Quadplex: 4 reasons you should take advantage of this real estate loophole

I have developed a recent obsession with quadplex buildings as an amazing real estate tool and I want to tell people all about why I have fallen in love with them.

I have a quest to make my home less of a burden. It’s not just that I hate raking leaves, organizing the garage, and shoveling the driveway. I want to break away from the financial burden of owning a home when I want to travel. 

How I’m going to do that I’m not exactly sure, but I’m eyeing the idea of buying and living in a quadplex. They seem to make for great real estate investments and the ultimate lucrative home. 

We’ll be talking about:

Renting vs Owning (Do both!)

There is a debate about whether us millennials should own or just rent forever. I’m not solidly on one side or the other yet but if I only need to pay for a small fraction of my home’s costs, I’d be in financial heaven. 

I didn’t invent the concept of renting out part of your house, but I am a recent convert. What gives?

What is a quadplex?

Everyone has heard of a duplex. Well the “du” is for Duo-Plex or 2-plex – a house with 2 units. Triplex is a common term too for 3 unit houses.

Then quadplex is the awkward way to say 4-unit house which sounds like a wrestling move, yet somehow isn’t! Sometimes quadplexes are also called quads.

4-plex-meme-quads

If you decided to rent out your basement, you’re just a regular homeowner with some side-money coming in. With a quadplex it’s the same thing, the rules are the same, except most of your house is a virtual basement. It changes the game drastically!

The real magic is that as far as the banks are concerned it’s still just a normal house which means they still give amazing financing.

A 5 and 6-plexes exists too but it doesn’t have the special features you’ll see below.

After quadplexes you tend to enter ‘commercial’ AKA ‘commercial apartment building’ financial rules which are much more complicated and questionably less lucrative.

4 reasons for quadplexes

1. It’s easy to get a loan against a quadplex

The financing is simple. It’s just as if you were buying a home for yourself. If you’ve taken on a mortgage before you have already been through the same process. 

No extra paperwork needed.

In fact a quadplex is the most units you can have in one building and get financing under conventional loans. 

They can be FHA and VA backed too. The finance term for this is a conforming loan which means it meets government qualifying standards for government organizations to buy the loans up. Sounds irrelevant? It is except that it improves rates and terms for you which is VERY relevant.

5-plex or 6-plex. No luck there. Too many units so you are getting a commercial loan.

What’s so bad about commercial loans?

There are different types of commercial loans you can get so I will just speak generally.

The downsides are:

  • Larger down payments
  • Rules about cash reserves
  • Non-conforming means fewer buyers for the bank to sell off your mortgage, meaning worse rates.
  • Must prove real estate investing experience 
  • Must prove worthiness of home as a rental
  • Larger origination fees

Overall, commercial loans can be great for scaling your business (no one cares about how much debt you have if the property will be profitable) but your average real estate investor can make a lot of money by leveraging their income to get a mortgage.

You have good credit and an income so use it!

2. Quadplexes qualify for huge amounts of financing

Leverage in real estate via mortgages is a great thing. So what makes quadplex buildings better as investments? Bigger mortgages.

If you have more units, the limits for conforming (government-approved loans) increase! Hell, you can get up to $1.4M on a conforming quadplex conventional mortgage without raising any flags at the bank.

Plus you can use some of your projected rental income to qualify for a larger loan than what you’d typically get based on your day job income.

Can that be dangerous? Sure, but if your house is consistently profitable the bigger the loan the better.

3. Quadplexes can be your home too

Quadplex buildings have lots of units. I need to live somewhere, so I can lessen my financial burden of living by only living in a fraction of my house (and try to make it feel big). This is the biggest benefit to me and why I’ve become so obsessed all of a sudden.

Imagine reducing your cost of living to about zero. (It would totally go with my quest of massive expansion in 2020!)

In the past, I thought quadplexes were odd. Why not just buy four different houses? [I realize that is a rich person question, but I’m here to make you rich too :)]

I figured it out though. This way, I can live in a better part of town. Plus my tenants are nearby to keep an eye on!

