For would-be multifamily investors who are only able (or willing) to secure residential financing, a fourplex is the biggest move possible toward becoming a professional landlord. This configuration is also known as a quadplex. Buying one such property means you’re a multifamily building owner with an income property that is also your primary residence.
Proponents of the fourplex call it the best of the housing hacks: having a primary residence that generates enough income to more than pay the mortgage. Detractors find fault with the commitment issue: Buying a fourplex means you’ll be responsible for tenants in the foreseeable future, because these configurations are too large for any one family. But if being an owner-landlord is the goal, then this isn’t a downside.
What is a fourplex?
As the name would imply, a fourplex is a multifamily home that is designed to house four separate families, in four complete living spaces including four separate entrances. While the smaller version of this, the duplex, is often one building split into two separate living units, the fourplex can be designed in a variety of different ways. What is mandatory is that it has one shared wall and four separate entrances.
Upsides to buying a fourplex
For investors just starting out, the biggest argument in favor of the fourplex is probably that it’s the largest multifamily configuration that can be purchased with a residential loan rather than a commercial loan. As long as it’s intended to be the primary residence, the buyer can qualify for owner-occupied financing that entails less rigorous underwriting and has a fixed rate 30-year term. Residential financing is easier for first-time borrowers to get and offers better terms -- including a lower down payment -- than an investment loan.
Hit ‘fast-forward’ on your property investor status
We’ve said on Millionacres that most people do not get into real estate investing without first owning their own home. But for most people, a primary residence is not likely to generate any kind of income in the first 10 years. A small multi-unit property, especially a fourplex, changes the whole scenario. You have the potential to generate rental income immediately.
Another upside to buying a fourplex is that of all types of property in the small multifamily category, it has the potential to generate the most cash flow, based on rental income generated versus mortgage payment.
Estimated rental income
One of the biggest lures of the small residential multifamily property is the potential to use estimated rental income (up to 75%) to qualify you for the loan. Essentially, if you’re looking to buy a fourplex and three units are rented at $1000 each, you can ostensibly add $750 per month to your income -- for each of the three occupied units. This gives much more of a boost to income than just the estimated rental income from a duplex or a single-family home, which has no estimated rental income.
Reminder, though, that increase in estimated income is a best-case scenario. It’s really up to the lender whether they want to calculate a borrower’s income this way.
Owning a fourplex also increases the potential for tax deductions related to maintenance and upgrades on the units you rent out. You can also use rental property depreciation rules to get tax breaks that you could not get on a single-family primary home. When you think that you’re getting all this plus the residential real estate tax breaks, like property tax write-offs, it really can be a best-of-both-worlds scenario.
Downsides to buying a fourplex
I mentioned commitment to being a landlord in the intro -- and it’s real. When you buy a fourplex, it’s only an income-generating property when the tenant-occupied units generate rent that more than offsets the mortgage. Depending how high the mortgage is, that might mean that half or all of the units need to be occupied all the time with tenants in good standing. This isn’t always easy to achieve, especially in not-so-hot housing markets or economically depressed times when people are struggling to pay rent.
The other thing to keep in mind is, the housing category itself is not typically on the high end of market rate. Fourplexes are usually four units on a lot the same size as a single-family lot. This means tenants have a fraction as much space as they would in a single-family home. Plus, there’s the fact that typically, the most desirable neighborhoods are not zoned for "plexes."
Finally, the flip side to all those positives mentioned above-- namely, the tax breaks for maintenance and depreciation -- means you’re going to be dealing with maintenance and depreciation on four housing units, not just your own. This can be pricey and time-consuming.
The bottom line
There are a lot of potential upsides to buying a residential multifamily unit. A fourplex, as the largest in its category, has the most potential. But while it can open the door to being a property owner-investor, it’s not passive income. Think of it instead as a co-living situation where you’re the senior occupant who takes on all the management responsibilities in exchange for having your mortgage paid for and a salary generated by the other occupants’ rents.