Want to get rich in real estate? So does everyone. And most people are doing things that they think will give them a quick hit. Fix and flip. Find an inside deal. Wholesale. Single family homes. All of these are fine… but oh so worn out. Those markets are highly competitive and the margins have dropped precipitously over the past few years.
Small multi-units vs. larger apartment complexes
What most investors seem to really want is a chip at the table of big apartment complexes. They believe that is where the real money is. But, I beg to differ. I owned a 9-plex, a 33 unit complex and a 48 unit complex. All within 6 blocks of each other. I too thought that apartment complexes were the pathway to building wealth. I was wrong. With about 90 units of apartments, I was always struggling. My occupancy was always on edge. When the HVAC went out, it was thousands (or tens of thousands) of dollars. When I hired a management company, they stole from me. When I hired my own manager, they stole from my tenants. Imagine your surprise when you find out that your manager's girlfriend used his keys to break into apartments to drink vodka from the other tenant's freezers. True story. Or the manager who was lit up on prescription drugs and decided he needed to pull the drywall off the whole ceiling of his unit to find a mysterious noise.
Yes, those 90 units gave me economies of scale, but the reality was that the expenses had more scale than the income. Everything costs more. And, when it comes to income, getting to 85% occupancy was a distant goal. Luckily I survived a ten-year-run in large apartments and now have found an untapped secret: 2-4's. Yup. Little complexes that have 2, 3 or 4 units are the goldmine. The cash cow. The golden goose. Here's why.
Financing a duplex or fourplex
You can finance a 2-4 plex with FHA financing if you live in one unit. That's 3.5% down. Want to buy a million-dollar 4-plex? You get income credit for the other 3 units, add that to your personal and business income and you might qualify to put down just $35,000. Hold that for a couple of years, refinance with a conventional loan to dump your PMI and then find another and do it again. Even without FHA, you can use conventional federally-backed loans for 2-4's for both purchase, refi and HELOC loans. You'll never get that kind of deal with an apartment complex. Apartments require 25-30% down and often more, and also have higher interest and pre-payment penalties that can be quite stiff.
Easy to own and manage
Once you own one, these little units are far easier to keep occupied. They are also easier to maintain and can be self-managed. High occupancy (check). No management fees (check). Do your own maintenance or hire locals you can trust (check). I love getting that Venmo payment every month from each tenant, and knowing that my mortgage is being paid down. By the time I've owned a 4-plex for 18 years, I'll have it paid off and paying more in retirement than any other investment in my portfolio.
Down Payment: $35,000
Gross Income: (when acquired: $68,000; after increasing rent and renting garage: $82,000)
Mortgage & MI: $5300
Net Monthly Cashflow: $400
Numbers that work
Now, remember, you don't have management fees eroding your profit. You can fix half of the small issues that arise and not get gauged by contractors. Yes, you are riding close to the line here with only $400/mo in buffer. But, you also get depreciation. Your tax savings on this property might net you $7,000 per year in actual money you put in your pocket. That makes the $4800/yr tax-free profit, and adds even more than that to your pocketbook. And, remember you only put down 3.5%. Your cash-on-cash return is ridiculous. The numbers are still amazing even if you put 20% down, which saves you on mortgage insurance, and reduces your payment.
2-4 unit apartment complexes are great because they have just enough economies of scale to make them save you money over single-family houses, and yet small enough to not have the burden and downside of owning larger apartment complexes. They are the Baby Bear of real estate, and often overlooked by investors.