Last week I shared information about investing in real estate, specifically purchasing a single-family home for use as a rental. This week, I’ll share why duplexes and four-plexes can be even better investments, if you have the funds.
I’ll use a four-plex as my example. In Ukiah, you can purchase one for about $450,000 and expect rental income of $3,800 – $4,200 per month. That’s a higher rent-to-income ratio than you can typically find with a single-family home. And duplexes and four-plexes are still easy to finance because they qualify for the same preferred financing as single-family homes, so you can get a 30-year fixed rate loan (not true for most other types of real estate investments).
Because of the lower monthly rent, it is often easier to find tenants for duplexes and four-plexes, but the turnover can be higher. Obviously, you’ll want to fill vacancies as soon as possible, but be aware, having a vacancy is sometimes better than having a bad tenant. Screening tenants thoroughly is essential to your emotional and financial happiness, and your neighbor’s niece and her boyfriend should not be exempt from the same scrutiny all prospective tenants should face. I am biased as the owner of a property management company, but I’d say the work required to find and keep good tenants can be reason enough to consider hiring a property manager.
More living quarters means more people and more maintenance. Four-plexes are ideally suited to small families, adults looking to share expenses, or individuals who want a little extra space. Having all these people living in such close quarters (sharing walls or ceilings/floors) can sometimes lead to disputes, and unless you hire a property manager, it will fall to you, as landlord, to address them.
A four-plex will not require four times as much maintenance as a single-family home, but it will require more. As with a single-family home, you only have one roof to patch, four exterior walls to paint, and one driveway to seal. However, with a four-plex, you have four toilets to unplug, four heating/cooling units to maintain, and four sets of appliances to fix when they break.
As a smart investor you must include these maintenance costs into your planning. Anticipate expenses of about 3-4 percent of the purchase price per year, or $13,500 – $18,000. This includes taxes, insurance, and maintenance costs. While you won’t spend this much every year, you will over time. And when you need the money, you don’t want to dip into junior’s college fund to get it. Create a reserve savings account and pay into it each month.
Happily, you’ll benefit from your property’s depreciation, which helps offset your cash expenses. Depreciation is a bookkeeping expense that allows you to deduct the value of improvements over time. Depreciation is only a taxable expense, not a cash expense. This means, you have the ability to save on your income taxes and this savings should offset the cash expenses noted above.
So, now you own a $450,000 rental property with a break-even cash flow. You invested $95,000 (a 20 percent down payment plus $5,000 in closing costs), and your benefit is the potential appreciation in the value of this property. If values rise at three percent a year, you’d make $13,500 on a $95,000 investment or almost 15 percent. Not too shabby.
In addition, rents will likely increase over time. And while expenses go up with inflation, your mortgage payment won’t. The bottom line is, if you can afford to buy a $450,000 rental today, in 10-15 years, you should have an asset capable of paying for junior’s college tuition (or more rental properties to earn more income).
If you have questions about real estate or property management, feel free to contact me at firstname.lastname@example.org or visit our website at www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you’re a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 35 years.