Are you finally ready to take the plunge and buy your first investment property?
In Part I of this segment we discussed the pros and cons of making a Single Family Residence your first investment. Now I’d like to discuss the benefits of 2-4 unit properties, also called Duplex’s, Triplex’s and Fourplex’s.
2-4 Unit properties typically require 10-20% down, providing an investor with the ability to get pretty good leverage and come out of pocket with a smaller down payment compared to traditional multi-family properties consisting of 5 or more units. Remember, your goal is to find a property with a high CAP Rate and low GRM, so you debt cover each month. This means the rental income you collect each month will be enough to cover all expenses (taxes, insurance, utilities, etc.) plus the mortgage.
Like SFR’s, these properties are often purchased as pure speculation or appreciation plays, meaning the goal is to create equity over time. Unlike SFR’s, 2-4 unit properties have a lower Vacancy Loss Risk since there are more units to spread the risk over. So, if one of your tenants vacates, you’ll still have the rent from the remaining units to help pay your mortgage and monthly expenses. Remember, however, that you may still need to come out of pocket, so make sure you have 3 months of mortgage payments in reserve for a rainy day.
2-4 unit properties are a great place for you to cut your teeth and learn the basics of Property Management. They’ll provide you with the opportunity to rent units, negotiate leases and perform routine maintenance. I suggest you hire a local property manager for the first 6-12 months of ownership so you can ride shotgun and learn the basics of management before you completely take the task on yourself.
Like SFR’s, once you’ve built up some equity in these properties, you’ll want to sell them and do a 1031 Exchange into a multi-family property consisting of 5 or more units. 2-4 units are one of the first rungs in the Property Ladder and a great place to begin on your way to building a real estate portfolio that will generate enough passive income for you to retire on.
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