How Many Units Should My Multi-Family Rental Have? Pros & Cons of Duplexes, Triplexes & Quadplexes
As you explore how to start investing in real estate, you need to consider how many units you'd like to have in your multi-family home. Choosing a property with more units promises higher income, but it also means greater expenses and requires a more extensive time commitment. The right size for your multi-family home should land in the sweet spot between rental income earned and effort expended. Here's everything you need to know before buying a duplex, triplex, or quadplex.
Financing Residential Multi-Family vs. Commercial Multi-Family
Deciding how many units you want in your multi-family home will make financing significantly easier. The number of complete living spaces determines whether a building is residentially or commercially zoned.
If you're considering investing in residential multi-family real estate, your choices are limited to duplexes, triplexes, or quadplexes. Anything larger is almost always considered a commercial property. The main differences between residential and commercial multi-family homes manifest in the financing process.
Residential buildings qualify for different types of residential mortgages, which generally offer more favourable terms for investors. These terms often include:
- Lower Down Payments: Residential mortgages typically require smaller upfront investments than their commercial counterparts.
- Predictable Interest Rates: Stability is crucial for many investors, and residential mortgages provide this through consistent and predictable interest rates.
- Variety of Lenders: There's no shortage of options when seeking residential mortgages. A vast array of lenders, from mainstream banks to niche institutions, are typically willing and equipped to provide residential loans.
- Leasing Simplicity: Once you've secured your investment, the leasing process for residential properties is markedly more straightforward than commercial. The terms are often less complex, making it easier for landlords to draft agreements and for tenants to understand their obligations.
Both residential and commercial multi-family properties have their place in an investor's portfolio, but they cater to different financial strategies and management styles. While commercial properties can be lucrative, they come with a unique set of challenges and characteristics:
- Financing: Acquiring a commercial property necessitates obtaining a commercial mortgage. These mortgages usually demand higher down payments and can come with fluctuating interest rates. Furthermore, the pool of lenders for commercial mortgages can be more restrictive.
- Leasing Complexity: Commercial leases are intricate. They often involve negotiations on various terms, from maintenance responsibilities to rent escalations. While they offer more flexibility, they also require both landlords and tenants to be more vigilant in understanding their respective duties.
Duplex vs. Triplex vs. Quadplex: Which Type of Multi-Family Home Is Right For You?
Pros & Cons of Duplexes
A duplex is a single building divided into two separate living units. Each unit has its own entrance, kitchen, and bathroom. Managing tenant concerns, maintenance, and other property-related issues can be more straightforward with only two units. Additionally, duplexes are often more affordable than larger multi-unit properties, making them an accessible entry point for many first-time real estate investors.
Duplexes are also the most popular for owner-occupied investments. In this arrangement, the owner can live in one unit and rent out the other, effectively having the tenant help pay off the mortgage.
The main downside of duplexes is the biggest downside for duplexes. Since there are only two units, vacancy in one means losing 50% of potential rental income.
Pros & Cons of Triplexes
Triplexes are structures that contain three separate living units. Like duplexes, each unit in a triplex has its individual amenities.
With three units, the risk associated with vacancies is somewhat spread out. On top of that, the presence of an additional unit means increased rental income compared to a duplex. Depending on what rental rates are like in your area, this could mean thousands of extra dollars in revenue every year.
Despite the considerable increase in size, triplexes remain manageable for a hands-on investor who doesn't want to be overwhelmed. All the same, more units mean translates to more maintenance and potentially more tenant concerns. Self-managing a triplex may be challenging for people who have other jobs or don't want to be on-site most of the time.
Pros & Cons of Quadplexes
With four individual living units, quadplexes (also known as fourplexes) are the largest available residential multi-family homes. As such, the risk of income loss from vacancies is further diversified. Even with one unit empty, 75% of potential rental income remains.
Speaking of income, four rental units will likely provide the highest potential rental income of all the residential multi-family homes. Despite their size, quads still qualify for residential mortgages, thus saving investors the expenses and challenges associated with commercial real estate loans.
Of the three, quadplexes often come with the highest initial purchase price. And, even though the income potential is theoretically the highest, nothing is guaranteed. Location, building age, and amenities dictate how high you can set the rent per unit. Four rental units in a less favourable location will likely yield lower returns than a duplex in a prime position.
Pros & Cons of Accessory Dwelling Units
Accessory Dwelling Units (ADUs), often known as granny flats, in-law suites, or backyard cottages, have grown in popularity as a real estate strategy. When considering building and renting out an ADU, weighing both the advantages and challenges is essential. If you’re deciding between investing in a condo or a single-family home, the ability to add an ADU on the detached home’s property is a major factor.
On the positive side, ADUs can provide an additional income stream, help homeowners offset their mortgage payments, and increase the overall property value. They also play a role in addressing housing shortages in dense urban areas by providing more affordable housing options. Moreover, they offer flexibility: homeowners can use them for family members, as guesthouses, or even as personal spaces like home offices when they're not renting out to tenants.
However, on the flip side, building an ADU demands an upfront investment and can sometimes come with complex zoning and permitting processes. Not every ADU guarantees a high return on investment; its profitability largely depends on the property's location and local rental market conditions.
Questions to Ask Before Choosing a Multi-Family Size
Will the Property Be Owner-Occupied?
When considering an owner-occupied multi-family investment, deciding how many units to have in the property becomes particularly pivotal. A duplex might be enticing for the investor seeking a more intimate setting, effectively balancing private living and close oversight.
Triplexes and quadplexes offer a middle ground, permitting a degree of separation from tenants while maintaining a presence. However, as the number of units increases, so does potential rental income, which may sway some towards quadplexes. Yet, the more units involved, the more complex property management can become, even if living on-site. The ideal number of units will largely depend on the investor's comfort level in balancing personal space with the responsibilities and benefits of being both a landlord and neighbour to their tenants.
Will You Self-Mange or Hire a Property Management Company?
The decision between self-managing a rental property and hiring professional property management can significantly impact an investor's choice in the size of their multi-family investment.
Self-management, while cost-saving, demands hands-on involvement—from tenant vetting and rent collection to addressing maintenance issues and handling lease agreements. This approach may be more feasible and attractive to investors considering duplexes due to the fewer units and, thus, reduced management tasks. On the other hand, triplexes and quadplexes, with their increased number of units, present more complex management dynamics. While self-managing larger properties can yield higher profit margins, it also requires more time and effort.
This is where professional property management can be advantageous. By outsourcing these responsibilities, investors can enjoy the income benefits of a larger property without the day-to-day hassles. However, this comes at a cost, usually a percentage of the monthly rental income.
What's the Right Size For Your Multi-Family Investment?
Selecting the right size for a multi-family investment is more than just crunching numbers—it's a multifaceted decision that intertwines financial goals, management preferences, and long-term vision. From the intimacy of duplexes to the broader scope of quadplexes, each option offers its unique blend of opportunities and challenges. By thoroughly understanding the nuances of each multi-family type, aligning them with your objectives, and factoring in management style, you'll be better equipped to make a choice that amplifies income and aligns with your time commitment preferences.
Ottawa Multiplex Resources
- How Many Units Should My Multi-Family Rental Have? Pros & Cons of Duplexes, Triplexes & Quadplexes
- 5 Pros & Cons of Turning a Single-Family Home into a Duplex: Buy New Or Convert?
- Should I Live in My Investment Property? 5 Pros & Cons of Owner Occupied Rentals
- Search Ottawa Multi-Family Homes For Sale