By Fred Matera, CIO, Redwood Trust A lack of affordability will lead to near-term weakness,…
Why New Investors Should Add Small Multifamily Properties to their Portfolio
By Christian Knight
If you have made the decision to start investing in real estate, congratulations! Now, there are several other choices to make. Assuming that you have already settled on the market where you will be investing, the next major decision is property type. There are several property types to consider, but let’s keep it simple and break it down to three groups. Single-family, small multifamily and commercial.
Certainly, each property type has its own set of benefits and challenges, but for the newer investor, small multifamily properties may have more upside than downside.
What is a Small Multifamily Property?
Small multifamily properties are classified as 2-4 unit properties. Two-unit properties are often referred to as a “duplex”, three-unit properties are called a “triplex”, and four-unit properties are typically called a “fourplex”.
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You might be asking, why are we capping this classification at four units? Well, any property with more than four units is often considered commercial property, while properties with less than four units are considered residential property. Commercial properties can be more challenging for new investors to finance and manage, so it is recommended to start a little smaller.
Benefits of Small Multifamily Properties
Yes, small multifamily properties can be easier for a new investor to finance and manage, but there seems to be an endless list of additional reasons why someone might want to purchase a small multifamily as opposed to a commercial property or single-family residence.
First, buying small multifamily can be relatively lower cost compared to larger multifamily property, and purchasing a duplex may only cost 50% more compared to a single-family home in the same area. This can allow you to pick up additional income generating units without doubling or tripling your purchase price. Second, if your business plan is to quickly build your rental portfolio, small multifamily properties will allow you to acquire more units while minimizing the headache of managing several transactions.
In addition, this strategy would allow you to scale your portfolio quickly as small multifamily properties generally have more manageable maintenance costs. Much like single-family homes, 2-4 unit properties typically have one roof, one driveway, one sewer line, etc. Any homeowner can confirm that there is always something that needs to be fixed, and a property with multiple streams of income can make those repair costs more manageable. 2-4 unit properties can also lower and consolidate your expenses.
For multiple units you will only have one tax bill, one insurance bill, and only need to manage one location. These are all similar responsibilities to owning a single-family property, while often generating more income.
- Vacancy Protection – If a tenant decides to vacate the property, you still have one or more streams of income to assist with costs.
- Inexpensive Financing – 2-4 unit properties qualify for standard residential financing, and allow investors to access low rates.
- Reduced Property Management Costs – You can serve multiple tenants at one location vs. managing many.
- House Hacking – You can potentially live in one of the units to reduce personal housing costs.
The Bottom Line
Small multifamily properties can be an excellent solution for new investors looking to break into the world of real estate ownership and advancing their financial goals. 2-4 unit multifamily investments can allow you to scale quickly, consolidate your expenses, and access more income. It is important to note that there are many ways to invest in real estate, but with the proper knowledge you can pave your own path toward financial freedom.
Whatever property type you choose to invest in, CoreVest is here for you every step of the way. Allow us to become part of your team, as your preferred lending partner. For more information about how CoreVest can help you grow your rental and rehab business, please call Christian Knight at 347.269.2043 or email email@example.com.