The 2-4 unit Investment Niche

By
Services for Real Estate Pros with 2-4 Units Inc.

There is a well defined niche in real estate investment that is the 2-4 unit niche. The niche is created basically by the financing. Typical banking guidelines classify 2-4 unit properties as residential, meaning the same financing you would use to by a single family residence. So, down payments and interest rates are the lowest when financing a property. Five units and above is considered commercial financing and banks want a minimum of 25-35% down payment. This is the first definition of the niche.

The second definition is tied closely to the first and it is liquidity. Liquidity simply is the ability or ease with which assets can be converted into cash. Because of the ease in which to gain financing, the investor pool is much larger, if selling your investment, and refinancing to pull cash out or "leveraging your investment" is easier as well than larger apartment buildings.

Why not just own and rent single family houses? Good question and that brings us to the third definition of the niche. If you own and rent a single family residence and your tenant moves out what is your vacancy factor? 100% vacant. If you own a duplex and one tenant moved out it's 50% and so on up to 4 units. Now of course tenants do move out and it's imperative that you fill the vacancy quickly but it's much easier on your cash flow if the vacancy is not the only tenant in the building. Another reason why 2-4 units is better than SFR (single family residence) rentals is the cash flow. Owning 4 SFRs  means owning four separate buildings, with 4 separate roofs, 4 separate plumbing systems, heating systems, electrical systems and ultimately higher maintenance costs. You get the point. The choice becomes obvious.

The final defining characteristic of this niche is the first time investor and buyer. Most real estate investors get their wings investing in 2-4 unit properties for all the above reasons. Most of them keep these properties in their portfolios for those same reasons.

 But if you are a first time home buyer pay close attention. Make your first purchase a 2,3 or 4 unit property. Most of these will give you the feel of owning a separate home, SFR, and you will get 1,2 or 3 other tenants helping you pay that mortgage payment. You also will benefit in financing as you will be able to buy this property as an owner occupant, allowing for a lower interest rate. Then, after you've saved enough money for a down on your next investment, you can buy that SFR you want also as an owner occupant. Loan underwriters rarely will allow you to do this in reverse.

So, stay tuned to this blog for more advice and suggestions when investing in the real estate market. You should go to the website and search for 2-4 unit properties across the nation, cash flow analyze them, check demographics, map them out and speak directly to the agents who are listing these properties. If you're an agent, post your listings today. The site is http://www.2-4units.com/ and I'm certain you will find it to be an extremely valuable resource for new and seasoned investors

Comments (3)

Robert Huntsinger
Empire Realty - Upland, CA
Empire Realty Upland, CA - Full Service at a Discount

I like the definition of that niche, I buy single family homes for investment and I was looking at going into a new area, Texas, and I was going to buy more than one at a time to reduce my risk.

Take care!

RJH

Jan 27, 2008 06:12 AM
David Salvato
David Home Inspection Service Home Inspector San Bernardino - Los Angeles, CA

Multi-units can compound problems. "A single-family dwelling as opposed to a four unit building will present different issues and challenges.  With more units comes more mechanical items to maintain and repair, such as appliances, heating and cooling systems, etc." As a person who owns many muli-units I find that when one thing starts to go it"s better to replace everything. If a garbage disposal goes bad in one unit, I change them all out. Saves on down time for the tenet.

David

Aug 31, 2009 05:58 AM
Fred Griffin Florida Real Estate
Fred Griffin Real Estate - Tallahassee, FL
Licensed Florida Real Estate Broker

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Nov 02, 2015 11:59 AM