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Buying a Fourplex: What You Should Know About Buying a Multifamily Property

Buying a Fourplex: What You Should Know About Buying a Multifamily Property
sara li cain Contributor

You’ve thought about buying a single-family home. Maybe you’ve even purchased a house or two. But have you ever considered buying a fourplex?

Fourplexes are multifamily properties, meaning that four separate tenants or families can live in the building with their own fully-equipped living spaces. Buying a fourplex is a great way to get started with real estate investing, since you can live in one unit while renting out the others.

A fourplex can be a stepping stone toward building a real estate portfolio and earning additional income.

What's in this Article?

What is a fourplex?
How to buy a fourplex
Can you buy a fourplex with an FHA loan?
What should I know before buying a fourplex?
How buying a fourplex can help you build wealth
Pros and cons
Frequently asked questions

What is a fourplex?

Also known as a quadplex, a fourplex is a type of multifamily property consisting of four units individually connected under one roof.

Fourplexes can be great options for getting started with real estate investing, especially if you plan to live in one of the units. If it will be your primary residence, you can buy with a 5% down conventional loan, a 3.5% down FHA loan, or a 0% down VA loan. While you must live in one of the units, you can rent out the other three.

Not only does this allow you to purchase the property with less money down and a lower interest rate than if you bought it with an investment property loan, it also lets you ease into becoming a landlord.

Since you’ll also live on the premises, you’ll see right away when something has broken down or needs repair. You’ll also be able to develop a relationship with your tenants, since you’re likely to see them often.

You can learn the ins and outs of property management while living on the property, and that can give you a feel for what it takes to manage future real estate investments.

Of course, you don’t have to buy a fourplex with the intention of renting it out. Some people buy multifamily properties – whether that’s a duplex, triplex, or fourplex – for multigenerational living. They live in one unit while their parents, children, siblings, or other relatives live in the others.

How to buy a fourplex

“Buying a fourplex is the same process as any other mortgage, other than that it’s an income-generating property,” says Jodalee Tevault, a senior mortgage consultant with Fairway Independent Mortgage Corporation in Chandler, Ariz. (Fairway owns 

You’ll need to get preapproved* for a loan, which means your lender will look at your credit score, debt-to-income ratio (DTI)**, income, and assets to determine which loan programs you qualify for and how much you can borrow.

The difference with a fourplex is that your lender can use the projected income from the rental units toward your qualifying income.

“We will order an appraisal with a rental income analysis, and we use that income to help you qualify,” Tevault says. “So it’s not hard to qualify for a fourplex because the rents usually offset the payment.”

“It’s not hard to qualify for a fourplex because the rents usually offset the payment.”

Jodalee Tevault, senior mortgage consultant

Primary residence vs investment property loan

You can buy a fourplex as a primary residence or an investment property. The loan qualifications for an investment property are steeper than for a primary residence, which is why the latter is an easier way to get into real estate investing, especially for a first-time homebuyer.

Let’s take a look at how they compare.

Loan options

You can use an FHA, VA, or conventional loan to buy a fourplex as a primary residence. But the FHA and VA do not back investment loans, so you can only use a conventional loan to purchase an investment property.

Credit score requirements

The credit score requirements for a primary residence loan are:

  • FHA: 580
  • VA: 580
  • Conventional: 620

For a conventional investment loan, you’ll need at least a 620, though many lenders have higher credit score requirements for investment properties. You may need a 640 or even a 700 minimum score to qualify.

Down payment requirements

There are several low down payment options for buying a fourplex as a primary residence:

  • FHA: 3.5%
  • VA: 0%
  • Conventional: 5%

The down payment requirement for an investment property loan is much higher. To buy a fourplex as an investment property, you’ll need at least 25% down.

Interest rates

Interest rates depend on several factors, including your credit score and down payment. But at a baseline, interest rates for investment properties are higher than for primary residences. So, in addition to needing a higher credit score and more money down, you’ll also pay more in interest.

But even if you buy a fourplex as a primary residence, you could pay a higher rate. According to Fannie Mae, there’s a fee of 1.0% for 3-4 unit properties, which likely translates into 0.125-0.50% hike in the mortgage rate.

