Evaluating Duplexes, Triplexes, Fourplexes - The Unknowns
Duplexes, Triplexes, and Fourplexes are great options to get into an investment property with lower barriers to entry than commercial apartment buildings. Evaluating any of the plexes requires collecting more than sales comparables to get an accurate snapshot of your potential investment. These properties are commonly owned and self-managed by individuals/owner-occupants, and at the time of sale, it’s possible that there’s not an accurate record of expenses, some won’t have current lease agreements in place, and deferred maintenance items could be unknown. While conducting your due diligence, it may be required for you to come up with your own estimates and figures.
Here’s a list of variables, you will want to consider in addition to your cost of financing, insurance, and property taxes. Any estimates and figures provided below are just a ballpark and should be tweaked based on your local market conditions;
Unit Mix, Current Rents, and Proforma Rents: What is the current unit mix? How many units will be delivered vacant at the close of escrow? What are the current rents? And, what is the upside in rents if you were to re-lease the unit today? Are there current leases in place? And, something important to consider during a pandemic…are there any unpaid rents for the units?
Deferred Maintenance: Consider the big-ticket items; roof, plumbing, electrical, landscaping. If any of these items are passed along to you as the new owner, be sure to factor this into your offer or be ready to negotiate based on the out-of-pocket costs.
Expenses: If you want a quick plug for estimating purposes, $125-$150 per month per unit is a good starting point.
Reserves & Vacancies: 7-10% is a good place to start. You will inevitably have some turnover of units, especially if your unit mix is made up of singles and 1 bedroom units. These units are great for single’s or couples, who eventually tend to upsize leading to a higher turnover.
When buying any of the plexes, it may require more upfront due diligence to factor-in accurate estimates and figures, but this could also lead to a good opportunity to strike a deal with a seller if you can clearly communicate and provide your evaluation of the purchase. There is also potential upside on properties to factor in if you anticipate rent rates to increase in the particular neighborhood or if there is value add options like ADU’s on the property.