November 28, 2022

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Professional Real Estate Experts

How To Buy a Triplex & Is It a Good Investment

How exciting does “buy one and get three” sound to you? That is largely what you get when you invest in a triplex. Buying a triplex gives you the luxury of owning a building containing three separate dwelling units. You can either rent out all three units or live in one of them if you wish.

If the idea of purchasing a triplex sounds interesting to you, then you are at the right place. The purpose of this article is to serve as a guide for real estate investors interested in buying triplexes. We cover what triplexes are, how to buy a triplex and other questions investors interested in triplexes have.

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What Is a Triplex?

A triplex is a single building with three separate dwelling units. All three units are under a roof. Some triplex buildings have the units built beside each other while others are stacked on top of each other forming a three-floor building. Depending on how the triplex is designed, there can be one or more common walls. For a stacked triplex, the three units share a common elevator or staircase.

Each dwelling unit is independent of the other. Each unit has its own unit number, utility meters, kitchen, bedrooms, living room, and a separate door leading outside. Though these units are separate, an investor buys the property as a whole, not a unit at a time. You can rent out the three units or live in one and rent out the other two. Buying a triplex and living in one unit offers you more financing options and lower interest rates.

Is a Triplex a Good Investment? (Pros & Cons)

Below are the pros and cons of buying a triplex.

Pros

1. Multiple rental income streams

If you are interested in a multi-family property with a healthy cash flow, then investing in a triplex is a smart option. Compared to a single-family home which gives you a single rental income, a triplex gives you three rental income sources or two if you live in one of the units. Multiple income streams relieve the burden of mortgages and other expenses.

2. Can be owner-occupied

Purchasing a triplex makes practicing house hacking very easy. You could live in one of the units and rent out the other two. Aside from that, the rents paid by the tenants pay a large percentage, if not all, of the mortgage and other expenses. Also, an owner-occupied property can enjoy an FHA loan which requires a lower down payment and a more favorable interest rate than commercial loans.

3. Less vacancy risk

A single-family property is at a higher vacancy risk than a triplex. When a single-family property is without a tenant, the rental income is zero and you have to pay the mortgage out of your pocket. That’s a loss. With a triplex, you can’t have zero rental income unless all your tenants move out at the same time.

For example, if you rent each unit for $2000 and one of the units is empty, you still get to make $4000 to help cover the mortgage. Even if just one unit is rented out and you live in another unit, you’d still receive $2000 which will relieve the burden of the mortgage. Overall, the chances of having a 0% monthly income on a triplex are very low.

4. Consolidate maintenance expenses among multiple units

One of the perks of multi-family investing over single family is that landscaping, exterior maintenance, roofing and other general maintenance costs can be consolidated.

For example, it’s a lot cheaper to repaint a triplex than to repaint three single family homes. Having only one building as opposed to many can greatly reduce a landlord’s maintenance costs.

Cons

1. Triplexes are expensive

Generally, purchasing a triplex is more expensive than a duplex or a single-family property since they contain extra units. Investing in a triplex might seem beyond the means of investors without enough savings to cover the down payment. Even if you are applying for a loan, a larger mortgage will be required. As a result, you may end up paying a high-interest rate on the loan, which will affect your ROI.

However, if you do not mind joining hands with other like-minded investors, you could join resources together to purchase a triplex.

2. Difficult to sell

The tenants of a triplex will come in at different times therefore, they would have different lease end dates. You have to wait for all tenants to vacate the building before you can put the property on the market for sale. Also, since a triplex is more expensive and can only be sold to investors, it might be a bit harder to exit your investment than with a SFH or duplex.

3. It can be uncomfortable living with tenants

If you choose to do house hacking and live in one of your triplex units, you may have a loss of privacy. Though living in a triplex gives more privacy than an apartment building, you might have to share walls, the driveway and outdoor space with your tenant. Tenants will knock on your door directly for repair requests. There might be a quarrel between your tenants; you can’t turn a blind eye to them. You have to be ready to tend to matters that don’t directly concern you.

4. Tenant turnover is higher

Triplexes have a higher turnover because many people see them as short-term rental properties and view single-family homes as long-term rental properties. As soon as families living in triplexes get enough money to buy a single-family home, they move out.

5. Limited options

Even though triplexes are very desirable investment options, the number of triplexes you will find on the market is notably less than single-family homes, duplexes, and fourplexes. Therefore, if you are specifically searching for a triplex, you will have a difficult time finding them especially if you don’t know the right place to look.

