How Three and Four Unit Buildings Are Ideal Primary Investments in Real Estate

Many experienced investors think three unit and four unit buildings are ideal first time investments. Buying a four unit building can be as easy as buying a single-family home, and the quad offers superior profit potential. Three unit buildings (triplexes) are the middle ground between duplexes and quads. Think of the number of rental units as increments of profit. Normally, the more rental units you own, the more money you make. Four unit buildings are a bit more popular than triplexes because they can be financed with the same types of loans, may not cost much more, and provide an additional rental unit to generate profit.

Duplexes work for owners who occupy them, but hands-off investors often have trouble turning a profit. Making money gets easier with triplexes, but investors still may encounter plenty of risk and tight numbers. Some triplexes produce more net income than some quads; however, logically speaking, more units equal more income. Moving up to a four unit building increases the odds of success. Either building -- triplex or quad -- can prove profitable. Cost compared to return should be similar. Triplexes bring in less money, but they usually don't cost as much as quads. You must evaluate every project on a case-by-case basis. All aspects of real estate investment are subject to specific individual conditions.

Circumstances begin to change more when you get into four unit buildings; however, until you exceed four rental units you can finance a quad like you can a house. This means a required down payment as low as 5% of the purchase price if you plan to occupy the property. Most lenders will allow you to claim some portion of the rental income from the apartment building to offset your loan requirements in terms of qualifying ratios. Therefore, it actually can be easier to buy a four unit building than a duplex. The quad should cost more than the duplex, but the added rental income can more than compensate for the increased cost. This is something many new investors are not aware of.

The majority of first-time investors think they are limited to small buildings, like duplexes, due to overall purchase price. They can't imagine that a lender will allow them to buy larger buildings that cost maybe twice as much. Generally, their fears are unfounded. Because a lender uses a building's rental income, based on historical data, the qualification process for a loan can be easier with a big building than a smaller property. In fact, you might be able to buy a six unit or a 12 unit apartment building with less out-of-pocket cash than it would take to buy a duplex that you didn't plan to live in. Certainly, bigger buildings cost more and require larger down payments; however, depending on how a deal is structured and how financing is arranged, you could buy into larger buildings with less money. Larger buildings often fall under commercial loan status, which means the seller may hold a second mortgage for part of the down payment.

Deciding on what type of real estate to invest in is not easy. Knowing can tell you which projects offer the most profit or potential. Results vary depending on numerous factors. Investors must seek their own levels. Usually, buying small apartment buildings is an excellent way to create wealth; however, when inexperienced investors move into a market coveted by high-rolling investors -- such as the market for quads and larger buildings -- the risk can become greater. Sharks working the waters of real estate investment sometimes go into feeding frenzies.

No real estate investor is guaranteed safety. You could be taken advantage of when buying a single-family home. A savvy investor might sell you a duplex with conditions that don't favor your position. You may have no way to know which baits contain hooks when you happen upon them. However, the right research and patience can help keep you safe when purchasing smaller properties. But as you move up to larger buildings, you're more likely to be dealing with professionals who make their living as buying and selling real estate. For this reason, treat every deal like a dangerous one (even deals to purchase smaller properties, for that matter). Learn to work with historical data, research materials, and your attorney to weed out the bad projects. The quicker you have your radar, the more likely you are to be successful.