Investor Financing

Financing a Single vs. Duplex vs. Triplex vs. Quadplex

Financing a Single vs. Duplex vs. Triplex vs. Quadplex
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Wouldn’t it be nice to not have to pay your mortgage each month? With real estate investing, you not only earn passive income from renters, but you can also earn enough to cover your living costs and the costs on your rental property.

Table of Contents - Financing a Single vs. Duplex vs. Triplex vs. Quadplex

This strategy doesn’t require having a large portfolio bringing in tens of thousands each month. Even novice investors can grow their wealth and live mortgage-free by buying and inhabiting a multi-unit property.

With the multi-unit strategy, you purchase a property with two to four (sometimes more) units and plan to live in one of those units. The income you generate from your tenants covers your mortgage and thus your housing costs.

By comparison, it would be harder to achieve these results with a single-family home. If you owned and lived in a single-family home and rented out another single-family home, you’d need to earn enough rent from your tenant to cover both mortgages. The rent will cover the mortgage on the second property and give you some passive income, but you may still be paying most of your mortgage.

The idea of moving into a multiplex may seem unappealing to someone already living in a single-family home. Perhaps you prefer not to share a wall, or you want a bit more space. The multi-unit strategy doesn’t need to be long-term. Living in a multiplex for a few years allows you to save for your dream home while building equity in another property. When you’ve saved enough to move, you will already have an investment property with two to four units earning you passive income.

Financing a multiplex

The key to successfully using this strategy is finding the right financing. The better mortgage rate you can get, the easier it will be for you to cover your housing and save with rental income.

Whether or not you live in one of the units plays a big role in your financing. If you are buying the property strictly as an investment, you are required to have at least 20 percent for a down payment.  However, if the property will be owner-occupied, you can have a smaller down payment. Properties with one to two units require at least a 5 percent down payment, while properties with three to four units require a 10 percent down payment.

Next, you’ll need to consider your monthly cash flow. Everyone wants a lower monthly mortgage payment, but you’ll also need to be able to charge enough rent to meet your financial goals. Your tenant’s rent doesn’t need to fully cover your mortgage; even a reduction by half can be a big step in helping you achieve your investing goals.

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There are other factors you’ll need to consider when calculating rent and estimating your monthly cash flow:

  • Principal payments and interest payments
  • Property taxes
  • Homeowners insurance
  • Maintenance costs
  • Utility payments

You can finance a multiplex to use as your investment property without living in it; however, you’ll need a larger down payment and financing will be more difficult to obtain.

Finding the right place multiplex for your situation

Once you have an idea of what you’d like to accomplish with the multi-unit strategy and what you can afford, you’ll need to find the right property.

It’s important to remember that a multiplex consists of separate living units. In an owner-occupied multiplex, you are not renting out a bedroom and sharing common space with a tenant. You are renting an entirely separate unit with its entrance, kitchen, bathroom, utility meter and address. In many cities, the term ‘duplex’ refers specifically to a building with one unit on top of the other, rather than side-by-side. Some single-family homes have been converted to multiplexes, particularly in dense urban areas. This is fine, as long as the changes are reflected with the county assessor.

When looking for a multiplex for your investment, the largest property you’ll find is likely a quadplex or one building with four distinct units. Most properties with six or more units are zoned commercial, which would require a different investment strategy and different financing.

The nice thing about multi-unit properties is that you’re earning rent from two to four units, but you aren’t dealing with as many properties. If you were to buy four single-family homes, you’d need to do the loan process four separate times. You’d also have four locations to visit, four roofs to repair and all of the other drama that can arise when managing properties. With a multiplex, you still have to fill the units, but you only have one loan and your repairs often benefit all tenants.

To determine how much profit potential your investment has, research rent prices in the area to see what you can expect. Plan to set aside 10 percent of that income to budget for repairs, maintenance and any costs associated with finding new tenants.

There are pros and cons to serving as a landlord for the property you inhabit. Besides having your living expenses covered, you’ll be able to see what’s happening at your rental property. You’ll understand what needs repairing and how it can improve. You’ll likely find that you have a better tenant – no one wants to upset the landlord living upstairs.

Some landlords cringe at the idea of sharing a space with their tenants, even if they are separate units. If that’s the case, consider hiring a property manager. It might seem silly given you’re already on the property, but it could save you from dealing with tenants at midnight over a minor issue. A property manager is a worthwhile expense to give you peace of mind while you save for your forever home.

If you’re interested in becoming a real estate investor, an owner-occupied multiplex is a great way for you to build wealth fast and grow your portfolio. With a little flexibility and patience, you’ll end up with a steady investment that will bring you income for decades.

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