Duplexes and small buildings

14 articles

• The same fourplex: 8.9% borrowed at $499,000, and a loss at $700,000

  Negative leverage is borrowing at a cost higher than the building earns, so the loan lowers your return instead of lifting it. In this example a fourplex pays 8.9% on borrowed money at $499,000 and loses 4.1% a year at $700,000, where its 5.4% cap rate sits under the 8.0% the loan costs.

  6 min read

• $150 more a unit added $78,171 to this fourplex’s value

  Value add means raising a building’s net operating income, because a building is priced off its income rather than off what similar houses sold for. In this example, $150 more a unit on a fourplex adds $5,472 a year of net income, worth $78,171 at a 7% cap rate, and monthly cash flow goes from $849 to $1,305.

  5 min read

• A $400,000 triplex passes FHA’s rent test by $48. The duplex never takes it

  Two units and three units are different loans. FHA tests whether a three or four unit building’s own rents can carry the mortgage, and skips that test on a duplex. In this example the triplex passes by $48 a month and the fourplex by $498.

  6 min read

• The same fourplex asks $139,720 as an investment or $32,435 to live in

  Nothing stops a first-time buyer from buying a rental. What changes is the loan: the cheap low-down-payment programs all require you to live in the property. In this example the same $499,000 fourplex needs $139,720 of cash as an investment, or $32,435 with FHA if you move into one unit.

  5 min read

• With no money down, this fourplex costs $1,084 a month to live in

  Yes, a VA purchase loan covers up to four units, and you have to live in one of them. In the example below a $499,000 fourplex bought with no money down costs $1,084 a month to live in, against the $1,575 the unit would rent for.

  6 min read

• A six-unit building where $564,036 of the loan falls due in year five

  A balloon payment is one large payment that clears a loan at the end of its term, years before the monthly schedule would have paid it off. In this example a $599,200 loan on a six-unit building is spread over 30 years but comes due in five, leaving $564,036 to refinance or pay.

  6 min read

• The rent roll says $7,290 a month. Only $5,995 is coming in.

  A rent roll lists every unit with its rent, its lease dates and whether anyone is living there. Read it against the seller’s income claim: in this example the roll adds up to $7,290 a month, but one empty unit means only $5,995 is actually arriving.

  5 min read

• The same fourplex is worth $700,933 or $525,700, depending on the cap rate

  You value a small apartment building on the income it produces, not on what similar homes sold for. Divide net operating income by the cap rate you require: in this example $42,056 of NOI is worth $700,933 at 6% and $525,700 at 8%.

  5 min read

• Six units at $900,000: the lender’s income test asks for $35,006 more

  At five units a building leaves residential lending, so the loan is sized on what the building earns rather than on your income, and the note usually comes due long before it is paid off. In this example the two limits sit $35,006 apart, and that gap is cash out of your pocket.

  5 min read

• This duplex out-earns a house by $236 a month. $125 of it is the down payment.

  A duplex can earn more than a house at the same price when its two rents beat the house’s rent by enough to cover its extra bills, but on a standard loan an investor needs 25% down instead of 15%. In this example, a $375,000 duplex keeps $281 a month to the house’s $45, takes $18,750 more cash than the house at 20% down, and loses $1,015 in a month with one unit empty.

  6 min read

• Your tenant pays $1,700 a month next door. Living in your unit costs $1,367.

  Compare what living there costs you each month with the rent you pay now, then check what the building earns once you move out. In this example, a $300,000 duplex bought with 3.5% down costs $1,367 a month to live in, $333 less than the $1,700 rent next door, and loses $75 a month once both units are rented.

  6 min read

• One empty unit takes this fourplex from $938 a month to $285

  Build the income from the rent roll, take off a vacancy allowance and every running cost, then subtract the mortgage and test what an empty unit does. In this example, a $460,000 fourplex clears $938 a month with all four units let and $285 while one of them sits empty.

  6 min read