May 13, 2014 by Dymphna 1 Comment

Two Duplexes…Or One 4-Plex?

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As a beginning real estate investor, once you get those first few rental homes in your portfolio…

Almost inevitably, your next goal is to start buying multi-family properties, isn’t it?

And why not?

Multi-family properties give investors more bang for the buck, right?

The answer is…it depends.

On the face of it, buying four rental properties all in one location certainly makes it a more efficient use of your investment dollar…

You can collect four rent checks without driving to different parts of town or worse…

But the yield on a 4-plex may not be as fantastic as you might think…

In fact, you might be better off buying two duplexes instead of that one, very convenient 4-plex that you see with a “For Sale” sign on the front of it.

This may come as a surprise to some of you…

But for iLoveRealEstate.tv students…

It’s about understanding the market where you’re investing.

It’s not always true, but often is…

Depending on the duplex, buying two of them can be a smarter, higher-yielding investment strategy than buying a single 4-plex.

Let’s look at a few reasons why this might be.

The tenants’ perspective

First, take a look at the differences in property types from your tenants’ perspective…

If you’re renter looking for a nice place to live…

Whether you’re single, a couple or even a small family… You want the nicest living environment you can afford.

For many tenants, a detached house is their first choice…

A house usually comes with a bit of a yard and a patio in back where they can relax, entertain or watch their children safely play.

They don’t have to worry about another family or other tenants sharing walls and space with them.

But of course, the rent on a detached house is going to higher because of all those benefits…

And those benefits are certainly worth the price.

But the fact is, some tenants don’t have the money to rent a detached house…

Still, they want as many of the same benefits as they can get.

They may accept a slightly smaller living space…

And sharing a common wall with their neighbors…

But, with most duplexes, there will still be a bit of their own backyard and patio to spend a relaxing weekend enjoying the kids or an evening meal.

And, there’s only one other tenant to worry about.

Finally, duplexes can usually be found either mixed in with single-family houses…

Or very nearby, which typically means a better area and a better quality of tenant…

Not always, but usually.

The 4-plex formula

But what about those who can’t afford to rent a house or a duplex?

Where do they go look next?

There’s an interesting phenomenon that takes place with renters…

The quality of life becomes a bit less when you move from a house to a duplex…

But often, it gets worse when you go from a duplex to a 4-plex.

Why would that be?

The reasons are pretty basic, really…

In a 4-plex, the rental prices will usually be lower than those of a duplex…

This means that the tenants will be of a lower economic strata…

Nothing wrong with that per se…

Lower income can mean higher costs

But lower income properties tend to be less well-taken care of by their tenants.

And of course, every tenant has to deal with three other tenants…

In that situation, the odds go up that the tenants’ quality of life will go down.

And, in most 4-plexes, there won’t be separate yards for each tenant…

There will instead be a small common backyard, which will likely not be kept very nice…

So the lower rental rates attract a different kind of tenant…

Where quality of life issues that you would find in higher rental areas…

Just aren’t that much of a concern.

This can mean higher maintenance costs…

Higher turnover…

And overall, just a much larger “head-ache” factor.

Combine these factors with the probability that 4-plex locations can tend to be a bit rougher than PPR and duplex areas…

And you can see why 4-plexes can be rough on your portfolio…

And your sanity!

Now, of course, there are many wonderful properties out there…

Including houses, duplexes and even 4-plexes that really are cash cows…

You just have to understand the basic factors that impact rental prices.

There are also rough areas, where rental houses are beat up just as bad as the other properties…

But if you’ve got a property in a desirable location…

Like near a nice beach or other popular area…

It won’t matter as much as it would elsewhere.

But if location is a neutral factor…

You’ll usually find that your best returns are on the duplexes and single houses…

Until you get into the development phase of real estate investing…

Or in the apartment block-level of multifamily units.

Still, if you own a nice 4-plex that is yielding strong income…

Good for you!

But if you’re looking past the single detached houses for more yield…

And wish to go forward into the multi-family properties…

Just look at every 4-plex deal and where the rental income is and has been…

And don’t compare it to nearby duplex rates.

It will probably be lower…

And now you know why.