The type of property in which you invest determines the terms of your financing. If you buy a duplex or four-plex, you'll still be able to take out a residential loan. Five units and above moves you into commercial lending. Does that make a big difference? Yes.
Residential lending requirements are less restrictive. You'll benefit from:
- a lower interest rate,
- a lower down payment,
- less required reserve,
- greater lender competition . . .
and you won't be held back if your experience with real estate investing is reasonably limited.
Of course, the first question investors ask is, "Why would I want to fool with a duplex or a four-plex over a single-family home?" Good question, and one that bears exploring.
The percentages may run in your favor with a duplex or four-plex in terms of turnover. Think of it this way:
- When you own a duplex and have one unit empty, you're 50% vacant.
- When you own a four-plex and you have one unit empty, you're 25% vacant.
Own a single-family dwelling that's empty? No way to work that math. You are 100% vacant. Period.
Additionally, the make-ready costs on a single family are generally higher than on a duplex or four-plex.
Of course, there are "cons" in the other direction. You will have greater management and maintenance costs with a multi-unit property. The traditional industry wisdom says it all, "More toilets to take care of."
People who rent in a four-plex or duplex don't tend to know much about home maintenance. People who rent houses are essentially upgrading -- they simply "care" more. The turn-over average for a single-family dwelling is 30-36 months, TWICE as long as that of a tenant in a multi-unit setting.
So the major single-family advantages are:
- lower maintenance costs,
- less turn over,
- better quality tenants,
- and a better exit strategy.
So, what do we mean by exit strategy?
- A vacant home will sell faster than a partially occupied multi-family dwelling.
- In a single-family scenario, the tenants are paying down the mortgage while you build equity.
- When it comes time to dissolve the asset, you do a little fixing up, present the property on the market, and capture all the appreciation.
And generally, rents will be higher in a home than a duplex or four-plex.
So, which type of property is right for you? Only you can answer that question (with advice and counseling from your realtor and lender.) You always want to honestly answer the investment fundamentals first:
- What are your investment goals?
- Where will your money work best for you?
- How much investment experience do you have?
- How much property management experience do you have?
- What are the area statistics?
- Are you a local or out-of-town buyer?
- How much money do you have?
- How much additional financing can you get?
- What are your goals for the property (flip or hold)?
We can say, with reasonable confidence, that residential real estate is a great place for the beginning investor to get his feet wet. It's easy to get involved and it's a great "classroom" to learn the ropes.