The 2-4 unit multifamily home

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Not glamorous, but very effective

The 2-4 unit dwelling is one of my favorite topics to talk about. Boring on the surface, but yet very effective upon closer examination. To me, it is a cornerstone of building wealth, especially when you first start your adult life.

In a previous post, I talked about how currency is created by our fractional reserve banking system where banks only have to keep a small percentage of currency in reserve (i.e. a fraction as the name suggests) and can lend the rest out. When this happens over and over again, currency is “created” and demand increases for whatever is being borrowed against. In this case, it is homes, including apartment buildings. The government plays a role as well via loans created or backstopped by Fannie Mae and Freddie Mac, and also by fiscal policy.

Housing makes up about 40% of our costs, according to the CPI (consumer price index). There is much debate as to whether the CPI accurately reflects housing costs, however, under any scenario housing is a large expense for people. Further, the combination of fractional reserve banking and government involvement has created an “artificial” price for housing such that owning a home is out of reach for many Americans as shown below.

Housing bubble 2.0?
home prices versus real median income

How do we combat this? A 2-4 unit dwelling as the post headline would indicate. This type of property has many advantages. One, you can purchase as a primary residence which then falls under residential lending requirements. Residential housing requires a smaller down payment, from as little as 3% down to 20% or more if you desire. Commercial properties usually require a larger down payment AND have a higher interest rate associated with the loan. Two, the rental income obtained from the other units can offset the costs of owning the property, and in some cases create a surplus. This is known as “living for free”. Third, there is a great ROI (return on investment) or cash on cash return when combining one and two above. In other words, a small cash down payment of 3% to 20% which then reduces rent paid by you to zero or near zero. Fourth, the tax advantages that come along with purchasing as an owner-occupied investment. All the tools and supplies that you purchase, repairs that you make, vendors that you hire in the maintenance of the property are tax-deductible. The property can also be depreciated every year, which is an accounting expense but not a cash expense! In other words, one can hypothetically generate a positive cash flow however show an accounting loss!

To summarize, housing costs have skyrocketed in the US and have become unaffordable for many whether they rent or own. To mitigate this, I suggest to purchase a 2-4 unit multifamily dwelling rather than rent or buy a single-family home. The primary advantages of this strategy include:

  • Low down payment requirements
  • reduce or eliminate rent
  • tax advantages including depreciation
  • great cash on cash return

Another “hidden” benefit is that in owning a property such as this you have a great hedge against an increase in the supply of currency (inflation), both in cash flow and capital appreciation. In short, an outstanding investment, AND a place to live.