If I have a first time home-buyer that mentions the word, “investment,” I immediately want to have the conversation of going multi-family. Multi-family is a term us in the biz use to describe a residential property with multiple dwelling units.
Sure, you can rent out a single-family home on a conventional loan and perhaps cash flow a little (there are better ways to get into single family homes by the way, we’ll save that for a later date), but would you want to do that? The cash-on-cash return is horrible and most of the numbers don’t make sense for investment purposes.
If you are going to invest in real estate in Alaska, you can bet your bottom dollar the buy and hold strategy works immensely better with multi-family units. Not to mention the re-sell value on a duplex up to a fourplex is insane, and the market audience is huge! Duplexes on the West and South side of town are insanely high right now. I can attest that I just saw a duplex near Turnagain, no garage, not that big, go for $500k. What?!
There are some downsides to this though. You have to be comfortable being a landlord, you should have some extra money in your pocket (incase you wake up in the middle of January and notice it’s -20 below in your house) and think about whether or not you want to give up 10% of your rental income to a property manager when you move out so you don’t have to deal with the headaches.
Below is something I wrote for a client a while back that just lets you know a few items of discussion for multi-family homes, going down to a single-family home for future investment.
Fourplex (Triplex)– Number one option
Note: A triplex can fit in this category, they MAY cash flow, probably not, but it will be a very property dependent thing. Typically speaking, they are MUCH better cash flow wise than a duplex.
1. Generally, you will live for FREE and/or cash flow $100-$300 a month. Sometimes you may cash flow even more, but on a good deal that is generally the norm. I would typically not put any of my owner-occupy clients in something that does not allow them to live for free (unless there are other factors that permit such). P.S. when you rent out your last unit after a year, you will generally be cash flowing upwards of $1,000 per month.
2. You build more equity. If you are leaving in a short amount of time, use a VA or FHA loan; you typically will not build much equity in a couple of years. However, if you are purchasing a bigger property, with a bigger mortgage, that cash flows, you can pay down the loan fast and/or receive more equity in the same amount of time. For example, if you get a $200,000 house, in two years you might walk away with $7,500 with a VA or FHA loan in two year’s time. If you get into a $400,000 multi-family, you might walk away with around $20,000 in two year’s time, or more if you’re aggressive.
3. They allow for more leverage. If you upgrade in a year, you could fully rent it out and cash flow, making you money. You could use the equity you build in it for other endeavors in the future, including getting into another property in another place, taking out a HELOC (Home Equity Line of Credit) to help with other endeavors….the list goes on.
Duplex – Option number two
1. You won’t have to pay such a big mortgage. You could get into a home you feel comfortable in with in an area you like. Having some one help build your equity in your home is awesome.
2. Less upkeep. Generally, your tenants are going to be responsible for their lawn, snow removal and general maintenance.
3. You build better equity than a single family home. Just like the four-plex analogy earlier, you put more money towards your purchase price, giving you more equity of time.
4. More bang for your buck. Sharing walls, city electricity and plumbing, you can get more for your money. A single family home has nothing shared and you will be paying for it! I always tell people single family homes are forever homes.
Single Family Home – Option number three
1. It’s more comfortable for a family. A single family home has its upside on personal preference, and comfort. Although it might not make you a bunch of money, it will improve the quality of your life and give you the privacy that you are looking for. There is no dollar amount that can be put on quality of life.
This is a quick little snippet into the multi-verse as I call it. Of course there’s a lot more to it than this, but it should get your gears spinning. If you read this and it makes you smirk with the thought of living for free, multi-family is for you. If just received a pair of clammy hands and cold-chills from the thoughts of being a landlord, single family might be the way to go.
Like I said, being a landlord isn’t for everyone, and investing in real estate in Alaska isn’t for everyone. There are many ways to build your wealth and your future.