Since I live in an area of the country where housing prices are higher than what I can afford, I was considering buying property in a very affordable state where I used to live and renting the property out. That city has a lot of available duplexes and quadraplexes, so I decided to read up on the subject. Investing in Duplexes, Triplexes, and Quads by Larry B. Loftis, Esq., promises to teach you “the fastest and safest way to real estate wealth.” The author makes a very good case for his point of view.
Real estate provides a unique set of benefits which includes cash flow, appreciation, tax benefits, equity buildup, and leverage. With many other types of investments, you will only have one or two of these advantages. For example, a Roth IRA provides tax benefits and appreciation, but it doesn’t provide cash flow. As a second example, you can make money in real estate by putting up very little or sometimes even none of your own money (this is leverage)–you can’t do this with other kinds of investments. You can’t buy $10,000 worth of stock unless you have $10,000. The author says that everyone he knows who is wealthy accumulated their wealth through real estate, and that convinced him to enter the market.
Here’s his reasoning behind choosing a residential multifamily property (what duplexes, triplexes, and quads are called) over a single family home or a commercial multifamily property (one with five or more residential units):
- If you only have one unit (a traditional house), any vacancy means a 100% vacancy, which means no cash flow and no help covering the mortgage or any of the home’s expenses until you fill the vacancy.
- There is less competition to buy multifamily units because the only interested buyers are investors, whereas with a house you are competing with investors, people who want to live there, and flippers.
- You get multiple rent checks while only having to manage one piece of property.
- Transaction costs are low because you are buying and holding (as opposed to flipping).
- You have the ability to put 0% to 10% down and get a fixed rate mortgage at a low rate (commercial requires 20% down and the loan is more expensive).
- Residential multifamily properties will often be priced similarly to houses with the same square footage, meaning that if you can afford a decent sized house, you can afford a residential multifamily unit. But you can get more rent for the latter because while you probably can’t rent the house for the same amount as the mortgage (because almost anyone who could afford it would buy their own house instead of renting) you can rent a residential multifamily unit out for more than the mortgage since it is divided into multiple units.
- They are easier to improve because you don’t have to leave the whole building vacant while you improve it. You can improve one unit at a time as tenants decide to leave. And when they leave, you can also raise the rent for that unit to its new, rehabbed market value. Cosmetic rehab will force appreciation for your building.
- When you buy a residential multifamily property (or a commercial multifamily property), it will already have tenants–you walk right into the cash flow. That doesn’t happen if you buy a house as an investment property.
There are also significant tax benefits from owning a residential multifamily property. Earning money that is taxed at a lower rate (i.e. through selling your real estate investments) is key to achieving wealth, according to the author. Since the building has multiple units, you can live in one unit as your primary residence. This means that if you live there for at least two years, when you sell, you will be taxed the same way as homeowners are and you will not have to pay taxes on the first $250,000 of profit (or $500,000 if married filing jointly). (This tax break has a few more stipulations, but those are beyond the scope of this article.) If you don’t want to live in the property, as long as you wait at least a year before selling it, your gains will be taxed at the long-term capital gains rate of 15%, which is a significant savings over paying the short-term rate (which would be the rate of whatever tax bracket you’re in–presumably a high one if you can afford to own property).
The book breaks down the steps you’ll need to take and teaches you how to do the financial calculations you’ll need to do to choose successful investment properties. There are chapters teaching you how to:
- Value your property
- Find your property
- Use a broker to your advantage
- Conduct due diligence
- Make an offer
- Understand and manage closing costs
- Manage your building
- Sell your building
- Find tenants
Another benefit of this book is that since the author is a lawyer, you get his legal expertise thrown in with his real estate experience, which is great since there are plenty of legal issues involved in buying, managing, and selling property, not to mention dealing with tenants. The book does have a few drawbacks, the biggest one being its unbridled optimism about owning real estate. I realize that the author has had great real estate success and the book’s tone reflects his own experiences, and that the book probably wouldn’t sell as well if it had a more balanced tone (i.e. you can make a ton of money in real estate, but you can also lose a ton of money). The author will occasionally allude to the possibility of losing money–for example, he’ll say things like that leverage can eat you alive if used improperly, but he won’t explain that further–he only explains how he’s used leverage to make incredibly successful investments. I think it would be helpful if he discussed his failures more so we could learn from his mistakes. Sometimes it’s hard to understand why a certain way is the right way unless you are familiar with the wrong way. Additionally, the book can be confusing at times if you are not a math person and don’t have the business background to understand things like leverage and return on investment. Though the book does try to explain it, I still had a hard time understanding these concepts.
Overall, I really enjoyed this book. I found it to be mostly very easy to understand for the beginning real estate investor and a real page turner (as far as investing books go). I would definitely recommend this book, as long as you take its unbridled optimism with a grain of salt.