If you’re buying with an FHA or VA loan, there are typically no interest rate increases, but check with your lender to be sure.

Cash reserves

You typically do not need cash reserves for a mortgage on a primary residence. But if you take out an investment loan, you will need several months of reserves in cash or other assets, such as stocks and bonds, the cash value of a life insurance policy, gift funds, or proceeds from the sale of other assets.

If you currently have six or less financed properties (meaning properties on which you’re paying a mortgage), you’ll need two to six months of cash reserves for each property. If you have between seven and 10 financed properties, you’ll need six months of reserves per property and a 720 or greater credit score. Cash reserves include the entire monthly mortgage payment for each property, including principal, interest, taxes, and insurance.

Alternative financing options for fourplexes

If standard mortgage loan options aren’t a fit for you, there are alternatives:

  • Portfolio loans: Some mortgage lenders offer portfolio loans, which they keep in-house rather than selling them to servicers or investors.Portfolio loans can be a good option for borrowers who have faced financial woes such as bankruptcy and have lower credit scores because of it. The drawback with portfolio loans is that they typically have higher interest rates and fees
  • Owner financing: In an owner financing agreement, the seller agrees to finance your home purchase, rather than a mortgage lender. However, these types of loans usually have high interest rates and short repayment terms, so borrowers often make a balloon payment or refinance to a more affordable loan
  • Home equity loan or cash-out refinance: If you already own a property in which you have significant equity, you may be able to take out a home equity loan or cash-out refinance loan and use those funds toward purchasing your fourplex. Keep in mind that this can be a risky move, since you’re increasing the amount of debt secured by your home. If you can’t keep up with payments, you may be at risk of losing that property

Learn more: Investment Property Mortgage Rates: What Should You Expect To Pay?

Can you buy a fourplex with an FHA loan?

Yes, buying a fourplex with an FHA loan is an option. The FHA allows lenders to approve qualified borrowers to buy properties with up to four units, as long as one of the units will be their primary residence. That means you must live in the fourplex most of the year.

“The benefits are living in a home while others help you pay your mortgage – and you have your own space,” says Garett Seney, a Fairway mortgage advisor in South Boston. “Over time this will become supplemental income as you build your real estate portfolio.”

“The benefits are living in a home while others help you pay your mortgage – and you have your own space.”

Garett Seney, mortgage advisor

The FHA does not offer investment loans, but it does allow homebuyers to buy a fourplex and rent out the other three units for income.

To take out an FHA loan, you’ll need a credit score of 580 or higher and a down payment of at least 3.5%. You can use gift funds or down payment assistance to cover some or all of your down payment and closing costs.

FHA loans have an upfront and annual mortgage insurance premium (MIP). The upfront MIP is 1.75% of the loan amount, and you either pay it as part of your closing costs or wrap it into the loan. The annual MIP rate depends on your loan amount and down payment, but most FHA borrowers pay an annual MIP of 0.85%.

Learn more: FHA Multifamily Loan: Start Earning Rental Income

What should I know before buying a fourplex?

“A fourplex is a great long-term investment for anyone,” Tevault says. But there are a few things to think about before you commit to buying a fourplex.

Will you be able to find tenants for all of the units?

It’s important to understand the real estate market in the area where you’re buying a fourplex. Is there high demand for rental properties? What is the average rent for units similar to the ones you’ll own? Look around on Zillow and Craigslist to discover average rents for similar units. Find a real estate agent who specializes in investment properties, and better yet, multi-unit investments.

Spend time learning about the area, including visiting property locations, reading up on rental trends, and learning how to market your future property to tenants. Consider the local amenities, services, and resources as well, because these may affect your rental pool and how much you’ll be able to charge.

Do you want to manage tenants?

Unless you’re buying a fourplex with people you know who will live in the other units, you’ll need to find and manage your tenants. That means collecting rent, answering questions, addressing noise complaints, and other renter concerns. Consider whether you’re up for those responsibilities, and be honest about whether you have the time to commit to tenant management. If you don’t, you might want to hire a property manager to help out with the units you’re renting.

Are you prepared for the maintenance costs?

