How to Buy a 4-Unit Apartment Building

A four-unit apartment building, or quadplex, contains four distinct dwelling units, each with its own entrance, kitchen, and bathroom. This investment offers a pathway into real estate, providing income generation and portfolio diversification. Unlike single-family homes, a fourplex allows an investor to potentially cover expenses even if one unit is vacant, as income from other units can contribute to financial obligations. These properties often qualify for residential mortgage loans, which offer more favorable terms than commercial financing for larger multi-unit complexes.

Financial Preparation and Loan Options

Assess your financial standing before searching for a four-unit building. Lenders examine credit scores (preferring above 620) and debt-to-income ratios (often below 43%). Your available down payment directly impacts loan eligibility and terms.

Four-unit properties often qualify as residential for lending. Conventional loans, from private lenders, typically require 15-25% down for investment properties. Qualification includes strong credit and sufficient income.

FHA loans are an option if you intend to occupy a unit. These government-insured mortgages allow down payments as low as 3.5% for owner-occupied properties up to four units. They require the property to meet FHA appraisal standards and owner occupancy for a specified period.

If not owner-occupied or not meeting residential criteria, commercial or portfolio loans may be needed. Offered by banks and credit unions, these loans have higher down payments (25-30% or more) and shorter amortization. Approval is based on the property’s income potential and borrower’s financial strength.

Get pre-approval early to understand your borrowing capacity. Submit financial documents like pay stubs, tax returns, and bank statements. Pre-approval signals you are a serious buyer, streamlining the offer process.

Lenders consider potential income. They request gross rental income projections and estimate operating expenses (property taxes, insurance, maintenance, utilities). This analysis assesses the property’s ability to cover debt and contribute to your financial stability.

Finding and Evaluating Properties

Find four-unit buildings through various channels. Multi-family real estate agents offer listings and market insights, including off-market opportunities. Online platforms like the Multiple Listing Service (MLS), LoopNet, or Zillow are valuable. Networking and driving through neighborhoods can also uncover properties.

Examine several property characteristics. Location is key, including neighborhood appeal, amenities, schools, and rental demand. The building’s physical condition is important; an initial assessment of the roof, heating, ventilation, and air conditioning (HVAC) systems, and visible structural issues can narrow choices before a full inspection.

Confirm zoning to ensure the property is legally designated for four units, preventing complications. Understand current occupancy and rental rates for insight into immediate income potential and tenant stability.

Perform a preliminary financial assessment to screen properties. The Gross Rent Multiplier (GRM), calculated by dividing price by annual gross rental income, offers a quick comparison; a lower GRM suggests a better price. Estimate cash flow using advertised rents and expense percentages to gauge profitability.

Initial screening prioritizes properties for detailed investigation. Conduct a Comparative Market Analysis (CMA) by examining recent sales of similar properties to establish a realistic market value range and support decision-making.

The Due Diligence Phase

Due diligence begins after a purchase agreement, requiring thorough investigation of the property’s condition and financial viability. This period verifies investment aspects before final purchase.

Hire a professional home inspector to evaluate the building’s physical integrity. The inspector assesses structural components, foundation, roof, plumbing, electrical, and HVAC, identifying defects. Specialized inspections (pests, mold, lead-based paint, asbestos) may be advisable. Review reports to understand repair costs and negotiate remedies.

Financial due diligence involves examining actual income and expenses. Obtain and scrutinize rent rolls (detailing tenants, lease terms, security deposits), tenant leases, utility bills (past one to three years), tax statements, insurance, and maintenance records. This provides a realistic picture of historical performance and helps project future financial outcomes.

Construct a pro forma financial model using verified data. This model projects income (current rents, market adjustments) and operating expenses. Expenses include fixed costs (taxes, insurance) and variable costs (vacancy allowances, repair budgets, capital expenditure reserves for large items like roof replacement). This analysis calculates cash flow and assesses return on investment.

The lender orders an appraisal to confirm market value. The appraiser evaluates the property based on condition, location, and comparable sales, ensuring value supports the loan. A title search confirms clear ownership and identifies liens, easements, or encroachments. This step protects your investment.

Review existing leases and tenant agreements to understand tenant rights, responsibilities, and lease expiration dates. This ensures a smooth ownership transition and helps prepare for renewals or vacancies.

Making an Offer and Closing the Deal

Craft a compelling offer with several components. The purchase price is central, along with an earnest money deposit (1-5% of price) demonstrating serious intent. Include contingencies (financing, inspection, appraisal) allowing withdrawal if conditions are not met. Clearly state the desired closing date and any inclusions or exclusions.

Negotiation involves offers and counter-offers to reach agreeable terms on price and conditions. Flexibility and understanding your bottom line are important to secure favorable terms.

After offer acceptance and contract, loan underwriting begins. The lender reviews your financial documents and property information (income, assets, appraisal, title) to ensure alignment with lending criteria.

Satisfy and formally remove purchase agreement contingencies. For example, the inspection contingency is removed in writing after the inspection period and renegotiations. The financing contingency is removed upon final loan approval.

Conduct a final walkthrough before closing to confirm the property’s agreed-upon condition, completed repairs, and no new damage. This is your last chance to inspect units and common areas before ownership.

Closing day officially transfers ownership. This occurs at a title company or attorney’s office, where parties sign loan documents (promissory note, mortgage). Title transfers, and funds are disbursed (down payment, closing costs). Closing costs (2-5% of loan) may include attorney fees, title insurance, recording fees, and prepaid taxes or insurance.