Real Estate Rookie Episode Summary: "5 Things to Know Before Buying a Duplex, Triplex, or Quadplex (Rookie Reply)"

Release Date: January 17, 2025

Welcome to this episode of Real Estate Rookie, hosted by Ashley Kehr and Tony J Robinson from BiggerPockets. In this insightful episode, Ashley and Tony address three critical questions from the BiggerPockets community, offering invaluable advice for novice real estate investors. They delve deep into the nuances of purchasing small multifamily properties, choosing the right mortgage options, and leveraging property equity effectively. Below is a comprehensive summary of the key discussions, complete with notable quotes and timestamps for reference.

1. Key Considerations When Buying a Duplex, Triplex, or Quadplex

Topics Covered:

• Utilities Management:
  Ashley and Tony emphasize the importance of understanding how utilities are handled in multi-unit properties. Tony shares his experience, stating, “I prefer the units to be separately metered” (02:54), highlighting the advantages of tenants paying for their individual usage. This approach minimizes disputes over utility consumption and ensures tenants are accountable for their own expenses.

• Inspections and Zoning Laws:
  Ensuring that the property is correctly zoned for its designated number of units is crucial. Tony recounts a scenario where an unpermitted third unit in a duplex led to potential legal complications (05:53). Ashley adds, “The other downside...is that when you buy it, you now assume responsibility for that” (07:38), underscoring the risks associated with purchasing properties that have unpermitted additions.

• Maintenance of Common Areas:
  The hosts discuss the challenges of maintaining shared spaces such as hallways and stairwells. Tony advises minimizing common areas to reduce maintenance hassles, noting, “It is amazing how, like, people don't care because it's not their living area and they don't want to clean up after someone else” (09:33).

• House Hacking Benefits:
  House hacking emerges as a strategic advantage for small multifamily investments. Ashley highlights that utilizing primary residence-type loans can lower acquisition costs. “There are options out there where you can get into a property for very little out of pocket, have a unit for yourself to live in and then two or three other units that you can rent out” (09:50).

• Cash Flow Analysis:
  Ensuring that the investment either breaks even or generates positive cash flow is paramount. Ashley advises, “Make sure that you're break even or cash flow. And once you move out of that unit” (14:32), stressing the importance of financial sustainability even if primary residency changes.

Notable Quotes:

• Tony Robinson: “I prefer the units to be separately metered” (02:54)
• Ashley Kehr: “Make sure that you're break even or cash flow” (14:32)

2. Choosing Between First-Time Homebuyer Mortgages and Conventional Mortgages

Topics Covered:

• Clarifying Mortgage Options:
  The hosts clarify common misconceptions surrounding mortgage types. Tony points out, “There's a huge misconception...people think that FHA is like first home first time” (18:15). They explain that while there are specialized first-time homebuyer programs, FHA loans are not exclusively for first-time buyers.

• FHA vs. Conventional Loans:
  Ashley breaks down the differences between FHA and conventional mortgages. FHA loans come with federal backing, providing lenders with more security but also imposing stricter approval processes. In contrast, conventional loans offer more flexibility, with options for lower down payments without the stringent inspections required by FHA (19:25).

• Private Mortgage Insurance (PMI) Considerations:
  The discussion shifts to the pros and cons of paying PMI versus making a larger down payment. Tony advises, “I would go the conventional route because you're not having to do that extra inspection that the FHA does” (21:20). Ashley further encourages investors to evaluate the financial trade-offs, suggesting that the additional down payment might be better utilized elsewhere rather than avoiding PMI (22:57).

Notable Quotes:

• Tony Robinson: “There's a huge misconception...people think that FHA is like first home first time” (18:15)
• Ashley Kehr: “Make sure that you're break even or cash flow” (22:57)
• Tony Robinson: “I would go the conventional route because you're not having to do that extra inspection” (21:20)

3. 1031 Exchange vs. Borrowing Against Property Equity

Topics Covered:

• Understanding 1031 Exchanges:
  Tony provides a clear explanation of 1031 exchanges, noting that they allow investors to defer capital gains taxes by reinvesting proceeds from a sold property into another real estate investment. He emphasizes the importance of using a qualified intermediary to handle the transaction (30:03).

• Alternative Strategy – Commercial Line of Credit:
  Instead of selling the property and initiating a 1031 exchange, Tony suggests considering a commercial line of credit. This approach allows investors to tap into their property's equity without altering the existing favorable mortgage terms. “You can still tap into the equity and use that line of credit to make purchases, pay for rehab, things like that” (31:26).

• Evaluating Investment Goals:
  Ashley highlights the necessity of aligning financial strategies with investment objectives. She advises investors to determine whether their goals are centered around cash flow, property appreciation, or portfolio diversification before deciding between a 1031 exchange and leveraging equity (32:11).

• Maintaining Financial Flexibility:
  Tony underscores the benefits of maintaining a line of credit as a financial safety net. This flexibility ensures that investors can adapt to market fluctuations or unexpected expenses without being locked into less favorable loan terms (33:28).

Notable Quotes:

• Tony Robinson: “Section 1031 of the IRS tax code allows us to basically sell a piece of real estate and defer the taxes that are owed” (30:08)
• Ashley Kehr: “What makes more sense to you? Is it paying 450 extra dollars per month or just shelling out an additional $75,000 at closing?” (24:55)
• Tony Robinson: “You can still tap into the equity and use that line of credit to make purchases” (31:26)

Conclusion

Ashley Kehr and Tony J Robinson wrap up the episode by encouraging listeners to engage with the BiggerPockets community through forums and make the most of available resources. They underscore the importance of due diligence, strategic financial planning, and aligning investment choices with personal goals to achieve success in real estate investing.

Final Thoughts:

This episode of Real Estate Rookie serves as a vital resource for aspiring real estate investors. By addressing practical concerns and offering expert advice on multifamily property investments, mortgage selection, and equity management, Ashley and Tony equip listeners with the knowledge needed to navigate the early stages of their real estate journey confidently.

For more detailed discussions and expert insights, be sure to listen to the full episode on BiggerPockets' platforms.