by: Jan Siever
In this article we will discuss the benefits of 2-4 unit properties, also called Duplex's, Triplex's and Fourplexes. These are an excellent alternative to investing in single family homes and a step in the direction towards building passive income in real estate.
A majority of the time , 2 to 4 Unit properties typically require 10-20% down, unless you can use a owner-occupied VA 2 to 4 unit loan for zero-down payment or 5% with an FHA loan. As a result, investors are given the ability to get pretty good leverage and come out of pocket with a smaller down payment compared to traditional multi-family properties consisting of 5 or more units. Remember, your goal is to find a property with a low Gross Rent Multiplier and a high CAP Rate, so your mortgage is covered every month.
The benefit here is that income you receive from the tenants each month will be enough to cover all costs such as insurance, utilities, property taxes, landscaping along with the financing. Two to four unit properties are typically bought as natural appreciation or speculation strategies just like single family homes. The objective is grow equity as time passes by.
Different from single family homes, properties such as duplexes, triplexes, and fourplexes have a lower risk of vacancy due to the fact of there being two to 3 units to spread out the risk. Therefore, a vacant unit is not as drastic as it is with a SFR because you'll still have the rent from the other rented units to help repay your loan and associated monthly costs.
Keep in mind, it is prudent of you to keep 3 months of mortgage payments in reserves for tough time when two or even 3 units are unoccupied. Investing in 2 to 4 unit properties is an excellent opportunity for you to get your feet with and learn the fundamentals of managing property.
You will become more experienced in renting units, negotiating leases and overseeing or actually doing maintenance on some units. For mundane and weekly tasks you may want to hire a local property manager for the initial year of ownership so you can monitor how it should be done and learn the basics prior to fully taking the tasks on yourself.
Once you have successfully managed these properties for some time, understand what it takes to own an income property, and built up some equity, you'll want to offer them for sale and start a 1031 Exchange possibly into a multi-family property comprised of 5 plus units. 2 to 4 units are part of the first rounds in the investing world and are an excellent area to start your way to constructing a portfolio of real estate that will bring back sufficient passive income for you to retire on or invest in other areas.