Fourplexes are popular properties for investors who are graduating from investing in single family homes but don’t yet feel ready for larger apartment buildings. One of the great things about fourplexes is that you can buy a fourplex and get some tenants for it and then hold it for fifteen years and let the tenants pay down the mortgage for you. All the while, your equity is building and you are reaping depreciation benefits.
Be aware, though, that buying and operating a fourplex is different than buying and operating an apartment building. Take note of the following differences if you’re interested in buying a fourplex.
1. Market Research. When looking for an apartment building, you will use the NOI (net operating income) as a base measurement to compare properties. Based on the NOI, you can figure out what the Cap Rate would be, and then you will know whether or not the property is worth your time and money. With a fourplex, however, the Cap Rate is really low. It’s difficult to get fourplexes that cash flow. They’re better for holding long term in order to build equity. So when you’re researching fourplexes, you’ll have to use comparables, like you would if you were looking for a single family house. Fourplexes are considered residential properties, even if they’re run like multifamily properties.
2. Loans. When considering a fourplex, a bank will look at the strength of the borrower and then the potential for payback on the loan. Lending for fourplexes is similar to lending for single family homes, but there is an occupancy component to qualifying the loan. A fourplex in an area where vacancy rates are low will qualify for a loan easier than a fourplex in an area with high vacancy rates.
3. Resale. There are a lot of buyers for fourplexes, even out of state. If a neighborhood is beginning to look up, then fourplexes in the neighborhood will move up in value, and buyers will be plenty. Again, fourplexes are often stepping stones between single family homes and apartment buildings, so there are generally more buyers for fourplexes than for larger properties.
Depending on your investment strategy, fourplexes may be the right investment for you. Keep in mind that market research is based on comparables, that occupancy is a factor in getting a loan, and that the neighborhood will affect your resale, and your investment should be a success.