Fourplex Pros, Cons and Tips for Investors

If you’re considering testing the waters as a residential real estate investor, Fourplex could be a good place to start. It’s also a good investment for first-time homebuyers, as you can live in one of the fourplex units and rent out the others – with your tenants paying the mortgage. If you want it strictly as an investment property, this isn’t a problem, although it may limit some attractive financing options.

What is fourplex?

A fourplex is a multi-family home with four separate units under one roof. You may also hear it referred to as Quadplex. Each unit has its own entrance. Some fourplexes include a common building entrance with separate interior entrances for each unit. The units are either side by side or stacked on top of each other.

From the street, a typical entrance quadplex may resemble a large, single-family home.

Fourplex Investment Pros

There are many reasons to invest in Fourplex. Here are some of the best:

excess cash flow capacity

If you’re looking for cash flow, fourplexes represent a better deal than two- to three-unit properties. Each unit represents one income stream.

friendly financing

Quintuplex is not a term used by most real estate investors. This is because once a multifamily building exceeds four units, it is considered a commercial, not a residential, property. This makes financing for a fourplex more favorable, as you can obtain a residential mortgage instead of the commercial loan required for five or more units.

one mortgage for many doors

Buy multiple single-family homes as an investment, and you’ll pay a separate mortgage for each property. If you live in your fourplex, you only have one mortgage payment and a property tax bill. Paperwork and record keeping is easy.

economies of scale

Because you have four units, you will pay less on expenses due to economies of scale. This is true of insurance, lawn care and snow plowing.

tax benefits

If you have bought four separate rental properties, you will pay less property tax on a fourplex. You can get other tax breaks, such as the real estate depreciation and investment tax deduction.

Tenant’s loss is less impressive

When a tenant leaves, you lose money if the property remains vacant. However, if you own a duplex property and rent out a unit, you will lose all rental income when the tenant moves out. When a tenant leaves a fourplex, you still have two to three units of rent due, depending on whether you are the on-site owner or not.

Fourplex Investment Cons

For all the advantages, there are still some reasons why Fourplex is not suitable for every new investor. Think about whether you can handle the following before investing in Fourplex.

management responsibilities

It’s one thing for an investor to manage one or two other units on their own. A properly managed fourplex takes a lot of time and effort. If you don’t live in a single unit, you deal with at least three and possibly four different tenants. That manageability is one reason why fourplexes are much less in demand than duplexes or triplexes. Of course, it’s still easier to manage a fourplex than to take care of four separate single-family properties. Many investors hire a property management company to look after their fourplex buildings.

hard sell

Because there is less demand for fourplex than duplex properties, it is often difficult for fourplex owners to sell when the time comes.

less privacy

If you’re using one of the units as your residence, expect tenants to come knocking on your door when problems arise. Expect less privacy when you’re an on-site fourplex landlord. On the plus side, when repairs are needed, or emergencies happen, you’re right there instead of leaving your rental. While you enjoy less privacy, you benefit from greater convenience.

high tenant turnover

There is a higher turnover of tenants in fourplexes than in single-family residences. For tenants, fourplex buildings are the primary living space. Many fourplex renters wait until the single-family housing market becomes more attractive or save up enough of a down payment to move.

how to find fourplex

Work with a local real estate agent or use the MLS to find available foreplexes. The BiggerPockets Agent Finder can match you with an investor-friendly agent specializing in multifamily property deals.

If the local housing market you target does not have a suitable inventory of fourplex living units, contact owners of fourplexes in the area and ask them if they are considering selling. Find the owner by going to the website of the municipal tax assessor or county recorder. The assessor’s information will include current property taxes.

financing your fourplex

Fourplex has several advantages when it comes to financing. A fourplex doesn’t meet the five-unit requirement for a commercial loan, so you can get a conventional residential loan with a 30-year fixed-rate mortgage for this investment.

No matter the current interest rate environment, residential mortgage rates tend to be lower than commercial loans.

FHA loan

Financing is even more beneficial when using a Federal Housing Administration (FHA) loan. The minimum down payment for an FHA loan is just 3.5 percent of the purchase price. Buyers can qualify for a lower than conventional mortgage with a credit score of only 580. Buyers with a credit score of 500 can qualify with a 10 percent down payment. Under FHA rules, you can buy a property with up to four units. The one caveat is that you must live in one of the units.

VA loan

Veterans can finance a fourplex with a VA loan with 0 percent down. The interest rates are also lower as compared to conventional loans. However, while you can own a fourplex through a VA loan, you must live in one of the units. VA loans are only available for primary residences, not investment properties. A fourplex offers the best of both worlds.

Can you live in your fourplex and still generate rental income?

Yes, living in your fourplex and generating rental income from other units is one of the major reasons to invest in this type of housing. Live in an owner-occupied unit on the site, and your tenants pay your mortgage. This arrangement makes a great house hack.

Do you have family or friends looking for a home but don’t want to share your living space with them? A fourplex allows you to rent units without sharing your kitchen, living room, bathroom or personal privacy. While under the same roof, walls and separate entrances allow for seclusion.

Tips for investors interested in Fourplex

If you are interested in a fourplex as your next investment property, here are some tips to make sure you are maximizing your cash flow:

• Find a Good Location: As with any real estate investment, the mantra of “location, location, location” holds sway. View Quadplex in a safe neighborhood with a strong job market, close shopping, entertainment opportunities and a good school system.
• Determine how to handle utilities: Decide how you want to handle utilities for each tenant. For example, a separate water meter for each unit billed to the tenant means they pay exactly what they owe. A separate bill means a separate, often hefty base fee. If you pay a water bill as a landlord, there is only one base fee, and you can divide water usage by four. You can increase the rent if the cost of water increases significantly. You will also have tenants who say they are not using much water, and that the other tenants are at fault.
• Check your tenants carefully: Perform a careful background check for each tenant. While you would certainly do this with people you don’t know, it can prove to be a touchy subject if one or more of your potential tenants are friends or relatives of yours. You may know that there is no criminal or eviction history, but you may not know whether the person pays his or her bills. Credit check reports reveal their credit scores, much of which is determined by on-time bill payments. You don’t want to worry about whether a tenant will pay their monthly rent.

Is Fourplex Right For You?

Is Fourplex a good investment for you? A lot will depend on whether you live in one of the units or are an absentee investor. For the latter, a good asset manager is almost always a requirement.

Consider Fourplex if you are just getting started in real estate investing. With attractive financing options for foreplex buyers, such purchases provide hands-on experience with property management. You may find that it’s right up your alley or that you’re better off with more passive investing. This is your opportunity to learn more about real estate investing and yourself.

Note by BiggerPockets: These are the views expressed by the author and do not necessarily represent the views of BigPockets.