Anyone looking to earn wealth will be pleased to know that there are multiple ways to do so. One of the most lucrative is real estate investing. Common properties to invest in include single-family homes, condos, and MULTIfamilyhomes. Investing in MULTIfamily homes is gaining popularity due to the high yields it generates. MULTIfamily homes are properties with lower costs and cash flows, which happen to include fourplexes, one of the most common forms of multiple-family homes.
If you're interested in what a fourplex is and what they have to offer potential investors, continue reading. In this article, we're going to take a closer look at real estate investing, particularly investing in a fourplex. We'll cover everything from rental property options, earning a rental income, what it takes to take on property management, and much more!
What is a fourplex?
Before investing in any type of real estate, as with any other major purchase, it's important to understand just what you're sinking all of your money into. There are so many different forms of real estate, from single-family housing to duplexes to condos to townhomes; it can get a little confusing, especially for new investors! To make it a little clearer, here’s a brief introduction to the fourplex
As the name suggests, a fourplex is a type of MULTIfamily property that is made up of four family units in one building. What is it about fourplexes that make them so alluring to real estate investors? Well, there’s the promise of the rental income or as some people see it: making a mountain of cash, the perfect real estate investment opportunity, which has big returns. and a low-risk way to build a passive income. Now that you know what a fourplex is and are considering buying a fourplex, whatever your reasons, there are crucial aspects you should consider.
As with any major real estate investing decision, whether it be a single-family home, an entire apartment building, or a MULTIfamily home, it's best to work with an experienced real estate agent. They can provide you with accurate information and are familiar with the local market conditions. Even the most experienced real estate investors can benefit from working with a real estate agent.
While it might sound like a simple and straight-forward process, if you're researching this yourself in advance of finding the perfect property, this post should help provide the knowledge you need to make a decision.
Why buying a fourplex is a good investment
Despite what many think, fourplexes are quite common, and by investing in a fourplex, you're not taking on the risk of a new industry. Fourplexes can be an excellent way to get into real estate investing as they're often a cheaper option compared to other types of investment properties such as a single- or two-family house.
Here are a few fun facts about fourplex rental properties:
- Fourplexes have been around since the 1960s. This means that there's a wealth of experience among brokers and real estate agents who have been buying and selling these properties for decades.
- It’s easier to get your unit in a fourplex rented out quickly so that you'll have money coming in consistently and allow for quick growth of your investment over time.
- There are many options on how to approach generating income from your fourplex. One unit can be your primary residence, and the other three rented out. Or you could be the investor and rent out all four units.
Where to find a fourplex?
If you're thinking about getting into real estate investing or property management, buying a fourplex is an excellent option. If you're ready to purchase, it's highly recommended that you be absolutely certain you understand the investment before making a purchase. That means first understanding the type of property you want to buy and then learning about the local market to best benefit from your real estate investment.
For example, the real estate market in Chicago ranked in 2020 as one of the best in MULTIfamily real estate markets including apartment buildings, duplexes, triplexes, and fourplexes. So if you're wondering where you should invest, maybe consider investing in a fourplex somewhere in Chicago.
Eight things to consider when buying a fourplex
There are a number of factors you should consider when you're about to purchase any form of real estate, be it a single-family home, a commercial unit, or an apartment building, and buying a fourplex is certainly no different. We've compiled a list of eight things you'll want to consider when you're buying a fourplex to make your real estate investing endeavor as smooth as possible.
Let's take a look at those factors!
It really is true what they say: location, location, location! It's easily one of the most important factors to consider when buying real estate. You can search for a fourplex on your own, with the help of a local real estate agent or through the local REIA (real estate investors association).
Before buying a fourplex, it’s best to check out the surrounding area. This way, you can get an idea of how much traffic and potential renters there will be in the area. It’s best to find a fourplex in an area that gets as much traffic as possible. It will make it easier for you if you decide to sell your property in the future and also make it less likely that you’ll have problems renting it out. You should also consider nearby businesses and how they impact the ability to rent your fourplex out to interested tenants.
The demographics of the area can also tell you a lot about potential renters and whether they are looking for short-term or long-term rentals. For example, students prefer short-term rental leases, whereas small families have proven to be the opposite.
2. Current condition
It's important that you thoroughly look over the property as this is something that you will own, and you want to make sure that it is in good condition to avoid spending money on repairs and maintenance.
You'll also need to take into consideration what you'll be doing in terms of property management. Many real estate investors choose to hire a property manager to take care of that aspect of the rental property while others choose to save some money and handle it on their own. If you're considering the latter, be sure that you'll be able to handle the job. The better the condition of the home, the easier it'll be to maintain.
Make sure that the units are large or small enough for your needs and the needs of potential renters. You don't want to purchase a property that you won't be able to manage down the road because buying a large fourplex now could mean that you need to downsize later on.
When looking at fourplexes, you should thoroughly inspect each unit before deciding to buy. This is important because you want to make sure there are no structural problems with an individual unit. Otherwise, you'll end up having to pay money for unexpected repairs and maintenance.
If you're new to investing in real estate, it's a good idea to hire someone with experience in the field. They will help you with your inspection as they can offer their expert opinion on whether or not the property is fit for investment purposes.
5. Market value and rental price
Always look around. Ask other fourplex owners or get a real estate agency to help you out. They can provide comparative market analysis to determine a value that is in line with the area. Something to consider right off the bat is your budget. With a fourplex, you’ll have to budget for the initial down payment and monthly mortgage payments.
When buying a fourplex, it's important to investigate the purchase price as this can significantly affect the future of your investment. As it is a low-risk investment, you want to ensure that paying a higher price will help you increase your returns.
