Cash is cash, but some cash flow is better than others — and easier to obtain – Particularly when it comes to purchasing residential real estate investment properties.
For instance, compare a 6-unit apartment complex with a Tri-plex and a Single Family Residence (SFR). The amounts in red represent the advertised monthly rental income for that property.
Which do you think is the best deal for the typical investor?
The 6-unit property offers the same rental income per unit ($600), but is cheaper per unit than the Tri-plex, so is this the best investment, right?
But if 3 units pencil out as a strong investment, a 6 unit property next door to it , at al lower per-unit price, is even better, right???
WRONG. Unless you're willing/able to pay all Cash rather then leverage your money.
Most likely, the best investment for you and most investors will be the Tri-Triplex, particularly when compared to the 6-unit apartment complex. It all comes down to financing.
When obtaining conventional financing, two to four residential units can be financed in the same manner in which you would finance a SFR investment.
That means you can obtain financing at 75-80% of your purchase price, through a large number of lenders and mortgage brokers.
You limit your cash investment to 20-25% and the financing is relatively easy to get, even nowadays.
In order to finance the 6-unit complex, you would have to obtain Commercial Financing, as it is over the 4-unit limit imposed by Fannie Mae & Freddie Mac.
This is a significant difference, as such financing is much harder to obtain, and the LTV’s would likely be in the 50% range.
So not only is it more difficult to get financing on a 5+unit property, but you will need to come to closing with tremendously more cash.
Now let’s compare the Tri-plex with the SFR. Both are the same price, yet the Tri-plex offers $700/mo more in cash flow, so that’s the best deal, right?
Well, probably… But there are a couple questions you will want to ask before locking in your investment strategy:
- Is the Triplex master metered?
- What will your property management fees be?
Note that multi-units often have master metered utilities, meaning there may be one water meter (or electric meter or gas meter) for the entire property.
Typically this means that the landlord must have the utility bill in his/her name.
You’ll want to check to see if the landlord is currently allocating these utility costs back to the tenants/units, and revise your pro-forma P&L accordingly.
On a SFR, the tenant typically pays all of the utility costs associated with the property, so you normally don’t need to factor that into your expenses.
Secondly, check with your property management company to see what the difference will be for typical management fees. While 3 (or 6) units provides greater differentiation (if one tenant leaves, you still have others there paying you), they also may require more management fees per rental dollar.
You will likely incur more leasing fees and repair costs over a 12 month period with a $150,000 Tri-plex than you will with a $150,000 SFR.
So it's important to make sure you're comparing apples to apples when comparing properties with 4 or less units with those that are 5+ units, primarily due to the better financing options on 4 or less units. We have a strong cash-flowing 4-plex in North Phoenix available for purchase -- see the first featured property below, or go to www.TrueFreedomAchievers.com to view the opportunity.
Real Estate Humor: