Two-to-Four Unit Residences

Homes with two to four residences are generally considered to fall under the category of Residential Real Estate, just as single family homes.

Acquisition Considerations

  • These properties may be owner-occupied, which typically are in better condition than those occupied just by tenants.
  • Accessibility is a huge issue and the property should be inspected with these requirements in mind.
  • In our area landscaping can greatly affect the operating expenses. Big lawns and shrubs, while great for curb appeal and obtaining new tenants, come at a price of higher water and gardener bills. It is a good idea to ask for copies of water bills to review.
  • Pools also can garner higher rents, but the operating expenses are typically higher between insurance, maintenance and water. There are also legal considerations, such as the California’s Swimming Pool Safety Act of 2007 (which may require an anti-drowning feature).
  • Existing leases for existing tenants usually survive the sale. So, if you want to occupy one of the units, make sure you understand the leases that exist.
  • In fact, you need to understand the leases that exist in any case. The terms of those leases (such as who pays for what) will affect your Cash Flow Before Taxes.
  • A lender will ask for an estoppel certificate to confirm with the tenant their understanding of the lease.
  • Check for illegal units. We have seen a number of four-unit properties that are only permitted for three.
  • Laundry room facilities can be expensive if repair or replacement is needed. Additionally, the machines are sometimes leased and that will affect the sale and Cash Flow.
  • Parking areas should be inspected to make sure they are up to health and safety standards. It should also be clear who can park where, and if there is storage, who can put stuff where.
  • Trash containers should be adequate for the need.

 

Advantages

  • The lower opportunity cost (compared to a five-unit or more apartment building) is appealing.
  • Lenders often treat these the same as a single family home – they are less complex than Commercial Real Estate and they view them as less risky.
  • Similar to above, there are more lenders available. Because they are categorized as Residential Real Estate, nearly all lenders who lend on single family homes will lend on them. This is definitely not the case with properties considered Commercial Real Estate.
  • Appraisal fees are typically lower.
  • Some investors decide to become owner-occupants and can manage the properties themselves.
  • Managing these properties is much simpler and creative options such as charging less rent to a tenant for janitorial services is possible.
  • Tenants who want to live in single family homes, but cannot afford the rents to go to those, are drawn to these types of properties.
  • Because of the more ‘single family home feel’ to these, tenants are generally less demanding and treat their space as their home much more than a typical apartment tenant.
  • Unlike a single family home, there is still a cash flow when there is a vacancy.
  • When it comes time to sell these properties, they are much easier than commercial properties. This has to do with both the number of agents who see them (because they are considered Residential Real Estate) and the number of prospective buyers who are considering becoming owner-occupiers.

 

Disadvantages

  • While the financing terms are better than Commercial Real Estate, they do require more down payment and higher interest rates than single family homes.
  • Because more tenants equal more likelihood of issues, repairs and maintenance are higher than single family homes. And because of proximity noise disturbance issues may occur.