4-plex-meme-rent-to-ghosts

And more importantly, a quadplex doesn’t have any wasted space – all those extra nooks and crannies in normal houses get transformed into rentable units! Hurrah for efficiency!

Maybe it’s a dealbreaker for you, I get it, but it’s a huge relief for me. As far as I’m concerned, I could lock the doors to half of the rooms in my house and it wouldn’t matter much to me. 

So buying a quadplex, is kind of like committing to a house with zero waste!

My real life example:

I own the cheapest home I could have bought in my part of town. If I were to rent it out, I’d get $2500/month.

However, there’s a triplex nearby and each unit rents for $1300 including utilities. If I were to live there, I’d still have all the space I need for my family of 4 and I’d cut my expenses by more than half. 

ORRRR. If I owned it, I could rent out the other 2 units for 2x$1300 and basically live for free. 

And if I owned a quadplex, I could do the same thing but even more extreme. So I’d get the benefits of: 

  1. Downsizing 
  2. Spending less on my home
  3. AND living in the area I like

4 – Quadplexes can be more profitable

This is just my experience, but you can charge more rent for a house that’s broken into units than you would for just one place. It’s partly because you can buy the house in a nicer part of town, and partly because there are “virtual bottoms” in rental prices that people will adhere to. 

For example, a bachelor apartment in an apartment building in my area would rent for over $1300. So if I were to rent out a unit for $1000, that’d be a steal for the tenants, right? 

That said, I don’t think that they’re really that much more profitable once you factor in all the extras. BOOOOO.

I have a first hand example of this. I own a single family home and a duplex down the road from each other. (In case it’s your first time here, I’m a real estate investor. That’s largely how I reached FIRE so early.) 

If you’re new to real estate take a course. The cost of housing is WAY more than course fees!

The duplex rents at $675/unit ($1350 total) and the single family home rents for $1050/month. (And I bought them both about $60K because I’m good at this stuff.) 

So, yes, it seems like the duplex has a 30% higher yield, but the costs get up there too. The utilities are higher. Maintenance is wayyy higher. It adds up. 

Most importantly, though, I pay for property management on those houses. And the costs for the duplex tend to be high given that they charge per unit. 

To make it worse, multi-unit buildings have higher turnover rates, which is when property managers take their big cut

The solution? Self-managing. 

Read: Why self-managing could be your investor secret weapon

I have property managers since I don’t live nearby, but they’re expensive. 

But if I lived there, I could manage it myself very easily and remove most of those costs. 

So yes, quadplexes are amazing – for people who plan to live there and self-manage – since you can both have a place to live and have all your living expenses covered. 

Little Bonus for you: In-depth comparison of self-managing software with a bonus offer from me 😉

Know what’s not amazing? Tenant Diversification.

Know what I don’t mention as part of this amazingness? Vacancy averaging or tenant diversification that comes with multi-unit rentals. 

When I did my research, most people rave about the fact that when a tenant moves out – you only lose a fraction of your income – which levels the bumps along the way. 

Sounds smart, right? 

If you only had one rental property, if that tenant moves out, you lose ALL your income for who-knows-how-long. Oh no!

Except, that never happens with my single-family rentals. 

I have never had a tenant leave my single family homes. As long as you have your house in a nice area and are good to your tenants they likely will just stay forever.

Disclaimer: The second house I bought did not match this, but I sold it off. It was a mistake on many levels. 

So I don’t care how much vacancy averaging allegedly helps. I have 0% turnover. Multi-units have higher turnover and I guarantee it will be above 0%.

4-plex-meme-wait-theres-more

One bonus recommendation:

So you just got my 4 benefits to owning a quadplex, but wait, there’s more! 

I’m going to add one more rule. From my yet to be released choosing a good house article. Don’t buy a place that rents below $1000 per unit. From experience with that duplex, lower rents cause long-term issues. 

(Though, to be fair, that $675/unit duplex has been pretty good to me, I still think my life would be easier if I spent a bit extra money for a house 2x $1000/mo units). 

Maybe $1000/month in a quadplex might be a little steep in some places, so I think my absolute cutoff is $850/unit. If you can’t pull that off in your neighborhood, then drop down to a triplex or even a duplex until the math works out. 

