Why A 5 Unit Apartment Building Is Worth Less Than One With 4

One of the most common misunderstandings about multi-family property investing is that more units is always better.

After all, the more tenants there are paying rent, the more a property should be worth, right?

Theoretically.

The trouble with that thinking when it comes to smaller apartment buildings, however, is that any property that has more than four units requires the buyer to obtain a commercial loan.

And commercial loans usually require a larger down payment (25 percent or more), come at a slightly higher interest rate, and have shorter amortization schedules.

Meanwhile, duplexes, triplexes, and four unit properties may be purchased with as little as 3.5 percent down (for owner occupants using FHA financing), and their loans are paid off over thirty years.

Spreading payments over a longer amount of time usually results in them being less. This helps the investment properties with fewer units cash flow.

More importantly, however, since the smaller the down payment, the greater the pool of possible buyers. The greater the number of buyers, the higher the demand. And the higher the demand, the greater the value.

So, that 5 unit building you see on the MLS that’s priced $50,000 less than a comparable four unit down the street may not be such a good deal after all!