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Cash is cash, but some cash flow is better than others — and easier to obtain – particularly when it comes to purchasing residential real estate investment properties.  For instance, compare a 6-unit apartment complex with a Tri-plex and a Single Family Residence (SFR).

6-unit complex                        $280,000 purchase price     $3600/mo rental income

Tri-plex                                    $150,000 purchase price     $1800/mo rental income

SFR                                         $150,000 purchase price     $1100/mo rental income

Which do you think is the best deal for the typical investor?  The 6-unit property offers the same rental income per unit ($600), but is cheaper per unit than the Tri-plex, so is this the best investment?

Typically, NO.  Most likely, the best investment for you and most investors will be the Tri-plex, particularly when compared to the 6-unit apartment complex.  It all comes down to financing.  When obtaining conventional financing, two to four residential units can be financed in the same manner in which you would finance a SFR investment.  That means you can obtain financing at 75-80% of your purchase price, through a large number of lenders and mortgage brokers.  You limit your cash investment to 20-25% and the financing is relatively easy to get, even nowadays.

In order to finance the 6-unit complex, you would have to obtain Commercial Financing, as it is over the 4-unit limit imposed by Fannie Mae & Freddie Mac.  This is a significant difference, as such financing is almost impossible to obtain in 2009, and the LTV’s would likely be in the 50% range.  So not only is it nearly impossible to get financing on a 5+unit property, but you will need to come to closing with tremendously more cash.

Now let’s compare the Tri-plex with the SFR.  Both are the same price, yet the Tri-plex offers $700/mo more in cash flow, so that’s the best deal, right?  Well, probably…  But there are a couple questions you will want to ask before locking in your investment strategy:

• Is the Tri-plex master metered?
• What will your property management fees be?

Note that multi-units often have master metered utilities, meaning there may be one water meter (or electric meter or gas meter) for the entire property.  Typically this means that the landlord must have the utility bill in his/her name.  You’ll want to check to see if the landlord is currently allocating these utility costs back to the tenants/units, and revise your pro-forma P&L accordingly. On a SFR, the tenant typically pays all of the utility costs associated with the property, so you normally don’t need to factor that into your expenses.

Secondly, check with your property management company to see what the difference will be for typical management fees.  While 3 (or 6) units provides greater differentiation (if one tenant leaves, you still have others there paying you), they also may require more management fees per rental dollar.  You will likely incur more leasing fees and repair costs over a 12 month period with a $150,000 Tri-plex than you will with a $150,000 SFR.

When setting your investment strategy, you’ll want to balance the estimated net cash flow with your financing options.  When contrasting several types of investment properties, look not just at your net monthly cash flow, but also the ease/difficulty of obtaining financing, and how much cash you will have to invest to purchase the property.  If repairs are needed to make the property functional/rentable, then factor those in as well.

More often than not, a Tri-plex or Four-plex will provide better cash flows per investment dollar than other types of residential properties, although they typically require more management time/fees throughout the year.  Lastly, unless you plan on never selling the property, then you will also want to consider your exit strategy.  SFR’s can be sold to owner-occupied buyers or to investors; multi-units have a smaller target audience of buyers.

Final tip: if you are investing in a different market than where you live, then you will be best served to buy a turn-key property that’s in good condition and with tenants already in place, and to use a professional property management company.  Same goes if you are investing nearby your home, and you don’t have much extra time.  Factor that into your calculations and save yourself unneeded headaches.