Apart from the purchase price, you should also consider what rent to charge your potential tenants. The general rule is to have all rental income equal to or be greater than 1% of the total of what you paid. For example: $4,000+ monthly rent income on a $400,000 fourplex.
You won't have to pay interest on the down payment for a fourplex. If you have the cash for a down payment then this can make it easier to purchase. It will also allow you to buy near your current home or rent out one of your units.
If you don't have enough cash for a down payment, then consider refinancing your existing home. This way you will save on interest costs and use that money towards purchasing the fourplex. If you're planning on refinancing loans and using that money towards buying a fourplex, make sure that you shop around and find the best possible mortgage company.
7. Expenses and Monthly management fees
When it comes to purchasing a fourplex, you might not know what the exact amount of expenses will be. The following are just a few expenses that you’ll have to think about before you make a final decision:
- Property taxes
- Mortgage payments
- Property management fees, if outsourced, or maintenance costs if managing it yourself.
Be sure to factor each of these into your calculations so that there will be no surprises when it comes time to budget. The last thing you need when managing a rental property is to find you're sinking more money into the property than you're making.
8. The neighborhood
If you plan on renting out the units in your fourplex, make sure that the neighborhood is welcoming towards renters, so the tenants who will reside in your building are unlikely to cause problems. A better option is purchasing a fourplex with current tenants. They are already familiar with the property and can help with the upkeep and ensure that the units also remain in good condition.
The pros of buying a fourplex
There are many benefits to buying a fourplex as an investment. One of the biggest advantages is that the total of your monthly payments will be cheaper than when purchasing a two-family home. Rather than paying mortgage payments for both the fourplex and a single home, you'll only have to pay for housing on a single unit.
This is another opportunity to improve your net worth by receiving income to offset your mortgage. As an added incentive to purchasing a fourplex, think about how much money you'll be able to earn from reselling the property after five years. It will help you increase the value of your net worth and possibly allow you to move on to a larger fourplex once your first investment is successful.
Successful fourplexes have found uniqueness in the market that distinguishes them from other types of investments. This allows them to attract tenants at rates significantly higher than other commercial property brokers.
Buying a fourplex affords you flexibility on all the units. Whether you are looking to lease temporary tenants or are hoping to keep the same tennants for as long as possible, you can decide how you'd like to manage your property. For example, if you're in an area close to a university, your focus may be leasing short-term to students.
All properties require some amount of maintenance and attention from their owners. In a fourplex, all the units are part of one building. So if issues or problems surface, it’s easier to manage one fourplex property compared to managing multiple townhome or duplex units.
Investing in a fourplex is considered a low-risk investment, so if you're looking for a way to build your net worth without taking on a huge risk, then consider this option as an extra source of income to store away for retirement.
It’s also just as easy to obtain financing for a fourplex as compared to other forms of investment property like commercial properties or homes. This can be helpful if you don't have enough money for a down payment or cover closing costs. There are options, such as state programs, Federal Housing Administration (FHA), short-term financing, and seller financing. You will also qualify for investment property loans from the income you receive from renting the units.
The Drawbacks of Buying a Fourplex
Some drawbacks of buying and living in one unit of a fourplex includes being there for the tenants at their every beck and call, which can become harder to manage over time. It also means a lack of privacy and more noise due to the collected units under one roof.
Like any other type of real estate investment property, it's important to make sure that you're protected when you buy a fourplex. This means that you'll want to make sure your insurance is up-to-date. When looking for insurance, you'll want to find the best rates possible so that you take all of your needs into consideration before choosing which company you'll work with. This will ensure that you're fully protected both legally and financially.
To guarantee you bring in enough income to offset your mortgage, you can’t afford unforeseen expenses and maintenance costs to pop up, whether you do it yourself or hire a property management company to do it for you. Try as you might to save and set aside money for emergencies, there's always the possibility for many unexpected costs to pop up such as expensive repairs, damage to your home, replacing appliances, natural disasters, etc.
There is also the possibility that not all the units are occupied at the same time. When you have a unit sitting empty for any amount of time, that's instantly a loss of income. There are several reasons why this could happen:
- Firstly, if the fourplex is not located in an ideal location, you might not find suitable tenants.
- Secondly, an eviction or sudden notice from a tenant could leave a unit empty.
- Thirdly, seasonal changes can affect demand and high turnover.
For financial success, all units must be rented out. Be proactive and have this information before the purchase of the fourplex, calculate the vacancy rate, and try to find tenants who are going to fit your rental timeline.
It's expensive to get started in the real estate investment world. Between 5-25% down payment is required when purchasing a fourplex. Although there are some options where you can make a down payment of as little as 3.5%. This is possible with buying a fourplex with a Federal housing administration loan.
Since fourplexes are residential or mixed-use property, there's no need to involve an agent when purchasing one. However, if you are buying one in an area where there is little demand for them, remember that there will be risks associated with such an investment, and it’s better to consult an agent.
Do Your Research Before Buying a Fourplex
If you are considering buying a fourplex, regardless if you are new to investing in the real estate market, it can be a good return on an investment strategy. When buying a fourplex, you'll want to do all of your research ahead of time to make sure you understand the market. Look at the local economy, and for steady employment growth, meaning paying tenants with jobs. The surrounding neighborhood should be safe and provide the basic amenities tenants are looking for. Overall, if you do your research and take the time to find the right investment for you, a fourplex will expand your investment portfolio and guarantee a steady revenue stream.
Check out fourplexes for sale in Chandler here.