Fourplex Basics: What You Should Know Before You Invest
Christa Ross4-minute read
August 13, 2021
Real estate investing can be approached several different ways. There is an array of strategies that vary in regard to potential profit and property management requirements. For a real estate investor who prioritizes simple property management and high cash flow, a fourplex is a great option. These properties are known for their relatively low entry price and high cash flow, but is buying one worth the investment? Here, we will explain the concept of a fourplex and what you should know before you invest in one.
What Is A Fourplex?
A fourplex is a multifamily home typically designed to house four separate families under one roof. The multifamily units can be side by side or stacked on top of each other, but typically, they’re a combination of both. In a standard fourplex, each residence has its own entrance, kitchen and bathrooms, although there may be a common foyer or entryway.
Fourplexes, Quadplexes And Quadriplexes
The siffix -plex refers to something made up of several parts. For example, duplex, which means a house with two separate living quarters. In this case, we are dealing with fourplexes. As mentioned previously these properties are designed to house multiple families and are divided into four separate living quarters. Also referred to as quadplexes, quadriplexes, and four-unit multifamily properties, these properties can be an advantageous investment.
Are Fourplexes Worth The Investment?
One of the many reasons real estate investors like fourplexes are their low price in relation to potential income. They can be great investments when they’re in the right location and when they’re properly managed, but every fourplex you see on the market will not be a good investment for you. Before approaching an investment like this one, you should think about the advantages and drawbacks.
The Benefits Of Fourplex Apartments
- They have the potential to generate more rental income when compared to buying other multifamily homes, such as duplexes and triplexes.
- They can still be purchased with a residential loan.
- Property management is generally easier than managing separate, single-family properties or apartment buildings.
The Drawbacks Of Fourplex Apartments
- Keeping a good cash flow means that investors need to keep apartments occupied.
- Fourplexes may experience high tenant turnover.
- Multifamily investments are generally more expensive than single-family homes.
How To Find The Best Fourplex Investment Opportunity
When choosing the best investment opportunity, consider the following: location, financing approval and calculating certain figures that will help determine whether a property is a good investment or not.
1. Research The Local Housing Market
The main goal of local housing market research is to identify an ideal area to invest in. Location is by far the most significant factor when it comes to a property’s success as an investment. When conducting research on the local housing market some key things to consider are the population, job market, schools, median income, safety and neighborhood. Approaching this research with a clear set of parameters and objectives is important to making sure you invest in the right opportunity.
2. Look For Listings
Some strategies for finding these types of properties on the market include searching from a multiple listing service and/or partnering with a real estate agent. You can even consider using off-market listings.
3. Lean On Real Estate Investing Metrics
To make an informed decision on a real estate property, you’re going to have to look at a lot of different factors. Some of the most important financial metrics investors should leverage to make an informed decision on a real estate property are net operating income and the 1% rule.
Net operating income (NOI) is a formula used to measure a property’s ability to generate a positive cash flow from operations. This calculation helps dictate the value of your property.
The 1% rule is a quick way to figure out if an investment property is going to provide you with the monthly cash flow you need to consider it a good investment. If you multiply the purchase price of the property plus any necessary repairs by 1%, you’ll get a base level of monthly rent which should exceed the mortgage payment.
If a property doesn’t quite meet the 1% rule don’t ax it completely, but if it doesn’t come close at all, that may be an indication you should keep shopping around.
4. Shop For A Loan
It’s essential that you talk about your options with a mortgage lender. Here are just a couple that you might be eligible for:
Conventional loans are the most common and are funded by private financial lenders and then sold to government-sponsored enterprises like Fannie Mae and Freddie Mac.
VA loans are backed by the U.S. Department of Veteran Affairs, so they’re only available to active service members, veterans, and their surviving spouses. VA loans tend to have lower interest rates and don’t require down payments. Yet, there are some restrictions and fees involved in these mortgages. Those eligible should expect to pay funding fees and have reserve funds available. Those who qualify can get a primary residence of up to four units without a down payment. It’s important to note that investment properties are not eligible for VA loans.
Lenders need to know that you have enough income coming in to cover your living expenses. Therefore, you should maintain a low debt-to-income (DTI) ratio that considers both the rental property income you will generate and the estimated vacancy rate.
The Bottom Line
Fourplexes are a great investment strategy for beginners due to their relatively low barriers to entry. They are a good way to generate a good cash flow, they are easier to manage than four individual properties, and they can still be purchased with a residential loan.
Although this is a sound investment, the income you’re generating is not passive. You must keep the property occupied to make a profit. If you’re ready to start shopping for financing start the application process today.
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