As the property owner, you’ll be responsible for maintenance and repairs. Make sure you’ll collect enough rent to cover future capital improvements. The real estate investment website BiggerPockets has a calculator with which to estimate all future costs. If the calculator shows a significant loss each month, you may want to reconsider the purchase. Ideally, your rental income will cover the mortgage payment plus all expected (and unexpected) expenses. If not, you’ll have to pay for those out of your personal savings.

Everything property-related will fall to you as the owner, so make sure you have the money and time to commit to these tasks. Or, again, consider working with a property manager who can handle many of these details for you (though you’ll still need to pay for the maintenance and repairs). Be sure to factor in property management costs, though. They run about 10-11% of your gross rental income, so they are not cheap.

Do you know the rental laws in your area?

Study up on local laws about property management and landlord responsibilities. You want to know exactly what’s expected of you as a landlord so you don’t run the risk of costly fines or legal issues. You’ll also want to consult with a lawyer to draw up your rental agreements to make sure your property and interests are protected once you begin renting out units.

“A fourplex is a great long-term investment for anyone.”

Jodalee Tevault, senior mortgage consultant

How buying a fourplex can help you build wealth

Buying a fourplex can help you build wealth in two ways. One is the rental income you receive (minus the expenses it’ll cost to maintain the property), which you can save or invest.

The second is through the equity in the property. As you pay down your mortgage loan, your equity will grow, and you can borrow against it using a cash-out refinance or home equity loan or line of credit. You can use that money to purchase additional rental properties and repeat the same process with those.

The profits you earn can be used however you choose, including for other wealth-building purposes such as paying off high-interest debt, renovations, and higher education expenses.

Learn more: Why Homeownership Holds the Key to Wealth Creation in America

Pros and cons of buying a fourplex

Pros Cons
Opportunity to earn rental incomePotentially high upfront costs if using an investment property loan
Low down payment options if you’re living in one of the unitsRisk of vacant units and loss of rental income
Good way to build wealth through property equityMore maintenance and repair costs and responsibilities

Is buying a fourplex a smart decision?

Purchasing a multifamily home is a major commitment, but it can be a great investment if you go in with eyes wide open. As long as you’re prepared to take on the landlord role, or you’ve assembled a network of real estate professionals who can help you, buying a fourplex can open doors to real estate investing and strategic wealth creation.

Find out how much home you can afford here.  

Buying a fourplex FAQs

Is it hard to buy a fourplex?

Not necessarily. If you plan to live in one of the units, you can buy a fourplex with a low down payment mortgage loan, such as a 3.5% down FHA loan, 0% down VA loan, or a 5% down conventional loan. The homebuying process for a fourplex is the same as for a single-family home.

If you buy a fourplex as an investment property, you can apply for a conventional investment loan. However, lenders may have higher credit score requirements, and you’ll need a down payment of at least 25%. Additionally, you’ll need to have cash reserves available.

Is buying a fourplex a good idea?

Buying a fourplex can be a good investment if you’re financially prepared to maintain and repair all of the units and you’re confident that you’ll be able to rent them out. Multifamily properties are a great way to build a real estate portfolio and earn rental income, but you need to do your research on the local rental market and run the numbers with a trusted financial advisor to ensure you’re ready for the commitment. 

Can I use an FHA loan to buy a fourplex?

Yes, you can use an FHA loan to buy a fourplex as long as you will use the property as your primary residence. In other words, you need to live in one of the four units, though you can rent out the other three.

Fairway is not affiliated with any government agencies. These materials are not from VA, HUD or FHA, and were not approved by VA, HUD or FHA, or any other government agency.

*Pre-approval is based on a preliminary review of credit information provided to Fairway Independent Mortgage Corporation, which has not been reviewed by underwriting. If you have submitted verifying documentation, you have done so voluntarily. Final loan approval is subject to a full underwriting review of support documentation including, but not limited to, applicants’ creditworthiness, assets, income information, and a satisfactory appraisal.

**Debt-to-income (DTI) ratio is monthly debt/expenses divided by gross monthly income.

Further Reading

What’s the Minimum Credit Score For a Conventional Loan?

Conventional Loans vs. FHA: Which Mortgage is Better?

Conventional Loan Mortgage Rates: Are They Rising In 2021?