4 vs 5 unit multifamily, which is better? Which creates more cash flow per unit? Which appreciates faster? Which obtains better financing? Which is better for you? Discover the answers to these questions and much more!
4 vs 5 Unit Multifamily
Here are the main differences between 4 unit and 5 unit multifamily investing.
Which is Easier to Start With?
When getting started with multifamily, buying a 4 unit can be easier than acquiring a 5 unit because 4 unit properties qualify for a residential loan. Residential loans have easier lending requirements and lower down payments. Residential multifamily loans can be as low as 3.5% on owner occupied loans and investor loans as low as 15% down. 5 unit multifamily properties are considered commercial property and do not qualify for residential loans so the lending requirements are more stringent . Not only will the lender require a down payment of 25-30% for commercial multifamily loans, but they will also base approval on the property’s income as well as your experience.
Which Makes More Money?
Due to better financing terms, a lower interest rate and a lower down payment, your return on investment (ROI) is higher on a 4 unit. However, the cashflow is higher on a 5 unit because you have more units. The more units you have, the greater the cash flow potential.
What’s the Main Difference?
The main difference between the two is the ability to force the appreciation. A 5 unit is classified as commercial real estate, which means you can force the appreciation by improving the performance of the property. As you increase your net operating income (NOI), you force the property value upward. A fourplex will appreciate with the market, but you cannot force the appreciation by increasing the income. So in terms of building long-term wealth, a 5 unit is better. For an in-depth comparison of the pros and cons of residential and commercial real estate investing, check out my training Residential vs Commercial Real Estate Investing.
Which One is Best for You? A 4 Unit or 5 Unit?
Both a 4 unit and a 5 unit multifamily are a great place to get you started in multifamily real estate investing. In fact, we have a student named Abdul who bought a fourplex in California. And even though his market is challenging due to rent control legislation, in the last 18 months his 4 unit has increased in value, produced cash flow, and provided him with incredible tax savings.
Abdul’s 4 Unit Multifamily Deal
Abdul is a healthcare professional in California. Even though he runs his own successful private medical practice, he was looking for a solid investment vehicle that would provide additional income. His journey into multifamily real estate began when he came across Robert Kiyosaki‘s book, Rich Dad Poor Dad. Before he was even finished the book, he had decided that real estate investing was the only investment option for him. So, he took action and began researching his options and decided on commercial real estate. Being a novice, he knew that he needed an experienced mentor, so he started looking online. That’s when he joined our Protégé Program and began looking for his first deal.
The Best Properties are Off-Market
Abdul purchased his 4 unit multifamily in California for $690,000 using the methods we teach the students in our program. Like most of our deals, Abdul found it off-market and negotiated directly with the seller. We worked closely with him through the negotiation process, and using the skills we taught him, he was able to get $24,000 in credits at closing. And because a fourplex is considered residential, he was able to get a mortgage at a lower interest rate of 3.75%.
Increasing Rents and Income
When Abdul acquired the property, only two of the 4 units were occupied and one tenant was paying. With only 25% economic occupancy, Abdul’s priority was to fill the vacancies and increase cash flow. Using the $24,000 in credits at closing, he put $20,000 of it back into the property to improve it to get the rents up. He evicted the tenant that was 10 months behind on rent and renovated all the units. Even with California’s rent control regulations, we were able to give Abdul the strategies he needed to raise the rents from $1,104 to $1,750 in less than two years. Now his rents are more than double his mortgage providing him with plenty of cash flow.
The Benefits of Depreciation
One of the benefits of multifamily investing is depreciation. In one year, Abdul received $26,000 in tax savings. So, even though his tenants paid the mortgage and he pocketed cash flow, he had a paper loss of $26,000 that he was able to apply to his medical practice, reducing his taxes. Depreciation is such a powerful tax saving tool in real estate. If you are unfamiliar with how depreciation in real estate works, I have a training for you that explains it in detail called 3 Tax Advantages of Commercial Real Estate.
Market Appreciation
Although Abdul doesn’t benefit from the ability to force the appreciation, his property has increased in value due to market appreciation. In our current market, due to limited supply and high demand of B and C Class multifamily, market appreciation is accelerated. So, in the last 18 months, his 4 unit has gained over a hundred thousand dollars in value. He purchased it for $690,000 and now it’s worth $800,000.
Start with the Best Deal
We encouraged Abdul to invest out of state because the prices are lower, and the cash flow is higher. However, Abdul wanted to invest closer to home, and when a good deal came up, he seized the opportunity to get started with his first multifamily investment. Looking back, he can see that he might have rushed a bit, eager to get his first property. And in hindsight, he could have purchased a 5 unit property that was cheaper with more cashflow out of state.
That said, we always encourage our students to get the best deal and for Abdul the best deal in the moment was a fourplex. And because he had our team working closely with him, he was able to stabilize the property and increase the rents, achieving all the benefits of real estate investing: appreciation, depreciation, and income. Abdul started his multifamily real estate portfolio with a successful 4 unit property, and now he is building on that success.
Make Money While You Sleep with a 4 Unit
Abdul has a great job as a healthcare provider, but there’s a limit to how much money he can make. You see, it’s not about how much money you make at work, it’s more about how much money you make while you’re not working. And this is what multifamily investing will do for you. Your tenants are paying down the mortgage, you’re building equity, and you’re getting tax savings, all while you’re sleeping.
Now some of you are thinking, Peter, I want to start bigger than a fourplex. In Abdul’s story you can see that you don’t have to. The best place to start is with the best deal, and now he’s working on expanding his portfolio to much larger multifamily properties. Here are Abdul’s 3 tips for aspiring investors:
- Get Educated.
- Find a tried and tested mentor with a team of professionals who can help you through the process.
- Be Patient and persistent. Like all good things in life it takes effort, so don’t give up on the process. If you have the right mentor, you will get there.
Which is Best for You? A 4 Unit or a 5 Unit?
After hearing Abdul’s inspiring story, which would you buy first? Would you prefer to start off with a fourplex or a five plex? Let me know in the comment box below!
And if you have any questions, post a comment below or text PETER to 833-942-4516.
Every Successful Commercial Real Estate Investor Has a Mentor
Here’s what Abdul had to say about our Protege Program:
“Thank you, Peter. I appreciate every minute of your time that you spent with me the past 2 or 3 years. It’s been a journey that I will never regret and I truly appreciate your company and your coaches and you, thank you for all your help.”
Every successful commercial real estate investor has a mentor and with our team at Commercial Property Advisors, Abdul’s success story can be yours too. Get your mentor here: Commercial Property Advisors Protege Program
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Thanks for your input
Both. I would move forward with both deals.