When it comes to real estate investing, most people will gravitate towards a single family home.
But did you know that buying a duplex or a tri-plex is a better investment? Let's look at the three most important items in real estate investing.
Cash flow, Appreciating and Value.
As anyone knows in real estate, the goal is for positive cash flow; otherwise you own an investment that costs you money on a monthly basis.
Positive cash flow is simply defined as money left over after paying for the mortgage, property taxes, insurance, and any monthly repairs and utilities.
Let's use an example from my home town in California.
Say Investor A has a single family home that is a 3 bedroom 2 baths with 1300 square feet of living area which rents for $1800 per month.
Investor B has a duplex, each side has 3 bedrooms and 2 baths with 1000 square feet and each side rents for $1400 per month.
We will assume that the taxes, repair and utilities are the same for both Investors and that the mortgage payments are about equal at $1600 per month.
The following month, Investor A's tenants move out.
Investor A is now is liable for the entire mortgage for the following month, and each month until Investor A finds a new qualified tenant for the single family home.
At this point Investor A is out of pocket $1600 per month (mortgage payment) plus taxes, plus any fix up cost and utilities.
While Investor B who similarly has a tenant move out the following month, still gets to collect $1400 per month from the one occupied unit.
Thus, his out of pocket expense for the monthly mortgage is only $200 ($1600 - $1400 loss rent).
So Investor B can actually weather a longer period of vacancy than Investor A at only $200 per month verses $1600 per month for Investor A.
As for Appreciation, that old saying which goes like this: "when the tide comes in all boats rise".
This is true in any geographical market.
But when the tide goes out, is when the value of a duplex shines and why most investors enjoy buying a duplex.
That leads us to Value.
The biggest difference between a single family home and a duplex is how it is Valued.
Single family homes are valued on the substitution method or "market approach".
That means your home is valued the same as the exact same home which recently sold down the street from your home.
If you have two homes of the same size, same room counts and same quality, then the "market" says they should be worth the same.
But a duplex, triplex or any multi-family structure is always valued by its cash flow, NOT by what sold down the street.
Or, as some investors would say: they are valued by the Gross Rent Multiplier or "Cap rate".
Thus, it is very easy to have a declining market for single family homes as we currently have in 2009, yet multi-family structures are increasing in value.
With out going into a detailed explanation of Gross Rent Multipliers and Cap Rates, let's just say and agree that the higher the rents are on a property, the more money it is worth to an investor.
Therefore, as more foreclosures bring the prices down on single family homes, All an investor needs to due is rise the rents on his property and the value is increased to a potential Buyer.
You can not accomplished the same effect on single family homes no matter how much you charge for rent, as single family homes are valued strictly on the "market approach" of what a similar house down the street sold for.
So in conclusion, you can see that buying a duplex is a better investment than buying a single family home as a rental or investment.