How Much Does It Cost to Buy a Triplex?

The price of a triplex depends on some factors. Location, how big the triplex is, what material the triplex is built with, the utilities offered and the condition of the triplex affect the price at which a triplex will be listed.

One way to assess the cost of buying a triplex is to use the replacement cost. The replacement cost is the cost per square foot for building a triplex in a specific location and with the same features.

According to Fixr, the average cost per square foot to build a triplex ranges between $95 and $220, depending on the location and layout of your unit. Fixr estimates that it costs over $787,500 to build a triplex in the US, on average. This price can vary based on the size of your units and amenities included.

Zillow data shows that the average triplex with 4 beds and 3 baths in New York costs between $600,000 and $1.5 million dollars.

Comparative analysis is your most reliable shot at arriving at an estimate. You can use any of the off market property search tools and search out the prices of triplexes in your area to get an estimate.

8 Tips for How to Buy a Triplex

1. Get Financing

The first step towards purchasing a triplex is sorting out your finances. There are different financing options for you to choose from. The availability of these options will depend on whether the triplex will be your primary residence or not.

Conventional Financing

Conventional mortgages are suitable for owner-occupants and investors. Conventional mortgages conform to underwriting guidelines established by the government-sponsored mortgage giants Fannie Mae and Freddie Mac. For mortgage approval, a down payment of 20% is needed if you intend to live in one of the units, otherwise a 25% down payment will be required.

When you’re looking for a mortgage lender, be sure to ask about the maximum loan amount they will approve.

Many conventional lenders consider the number of units in your home when determining what maximum loan amount they will approve. Generally, multi-unit homes would have higher loan limits than single family homes.

For example, a Riverside County, Calif., homeowner can borrow up to $442,750 for a single-family residence, but up to $851,450 for a four-unit property.

FHA Loan

An FHA loan allows investors with low credit scores to take out a loan with as little as 3.5% down. To qualify for an FHA loan, you have to make the triplex your primary residence. To get an FHA loan with 10 percent down, you’ll need a credit score between 500 and 579. For an FHA loan with 3.5 percent down, you’ll need a score of 580 or higher.

VA Loan

VA loans are not intended for investment properties, so you can only finance a multi-unit property if the qualifying applicant plans to live in one of the units. VA loans are suitable for those serving in the military, veterans, and their spouses.

HUD Multi-Family Loans

For seasoned real estate investors with solid financial standing that are willing to submit to annual audits, you can get a HUD loan of up to $1 million to buy a multi-family investment property.

Owner Financing

Owner financing is a suitable option for buyers who don’t have a good credit score. Instead of getting the usual mortgage loans, the owner of the property finances the deal; so you can buy a house without having to wade through the hassle of getting pre-approved for a loan.
The seller often lists a higher property price or charges higher interest rates because of the risk involved.

2. Search for Triplexes

There are different ways to search for a triplex property. One way is to find a Realtor or join a real estate investment network like Realwealth to get alerts about great deals in your market or a market you’d like to buy in. You could also do a quick “Triplex for sale near me” Google search.

Another way is to drive around your city and look for “For Sale” signs on triplex buildings. You could also talk to multifamily real estate agents and find out if they are aware of any triplexes on the market. In addition, let your friends, family, and other real estate investors know that you are looking to buy a triplex.

3. Assess the building’s location and condition

Location is a crucial factor in real estate investment. After crossing the big hurdle of finding a triplex building, you have to check out the building’s location and condition. You don’t want to invest in a triplex in a city that has a negative population growth.

Also of significance is the condition of the property. If the property is too damaged, move on. The time and financial costs may not be worth it.

4. Hire a home inspector

Compared to single-family buildings, triplexes are more complex and sometimes are not built correctly. Utilities that should be present in individual units might be shared; this will pose serious problems in the future and even cost you tenants. A professional house inspector will provide a detailed state of the building and what needs to be repaired. Also, a detailed inspection will come in handy during the negotiation. If the building has severe problems, you should back out of the deal.

5. Examine the seller’s pro forma

A pro forma is a detailed financial analysis of a property showing data including rental income, vacancy rate, repair expenses, and, the net income for the property.

To evaluate the feasibility of a deal, it is essential you also develop your pro forma and compare it with the seller’s pro forma. A pro forma should contain the gross rental income (how much will the property make if it was 100% occupied?), Vacancy allowance (what is the cost of vacancies?), the other income sources.

It should also contain operating expenses and NOI (Net operating income, i.e. gross income – operating expenses before taxes)You can verify the seller’s pro forma from their accounting records or property tax returns.

