What You Should Know Before Buying a Fourplex

No matter if you’ve purchased a home before or not, there are some key things to know before acquiring a fourplex. If you’re set on becoming a fourplex owner soon, you should be aware that not all banks see fourplexes as primary residences, you may have to pay your tenants utilities and you will officially become a landlord at the time of purchase. Let’s go into more details on these key points and more.

Only Certain Banks Lend on Fourplexes

Unlike a single-family home, the fourplex multi family home can only be purchased as a primary residence from specific lenders. As a quick reference for you to use, I already know that you can use: USAA, Alasaka USA and BMO as primary residence fourplex lenders. In my case, I used the military bank USAA to purchase my first fourplex.

The Right Bank to Use

If the previously listed banks don’t work for you, call all the banks you can think of and ask if they consider fourplexes to be commercial properties or residential properties. Your goal is to find banks that see fourplexes as residential properties. If you find a new bank that works, try to get pre-qualified with them before making offers on properties.

Why Your Fourplex Needs to Be Residential

If the bank see’s a fourplex as a commercial property, they will require you to pay 25% of the purchase price as a down payment to purchase the property. However, if a bank sees the fourplex as a residential property, you will only be required to put 3-7% as a down payment as long as you live in the property as a primary residence. Living in the fourplex as a primary residence makes the fourplex much more affordable for the average person.

Bank Pre-Qualifications for a Fourplex

Pre qualifications for a fourplex are pretty much the same as a traditional single family home. I will give some simple guidelines but, the best answer will be from each individual bank.

If you have at least these things, you should be ready to purchase a fourplex.

• A credit score of 650 or greater
• 7% of the fourplexes purchase price as a downpayment
• Little to no, other monthly payments on large debts

Confirm with the Bank & Credit Raising

Follow up with the bank of your choice to confirm the accuracy of the listed qualifications. If you feel like your credit score may be a challenge raise, definitely read my post about how to raise your credit score. Also, be sure to ask if the bank has any special programs for first time home buyers.

Get Help from a Real Estate Agent

If the fourplex will be your first home, I highly suggest you get a real estate agent to represent you. A real estate agent will help you go from finding your fourplex to getting your keys. Not to mention, they can help fill any gaps not covered here in the home buying process.

An Agent can Help You Find the Fourplex

One reason I recommend using a real estate agent is because they can send you a list of properties from the multiple listing service (MLS) that are currently on the market that meets your criteria. For example, you can tell them you only want to see fourplexes up to $500,000.00. This will help filter out the triplexes, duplexes and single-family homes making it easier for you to pin-point the right property.

Try to Get Rents to Cover the Mortgage

Another advantage of using the MLS is it typically shows the income and expenses of property. This is important because you may see if all units are currently occupied and how much each unit is renting out for. This means, you can start calculating one of the biggest advantages of purchasing a fourplex, the income. 

Calculating the Income

Most fourplexes you find will already have tenants, so find the current rental rates in the MLS listing and add them up. For example, your fourplex could be two, two bedroom one bath units and two, one bedroom one bath units. The two bedrooms could be rented out for $1,000.00 each and the one bedrooms could be rented out for $850.00 each. Total, giving you $3,700.00 per month!

Market Rents

Although your fourplex may be occupied prior to your purchase, the previous landlord may not have charged the proper market rental rate. The market rents are easy to find and you can do it simply by looking at apartments or other multi family homes comparable to yours.

Comparable Units for Market Rents

When looking for comparable units for your market rent analysis, be sure to keep in mind your bedrooms and bathrooms, square footage, upgrades and amenities. For example, only compare two-bedroom units to two bedroom units. Don’t compare a two-bedroom that looks new to a two bedroom that is outdated; unless you plan to make the upgrades. Lastly, be sure to consider renters may pay a premium to have a pool, washer and dry on site or utilities included in the rent.

Be Careful with Fourplex Expenses

Now that you’re able to calculate your total expected income, you should now add up your total expenses. These expenses include: your mortgage, possibly utilities, taxes, insurance and in some cases, a HomeOwners Association (HOA) fee.

Finding Fourplex Expenses

If you found your potential fourplex on the MLS, you may be able to find these expenses in the listing. If you don’t see these numbers in the listing, you can always get them from the seller once under contract to buy. Do your best to estimate these numbers ahead of time and if you have a number but you’re not sure, estimate higher to be conservative. 

Calculating the Cash Flow

Now that you’ve found your income and expenses, it’s time to subtract them to get the cash flow. Cashflow is the profit or loss after income and expenses are paid.

Fourplex Cash Flow Example

For this example, let’s continue with the $3,700.00 income we estimated early minus 3,500.00 in expenses. As a result, your fourplex generates $200.00 cash flow! This is now a potential home that gives you money, as opposed to taking money from you!

You are Now a Landlord!

Unlike purchasing a single-family home where you are the only resident, buying a fourplex with tenants officially makes YOU a landlord. As a result, it is important to accept this responsibility before pursuing your fourplex.

Extra Responsibilities

Just as a quick reference you will be required to:

• Market your vacant units
• Qualify your tenants
• Manage repairs
• Collect Rents

If you’re fine with the extra responsibilities which in my opinion are worth it in the long term, a fourplex may be a good fit for you.

Getting Property Management

If you didn’t know this already, you can also consider having a property management company handle the extra responsibilities. This is especially a good option if you have extra cash-flow and you can appreciate simply not having to pay a mortgage out of pocket and look forward to finding more cash flow in a different way.

In Conclusion

Now that you have finished this post, you are now more mentally prepared to become a fourplex owner; if you choose to go that route. This is definitely more information than what I had going into my first home. I only wished I had learned this sooner to better put me on a path of wealth instead of having to make the mistake of renting and buying a house first.

If you’d like to gain more wisdom like this, be sure to join our email list here to get daily tips and more.