It’s Scary – But, There is a Method

I’ve met a lot of people who, for the lack of a better phrase, are afraid to buy a multiplex.  You think I am going to poke fun of them or diminish their fears in any way?  Not a chance – people are right to be afraid.  A multiplex is a “business in a box” with numerous moving parts and lots of ways to mess up.  Folks are right not to take the notion of purchasing a multiplex lightly.

I want to tell you, however, that there is a method to this madness, which is the topic for today.  My intent for this article is not to get sucked into the infinite minutia, which, for me is easy to do, but to provide you with a bird’s eye view with a few broad strokes of the rhetorical brush which will give you some peace and confidence about buying a multiplex.

As the title suggests, there are 4 macro-elements that I want you to focus on when looking for a building:

1. Ease of Purchase

First of all, if you can’t afford to buy it, then nothing else really matters.  As such, Ease of Purchase is the number one concern.  In this you are limited by 2 elements:

  • Down Payment
  • Financing

Naturally, owner-financing has the greatest potential to accommodate both.  But, if this is not an option then the next best thing is a conventional 30-year amortized Mortgage.  Well – the secondary market residential loan qualifying standards preclude this type of a mortgage for anything over 4 units, and as such you are automatically looking for either a duplex, triplex, or 4-plex; anything larger than that and you’ll have to play on the commercial side where the amortizations are shorter and interest rates are higher.

So, for your first building, unless you can achieve owner-financing, I suggest that you stay with either duplex, triplex, or 4-plex, each one of which has strengths and weaknesses which are balanced in the following 3 points in this article.

2. Cash Flow

Well – this should be pretty easy.  Cash Flow is why we buy buildings, so if there’s no cash flow then it doesn’t matter how easy it is to buy it – right?  In fact, if there is no Cash Flow in the deal this may be exactly why it is so easy to buy the building lol.  Simple stuff…

I’ll give you one personal preference of mine – take it or leave it.  I like triplex configuration.  Why?  Because it affords more and more stable cash flow than a duplex, while at the same time it is easier to manage than a 4-plex, which takes me into my next point:

3. Ease of Management

Ease of Management is always a concern and much more so if this will be your first baby.  A ton of things can be discussed under the umbrella of Management – let me say two things:

A 4-plex configuration more often than not requires a 2-story structure with 2 units down and 2 up.  This has several disadvantages when compared to a triplex, which can often be found in a ranch-style design.

Also, we are looking for Stable Passive Cash Flow, which means that we want our tenants to stay in our units as long as possible.  In short, this is a function of the unit having a “feel” of home and not just some place to crash for the night, which is easier to accomplish in a ranch-style triplex for many reasons – enough said.

4. Ease of Liquidation

Even if you are not planning on selling this building any time soon, you need to remember to consider this aspect.  Why is the potential buyer going to choose to buy this building from you in lieu of another?  Make sure you answer this question before pulling the trigger, because you may not want to sell, but you may need to!