The other day I sent a listing for a four-plex to a client. While he’s not actively looking, and this one wasn’t an especially good deal, it reminded me in both appearance and location of one of the ones he already owns.
My client has invested and occupied income properties for many years. And he asked whether he was correct in not seeing the precipitous price drops in the four unit buildings that are occurring in the duplex market.
Yes and no.
Remember that old law of supply and demand? How if the demand for a product is greater, the price goes up? Well, this law applies when it comes to small multi-family properties (one to four units) as easily as everything else.
While FHA loans are available for duplexes, tri-plexes and four-plexes, most owner-occupants simply prefer duplexes. And while the amount of rent the other unit generates still played a role in a purchase, it didn’t carry nearly the weight of the more emotional nature of buying a home to live in. The duplexes that triggered those feelings typically sold for the higher prices that emotions always command. Consequently, they also rode the great wave of appreciation.
Well, aren’t there four-plexes with charm? Of course! But the prospect of coming home to three tenants with issues was and is, to many, far more daunting than the thought of simply one renter. This higher level of demand helped drive up prices during the boom years.
Typically, entry level duplexes also sold for less than four-plexes, and therefore required smaller down payments. The four-plexes, meanwhile, not only required a bit more of a down, but also needed to come closer to a positive cash flow for buyers to obtain financing for the properties. This was virtually impossible using the then FHA minimum of 3 percent down.
Therefore, for a time anyway, the four-plexes that sold during the hot market broke even or better in terms of their P & L (profit and loss) statements; paying their own way. Those with negative cash flows were often purchased by folks with deep enough pockets to cover the losses.
This same thinking is why many of the properties that are short sales and foreclosures haven’t suffered declines in equity as dramatic as the duplexes. Provided it is in decent shape, and in a good location, the landlord knows the value of the property is more closely tied to actual rental income. Short sale properties that are tenant occupied are inevitably reduced in price to the point where they are a better financial deal with tenants already in place (immediate cash flow) than they are vacant at a later date.
So are there some foreclosed four unit buildings being sold at unbelievably low prices? Yes. But, like their single family and duplex counterparts, they typically need a lot of work, are in less sought-after neighborhoods, or in the case of the suburbs, were built in the last half of the 20th century and are architecturally uninspired.