unanswered, and that wouldn’t be nice, I have given myself a limit of 1,000 words for this one.  Here we go…

As the title suggests, there are 4 macro-elements that I want you to focus on when looking for a building:

1. Ease of Purchase

First of all, if you can’t afford to buy it, then nothing else really matters.  As such, Ease of Purchase is the number one concern.  In this you are limited by 2 elements:

    • Down-payment
    • Financing

Naturally, owner-financing has the greatest potential to accommodate both.  But, if this is not an option then the next best thing is a conventional Fannie Mae / Freddie Mac 30-year amortized note.  Well – the secondary market residential loan qualifying standards preclude this type of a note for anything over 4 units, and as such you are automatically looking for either a duplex, triplex, or 4-plex; anything larger than that and you’ll have to play on the commercial side where the amortizations are shorter and interest rates are higher.

So, for your first building, unless you can achieve owner-financing, I suggest that you stay with either duplex, triplex, or 4-plex, each one of which has strengths and weaknesses which are balanced in the following 3 points in this article.

2. Cash Flow

Well – this should be pretty easy.  Cash Flow is why we buy buildings, so if there’s no cash flow then it doesn’t matter how easy it is to buy it – right?  In fact, if there is no Cash Flow in the deal this may be exactly why it is so easy to buy the building lol.  Simple stuff…

I’ll give you one personal preference of mine – take it or leave it.  I like triplex configuration.  Why?  Because it affords more and more stable cash flow than a duplex, while at the same time it is easier to manage than a 4-plex, which takes me into my next point:

3. Ease of Management

Ease of Management is always a concern and much more so if this will be your first baby.  A ton of things can be discussed under the umbrella of Management – let me say two things:

A 4-plex configuration more often than not requires a 2-story structure with 2 units down and 2 up.  This has several disadvantages when compared to a triplex, which can often be found in a ranch-style design.

One disadvantage is that water, last time I checked, does not leak up.  Oh yeah baby – water leaks down into the apartment below all right.  Trust me, this is not the call you want to receive – how do I know this?  For this reason, I say stay with ranch style for your first one, but this will disqualify most 4-plexes.

Also, we are looking for Stable Passive Cash Flow, which means that we want our tenants to stay in our units as long as possible.  In short, this is a function of the unit having a “feel” of home and not just some place to crash for the night, which is easier to accomplish in a ranch-style triplex for many reasons – enough said.

4. Ease of Liquidation

Even if you are not planning on selling this building any time soon, you need to remember to consider this aspect.  Why is the potential buyer going to choose to buy this building from you in lieu of another?  Make sure you answer this question before pulling the trigger, because you may not want to sell, but you may need to!

In Conclusion

Well, this is my idea of packing 40,000 words into 1,000 (933 to be exact).  Did I miss anything?

Photo: Alain Coutu

About Author

Ben Leybovich

Ben Leybovich has been investing in multifamily residential real estate since 2006. His area of expertise is creative finance. Ben works extensively with private as well as institutional financing. Ben is a licensed Realtor with YOCUM Realty in Lima, Ohio. He is also the author of Cash Flow Freedom University and creator of a cash flow analysis software CFFU Cash Flow Analyzer.

41 Comments

  1. Boy Howdy does water leak down. Knowing this, and worrying about this, is the one major detraction of my 10 plex… that an a princess tenant I acquired with the deal. Naturally it’s his unit that water leaked down in.

  2. I’m supposed to close on my first ranch-style triplex within the week! Rent from one unit covers PITI. Second unit covers 50% rule. Which leaves me and my 3.5% FHA down payment living in the 3rd for only the cost of utilities! There’s HUGE potential in the space (including a basement that was once a 4th unit until it was decommissioned for zoning and egress window law changes–but could easily accommodate a bar, storage room for the other 3 units, and a guest bedroom–all accessible from my unit!). I’m super excited to finally be closing!

      • I hope so too! The house is right on the edge of the area that’s revitalizing most quickly and most intensely. There are a couple other houses on the street, possibly abandoned, that I’d like to buy too, but I don’t want to bite off more than I can chew! What do you think–take a year and get stabilized with the first one, or try to get a hold of the owners of the other ones and see if I can make anything happen? I like the idea that improving one property increases the value of the others on the same street, but I’m rather cash-poor going into this first investment. That should change within a year, but the other properties need some not insignificant work before they’d be habitable.

        • It’s hard! Y’all are contagious! You think it’s worth starting a conversation now, or just wait and see how things are looking a year from now?

        • I guess on the bright side, if I do one deal per year, by the time I’m 40 I’ll have over a dozen properties! If I try to stick with MFs, even if they’re only duplexes and not triplexes, cash flowing $200/unit/month would gross $4,800…which is a lot more than I make as a full-time social worker! Ha!

  3. I definitely have a preference towards multifamily housing units. One of my favorite aspects of it is that if one tenant does not pay the rent or is a slow payer, I have at least one other tenant to help cover the loss. With a triplex, two paying tenants can easily offset one non payer. Once caveat to all of it is that as an income investor I must wait at least a year or two between deals, since all my money is tied up in the plex, unless I do a flip of sort in between. Also, if you choose to go FHA and only put down 3.5%, you will have to re-fi into a conventional before buying another owner occupied plex with an FHA loan as you can only have one government loan out at a time.

  4. anthony cecchini on

    Very good post. I plan on buying a something plex as soon as I move in the near future. I am not to worried about management, since all my properties will be managed by a PM. My time value is much higher than my dollar value in my life. Even if I live next door, I will still hire a PM. Of course the numbers still must work. I have the advantage of a decent salary job though, which i thoroughly enjoy and dont plan on quitting. Makes my situation very different than the many who want to cash flow to freedom.

