Managing investment property, no matter how many or how big, is managing a business. As such, you need to maximize your profit potential for your business. As a real estate investor, your goal is to generate positive cash flow. Positive cash flow means you have more money on hand to pay off debts, handle routine and unexpected maintenance and even buy more investment properties. It is a key goal of investing in real estate.
Table of Contents - The More Floors, the Merrier? Looking at the Impact of More Units on Cash Flow
One way that investors can quickly increase their cash flow is by buying a multiplex property. Multiplexes have two (duplex), three (triplex) or four (quadplex or fourplex) income-generating units. Having multiple tenants paying rent will cover your mortgage and then some, making for a nice way to earn passive income as an investor.
More units, more floors, more potential
Compare the income potential of a single-family home versus a duplex. Assume you collect $1,000 a month in rent from a single-family home for a total monthly income of $1,000. If your tenant moves out and you do not have another tenant ready to move in, you have $0 in income that month. Conversely, if you have a triplex and rent each unit for $1,000 a month, you have $3,000 in income each month. If one tenant moves out and you aren’t at full occupancy for a month, you can still collect $2,000 while you wait for a new tenant. More units mean more opportunities for cash flow and less risk.
When you have a multi-unit property, any maintenance, repairs and upgrades might benefit all units instead of one. If you repair the roof on a single-family home, you’re investing in one income-generating property. If you repair the roof on your multiplex, you’re repairing the roof on two, three or four income-generating units.
If you had four single-family homes, you’d be paying for repairs and maintenance like roofing, pest control, landscaping and gutters for four separate units. The same math applies for utilities the landlord pays like water or gas. With a quadplex, many of these costs cover all four units. Your cash goes further when your units are all under one roof – literally.
One way to offset the cost of investing in a multiplex is to live in one of the units. If you occupy one unit, the rental income covers not only your monthly mortgage payment but also your living expenses. Your cash flow increases dramatically when you live in your investment property. This isn’t possible if your investment property is a single-family home.
The financial benefits of an owner-occupied property increase with more units. If one duplex unit remains vacant while the other unit is owner-occupied, the owner must have reserves to cover the mortgage during that time. With a triplex or quadplex, the income rent from the other unit(s) helps offset the cost.
What to consider when buying a multiplex
When searching for a multiplex, investors need to consider not only what they’re willing to spend but also what they’re willing to manage. A multiunit property may require support from a property management company, especially if you won’t occupy one of the units.
One of the first things to consider is how many units the property has. If the unit has five or more buildings, it is likely zoned as a commercial building. If the building is zoned commercial, it will require commercial financing. Buying a commercial property comes with different purchasing terms and managerial responsibilities, which may not be attractive to a first-time or casual investor.
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While more units may increase the income potential, it isn’t the only thing to consider when deciding on a rental property. More units mean more income, but it also means more maintenance, marketing and tenant issues. It may not be worth it to handle tenant complaints from four separate units. Buyers need to consider how much they’re willing to do themselves.
One of the biggest factors in determining a multiplex’s profitability is the vacancy rate. While landlords cannot predict their future vacancy rate, they can use neighbourhood data to make an estimate. Canada’s overall vacancy rate is currently quite low according to the Canada Mortgage and Housing Corporation. As of 2018, the vacancy rate nationwide was 2.4 percent, down from 3 percent in 2017. The demand for rental units is much higher than supply, making a multiplex a smart investment.
Having multiple units helps protect against the vacancy costs that come with high turnover. However, renters living in a single-family home may think of the property as their own and treat it accordingly. They may feel more invested in the property, the neighbourhood and nearby schools. Conversely, tenants in a multiplex may view their stay as temporary and won’t be committed to staying in the unit long term.
Tenants who aren’t committed to the property may not treat your unit kindly. Multiplexes could come with more maintenance and repairs depending on the types of renters your unit attracts. You may be handling turnover more frequently because not only do you have more tenants to place, but you also have them moving out more frequently.
As with any home purchase – personal or investment – location is key. Locations, where renters want to live, will help ensure that a vacant unit isn’t vacant for long. A good neighbourhood means a better pool of tenants who can pay higher rents and are willing to take better care of the unit. The more neighbourhood amenities a property has, the greater potential for cash flow.
A cheap multiplex seems tempting but likely isn’t worth it. Unless the area experiences rapid economic development during your ownership, you may struggle to find tenants. Researching local rentals to see the market rate for units of your size will help you determine whether the property is in a good place for the type of investment you want to make. If you’re able to talk to other investors in the area, that will give you a better idea about the types of tenants and vacancy rates you can expect.
Investing in a multiplex is one way to increase the cash flow on your real estate investment. More floors don’t always mean more cash, but with enough research you can find the property that helps you meet your investment goals.
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