Read more about the ups and downs of low-income housing

Is a fourplex a good investment?

A fourplex is the best investment you could ever make most likely because:
1 – You can live in it to cover your own living expenses
2 – Most of a quadplex is rentable units
3 – Tenants are very close so you can avoid paying for property managers
4 – Fourplexes still qualify for ‘residential real estate’ rates
5 – Quadplexes actually help you qualify for a higher than normal mortgage (via rental income)

Is a quadplex considered an apartment?

A quadplex is not considered a commercial apartment building according to the Federal Housing Authority.
Buying a quadplex actually helps you to qualify for a larger non-commercial mortgage than normal via special quadplex rules and being allowed to count rental income as personal income.
One you have 5+ units though you enter apartment building rules which are different than typical personal mortgage rules.

Is a triplex considered an apartment?

Duplexes, triplexes and quadplexes are not considered commercial apartment buildings according to the FHA.
Buying a triplex even helps you to qualify for a larger standard mortgage than you typically could because of some special rules and having rental income factor into your income.
Many people still call triplexes apartments because there are multiple units in one building. It doesn’t come with any special legal obligations though.

TL;DR – Quadplex the greatest of housing inventions

  • Quadplexes are awesome real-estate loophole IF you plan to live in a unit and self-manage
  • Same mortgage rules as a regular house – but better
  • No wasted space

Okay. So that’s my plan at the moment. Anyone have any experience with Quadplexes or renting in general? Leave me a comment! 


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6 thoughts on “Quadplex: 4 reasons you should take advantage of this real estate loophole”

  1. Agree with you that multi-families that stay below the commercial loan size are great for house-hacking without having to share by the room. It still depends on where you live. We’re in Jacksonville, FL, and the multifamily stock isn’t great. We do have a duplex that we rent (both units), but it was hard to find the right fit. Every other rental we own is single-family or condo. We’d have more choices if we went commercial, as there are some interesting 8-plexes and beyond, but that’s not our niche.

    Reply
    • Yeah I get it. I think of 4-plexes as the ultimate housing loophole. Hopefully, you can buy one.
      Since writing the article I have realized I can probably only swing a triplex unless I build one. They just don’t build quads near me for some reason. Either way, the premise still stands, more units in my house that aren’t me is a win 🙂

      I would go 4-plex as my home and single-family everywhere else if I got my way 🙂

      Reply
  2. Quadplex is probably a good loophole if you live in it. However, if you have already used most of your income to qualify for your own home’s mortgage, the banks probably won’t consider enough of the new rental income to qualify on the new mortgage. In this case, a 5+ plex is actually a good loophole because as long as you can borrow 25% down payment personally, the bank will use *all* of the operating income (with a vacancy allowance) to qualify the commercial mortgage. My personal example was buying a $600k 6-plex. The building qualified for $450k on its own and I only needed to qualify for $150k HELOC on my personal residence. (This is Canada.) The downside is commercial mortgages do come with slightly higher interest rates.

    Reply
    • Oh yeah, for sure, quadplexes are great when you live in them.
      I wouldn’t want a quadplex (or 6-plex) that I don’t live in for the simple reason that it’s too many people to keep up with at a distance (managers are expensive for low rental income houses). If they are in my basement I at least know what they are up to.

      I’m also in Canada and I’m very slowly getting ready to sell my primary home to move into a triplex or quadplex. 🙂
      My best rentals are expensive single-family homes in the GTA. Lots of rent, 1 person to talk to 🙂

      Reply
  3. Curious. Financing for a Quadraplex is the same as single family housing. If you go to build a quadraplex, you can’t do so on a single family housing lot, can you? Will that depend on HOA rules if in a subdivision? Can any regular residential lot be used for a 4-plex

    Reply
    • That’s more of a city level thing but I believe in general a lot has to be a multiplex zoned lot at the city.
      If you are buying a quadplex, though then you know it’s zoned for it (assuming it’s a legal fourplex) and you now know you can get an awesome mortgage on it!

      Reply

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