      • So my big question is what is the big advantage of PM? I want to know what is going on w/ my place, I am going to collect and do the numbers myself, and I want to screen my tenants. I guess I can understand if you have 100s of units of just not having the time, but if you have a dozen or less why use a PM?

        • I do not use a PM Pete. I’ve always said – if there is a reason why I don’t hand my money over to a stock broker, it is because I can do better myself! And when I have 100s of units, which seems to be the direction I’m moving in, I am going to own the PM company and thus be able to select and train them myself…

  5. Everyone talks about it, but aren’t you concerned with liability with any of the residential mortgage products? I have all of my properties in an LLC, but do get hit with the higher rates (currently about 6% for me @ 25% down for 15 years).

    So many people seem to simply purchase properties without any of the corporate protection. Do you only do it for the cheap cash?

    Thanks. Liam

    • Yes Liam – most people choose to buy as individuals in order to take advantage of the easier terms of borrowing. The conversation which we’ll title “LLC or No LLC” has been talked about a lot in both blogs and the forums – different folks, different strokes on this issue.

      Thanks so much!

  6. Sander van Sletteland on

    Your article is timely for me given a decision I have to make in the next few days on whether or not to have a contract submitted to Homepath on the day the ‘First Look’ option has expired. Personally I prefer a 4plex over 3plex or duplex to get more bang for ur buck. Tons of them here in G-Ville, FL, about 50/50 ranch style vs 2 story, but they rarely go up for sale. Don’t trust contractors n rehab them myself so look for certain criteria in low price range of 20K/apt or less with most all or all major systems, HVAC, roof, no leaks, structure fine, etc still ‘serviceable’ and mostly cosmetic issues I can repair/fix myself. I have to make a decision about a ranch style 4plex w/same layout inside as the one i have here for only $47K from Homepath. Problem is if i wanna play the game, at least w/Homepath REO, I have to spend $600 for an inspection after contract submitted to see if it meets my criteria. Lots of cosmetic issues at that price, but I can handle most of them myself at just the cost of materials and months of long work days.

    With a low cost REO property like this though, it’s cash in hand, maybe another $10 to $20K in materials and months before even starts rolling in, but in the end the property value will at least double and I sit back and collect $2000 a month in ‘mostly’ passive income like I am now.. Thanks for your timely thoughts though on buying a Multiplex.

  7. Nice post Ben. A nice thing about multi-plexes, especially if you’re managing yourself, is that they’re all in one place giving you a chance to visit a little more often and keep better track of the property. Personally, I look at ROI and maintenance. We’ve mostly purchased townhouses as the exterior maintenance is taken care of by the association. That being the case, rents are a little higher than for duplexes, etc. These will be easy to sell when we want, though the market can get saturated pretty quickly in a downturn.

    • Hey Alan – sounds reasonable. But I do have one concern – association fees. Those can be very volatile and you as an owner of 1,2, or 3 units have literally no say. This has always steered me away from condos. This is just me…

      Thanks so much for sharing!

  8. When I began looking for an investment property, I thought I’d go with a duplex for my first deal. Over the course of more than a year watching the market, available properties, and some changes in my personal situation (and expansion of my thinking courtesy of BP!), I eventually decided to pursue a four-plex. Economies of scale. Better insulation against vacancies or nonpayment. Other benefits that have been previously discussed. And I specifically wanted to avoid commercial financing. Then I found the 5-family I ultimately bought, which was just too good a fit to let the spectre of commercial financing stop me.

    Perhaps my experience was atypical, but I found navigating the commercial lending process with my local bank (where I am well known and where I hold other investment accounts, so probably paved the way somewhat) on the 5-family I just bought a relative cake walk. I refi’d the mortgage on my primary residence simultaneously, and that proved to be exponentially more of a hassle than the commercial loan. The residential lending is more constrained by rules and regulations than the commercial lending, which, again, in my experience, is much more relationship based–at least in my community. Had I been dealing with a lender that was long distance or at least more removed from my community, my experience may well have been prone to more headaches. Fortunately, it was not.

    • No – you are right about commercial lending being easier Nancy. This paper is kept in house therefore the bank guidelines are it. There are no secondary market hoops to jump through. Once you have a relationship – boom 🙂

      Thanks so much!

  9. I have been looking for the right property 2-4 plex for a few months now, and unfortunately being in the SF Bay area there are no ranch style homes. Also, I am not finding anything that meets the 50/50 rule. There are a few good ones on homepath but priced way too high based on their condition and possible rents, as well as having to deal with rent control in most of the cities I would prefer to buy vacant but there are not many of those either.. I would love to invest in areas where I know the market is better, but I want to O/O to get the management experience and I don’t want to be paying rent. The area I am looking in is slated to appreciate about 15% next year and prices are steadily rising.. I sure hope to find something soon!

  10. Great article Ben! Good things to think about, as I am starting my venture in looking to invest in my first investment property outside of my current home. I was leaning more towards 4 families, but was open to the idea of triplexes, but this has made me think about the ease of management, as you made up great points to consider. Thank you for that!

  11. Great article as always Ben. You are right, the SoCal market is not the best for cash flow investing. I have been studying the market for over a year and there have only been a few really good deals for first time investors. Now I am considering Arizona, Tenn and both Kansas Cities. What are your thoughts on these multi-family markets?

    • No idea Pam – I am sorry. I just don’t see the viability of buying small multiplex outside of your comfortable driving circle. I believe in being present; my experience tells me that this is a must. I know others feel differently. Sorry 🙁

      Thanks so much!

      • I agree w/ Ben, but do have a friend that buys and rents property far away in the Midwest and says the cost to rent ratio is so much better it is worth the occasional drive and additional disadvantages of being absent. Seems to work for him.

Leave A Reply

Pair a profile with your post!

Create a Free Account

Or,


Log In Here

css.php