Cash is cash, but some cash flows are better than others, and easier to come by, especially when it comes to buying residential real estate investment property. For example, compare a 6 unit apartment complex with a triplex and a single family residence (SFR).

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

Triplex $150,000 purchase price $1800/month rental income

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

What 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 better investment?

Typically, NO. The best investment for you and most investors will most likely be the Tri-plex, particularly in comparison to the 6 unit apartment complex. It all comes down to financing. By obtaining conventional financing, two to four residential units can be financed in the same way that you would finance an SFR investment. That means you can get financing at 75-80% of your purchase price, through a host of lenders and mortgage brokers. You limit your cash investment to 20-25% and financing is relatively easy to come by, even today.

To finance the 6-unit complex, you would have to get Commercial Financing, as it exceeds the 4-unit limit imposed by Fannie Mae and Freddie Mac. This is a significant difference, since such financing is almost impossible to obtain in 2009, and LTVs would likely be in the 50% range. So not only is it nearly impossible to get financing on a property larger than 5 units, but you’ll also need to come to closing with a lot more cash.

Now let’s compare the Tri-plex with the SFR. They’re both the same price, but the Tri-plex offers $700/mo more in cash flow, so that’s the better deal, right? Well, probably… But there are a couple of questions you’ll want to ask before setting your investment strategy:

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

Keep in mind that multiple units often have metered utilities, which means there may be one water meter (or one electric meter or one gas meter) for the entire property. This usually means that the landlord must have the utility bill in the landlord’s name. You’ll want to check to see if the landlord is currently allocating these utility costs to the tenants/units, and revise your proforma P&L accordingly. In an SFR, the tenant typically pays all utility costs associated with the property, so you typically don’t need to factor this into your expenses.

Second, check with your property management company to see what the difference will be from typical management fees. While 3 (or 6) units provide more differentiation (if one tenant leaves, there are still others paying them), they can also require more management fees per dollar of rent. You are likely to incur more lease fees and repair costs over a 12-month period with a $150,000 Tri-plex than with a $150,000 SFR.

When establishing your investment strategy, you’ll want to balance estimated net cash flow with your financing options. When comparing various types of investment properties, look at not only your net monthly cash flow, but also how easy/difficult it is to obtain financing and how much cash you will need to invest to purchase the property. If repairs are needed to make the property functional/profitable, include those as well.

Most of the time, a triple or quadruple will provide better cash flows per dollar of investment than other types of residential properties, although they generally require more time/management fees throughout the year. Lastly, unless you plan to never sell the property, then you’ll also want to consider your exit strategy. SFRs can be sold to owner-occupied buyers or investors; multiple units have a smaller target audience of buyers.

Final tip: If you are investing in a market other than where you live, it is best to buy a turnkey property that is in good condition with established tenants and use a professional property management company. The same is true if you are investing close to home and don’t have much extra time. Factor that into your calculations and save yourself unnecessary headaches.