6. Do a comparative market analysis.

For comparative market analysis, similar buildings in close proximity that have recently been sold are compared to estimate the value of a building. Using a website that lists properties, you can get an estimate of how much a triplex should cost. So you can avoid overpaying. A seasoned real estate agent can help you with a comparative market analysis.

However, it is important to note that a comparative market analysis does not inform you of important metrics such as cash flow or ROI.

7. Run the numbers (NOI, property expenses, cash flow, cap rate, vacancy rate)

Before investing in any real estate property, it is crucial to analyze the potential return on investment. An investor has to be satisfied with metrics such as NOI, property expenses, cash flow, cap rate, and vacancy rate before making an offer to purchase a property. To calculate these metrics, you can use an online investment calculator. If you prefer to do the calculations by yourself, here are quick explanations of the key metrics.

  • Cash Flow: It is the difference between the monthly rental income and the monthly expenses of an investment property.
  • NOI: Net operating income is the amount left after subtracting expenses from the gross rent.
  • Capitalization Rate: Cap rate is the ratio of the net operating income (NOI) over the property’s value. Investment property with an NOI of $10,000 and a value of $100,000, would have a cap rate of 10%.
  • Cash on Cash Return: Cash on Cash Return measures the returns investors make per year on a property in relation to the amount they paid on their mortgage that year. It’s important to note that this measure only applies to investments that involve long-term debt borrowing.

8. Make an offer

If you are satisfied with the potential return of a triplex building, it is time for you to make an offer. Keep in mind that other investors are also after the same building. Especially in today’s competitive market, you’ll need to act fast and be prepared to make some concessions to win the deal. You should submit an offer as soon as you are satisfied with the analysis.

How to Find Triplexes for Sale Today

1. Hire a real estate agent

As said earlier, triplexes are less common than single-family homes and duplexes. Therefore, they are difficult to find. Searching online for a property to buy has become popular but when it comes to a scarce property like a triplex, you would have an added advantage if you hire a real estate agent who is familiar with the market in your target market.

2. Use your local REIA

You can take your real estate investing business to the next level with the help of your local REIA (Real estate investors association). There will be plenty of opportunities to network with potential business partners, investors, cash buyers, sellers, private lenders, agents, wholesalers, mentors, and a variety of real estate industry professionals.

Attending REIA Meetings will allow you to learn, grow, network, and build relationships with all types of real estate professionals in your local market. You’ll also get information and partnership opportunities for new SFH, multifamily or triplex deals.

3. Use Craigslist

The ‘housing’ section of Craigslist would be of interest to you as a real estate investor. Craigslist offers a lot of filtering options to help you narrow down your search. You can take your search further by using relevant keywords that properly describe the property of your interest.

4. Driving for dollars

Real estate investors use the term “driving for dollars” to describe driving around specific neighborhoods looking for off-market properties that their competitors haven’t found yet. Despite the fact that driving for dollars isn’t the most efficient way to search for properties, many real estate investors use it as a supplemental marketing strategy for finding potential deals.

All you have to do is choose a target location, prepare for the drive, look for triplexes with signs of distress, and take notes and pictures. After the drive, research each property and contact its owner.

5. Browse real estate listing websites for investors

Using a real estate listing website has become a popular method to search for properties. Using websites such as Zillow, Realtor, and Foreclosure, you can search for triplexes in your target location. These websites make things easy by allowing filtering options like location and price range that help you narrow down your search.

Also, the websites are very useful for comparative market analysis; since you can view many properties on a single page.

6. Join RealWealth

RealWealth is a real estate investment club that has helped over 63,000 members build wealth with real estate since 2003. We connect our members with property teams selling real estate, including single-family and multi-family rental properties across the country in markets such as Florida, Ohio, Georgia and Texas. You also get access to a RealWealth investment counselor who can help you create a plan for building your real estate portfolio as well as a network of other investing resources, including attorneys, CPAs, lenders and more. Become a member today for free. 

Conclusion

Like any investment, triplex investing comes with its own pitfalls. You have less privacy and a more difficult exit strategy than in single family home investing. But the upside is that you enjoy higher cash flow and lesser vacancy risk.

Whatever your investing goals, it’s important to plan them out carefully. In addition, it’s wise to talk to an investment counselor who can help you navigate the waters of either triplex investing or single family investing. Realwealth offers everything you need for successful real estate investing. Click here to join now!

The post How To Buy a Triplex & Is It a Good Investment appeared first on RealWealth.