Investing in a Fourplex: Pros, Cons, & Tips For Investors

Investing in a fourplex offers several advantages, including additional cash flow potential, favorable financing options, simplified paperwork, economies of scale, and tax benefits. However, like any investment, there are also cons to consider, such as increased management responsibilities, potential difficulty in selling, reduced privacy, and higher tenant turnover. In this article, we will delve deeper into the pros, cons, and provide useful tips for investors interested in fourplex properties.

First, let's define what a fourplex is. A fourplex, also known as a quadplex, is a multifamily home consisting of four separate units under one roof. Each unit typically has its own entrance, either side-by-side or stacked on top of each other. From the street, a fourplex may resemble a large, single-family home or have a common building entrance with separate interior entrances for each unit.

Now, let's explore the pros of investing in a fourplex:

1. Additional cash flow potential: Unlike two-to-three-unit properties, a fourplex offers more income streams, allowing for increased cash flow potential.
2. Favorable financing: Fourplexes fall within the residential property category, enabling investors to obtain a residential mortgage rather than a commercial loan. Residential mortgages generally have lower interest rates, making financing more affordable.
3. One mortgage for multiple doors: Investing in several single-family homes often requires separate mortgages and property tax bills. With a fourplex, you have the advantage of a single mortgage payment and simplified recordkeeping.
4. Economies of scale: Due to the presence of four units, expenses related to insurance, lawn care, and snow plowing can be lower compared to managing four separate properties.
5. Tax advantages: Fourplexes offer lower property taxes compared to owning four individual rental properties. Additionally, investors may qualify for tax breaks such as real estate depreciation and investment tax deductions.
6. Tenant loss is less impactful: If a tenant leaves a fourplex, you still have rental income from the remaining units. This mitigates the financial impact compared to owning a duplex where you lose all rental income if a tenant vacates.

While there are many advantages to investing in a fourplex, it's important to consider the cons as well:

1. Management responsibilities: Managing a fourplex requires more time and effort compared to managing one or two units. Dealing with multiple tenants can be challenging, especially if you don't reside in one of the units. Many investors choose to hire a property management company to handle the day-to-day operations.
2. Harder to sell: Fourplexes may have less demand compared to duplex properties, making it potentially more challenging to sell when the time comes.
3. Less privacy: Living in one of the units means tenants may approach you with issues or inquiries. While repairs and emergencies are more convenient, you may experience a reduced level of privacy as an on-site fourplex landlord.
4. High tenant turnover: Fourplexes tend to have higher tenant turnover compared to single-family dwellings. Many tenants use fourplexes as starter homes before transitioning to single-family houses.

Now that we've discussed the pros and cons, let's explore some essential tips for investors interested in fourplex properties:

1. Find a good location: As with any real estate investment, location is crucial. Look for fourplexes in safe neighborhoods with a strong job market, proximity to shopping centers, recreational opportunities, and reputable schools.
2. Determine utility arrangements: Decide how you want to handle utilities for each tenant. You can either have separate meters billed directly to tenants or include utilities in the rent. Each approach has its advantages and disadvantages, so choose the one that aligns with your goals.
3. Carefully screen tenants: Perform thorough background checks, including credit reports, for all potential tenants. Even if they are friends or relatives, it's crucial to ensure they have a reliable payment history and meet your criteria as responsible tenants.
4. Assess your suitability: Consider whether a fourplex is the right investment for you based on your circumstances. If you plan to live in one unit, be prepared for the additional management responsibilities. Absentee investors may require the assistance of a property management company.

Investing in a fourplex can be an excellent opportunity to gain hands-on experience in real estate investing, especially for those starting in the industry. With attractive financing options, potential cash flow, and tax advantages, a fourplex offers a unique investment proposition. However, it's important to carefully consider the management responsibilities, potential selling challenges, and higher tenant turnover associated with fourplex properties.

Ultimately, investing in a fourplex allows you to learn more about real estate investing and yourself as an investor. It's essential to conduct thorough research, seek advice from professionals, and assess your goals and capabilities before making any investment decisions.