# Why more units are better than fewer

Once you’re sold on the idea of buying an apartment building, the next question is: “What to buy?”

One of the important principles to keep in mind is that it’s usually better to buy more units than fewer for a given amount of money.

To see why, let’s compare two different deals on the same street:

Duplex (two units)

• Each unit rents for \$2,000 / month
• Total rent of \$4,000 per month
• Expenses (not including mortgage) of \$1,000 / month
• Net operating income of \$3,000 / month
• Price of \$500,000
• Mortgage for 80% of price, or \$400,000, at 4%
• Monthly mortgage payments of \$1,910
• Free cash flow of \$3,000 – \$1,910 = \$1,090

Fourplex (four units)

• Each rents for \$1,000 / month
• Total rent of \$4,000 per month
• Expenses (not including mortgage) of \$1,000 / month
• Net operating income of \$3,000 / month
• Price of \$500,000
• Mortgage for 80% of price, or \$400,000, at 4%
• Monthly mortgage payments of \$1,910
• Free cash flow of \$3,000 – \$1,910 = \$1,090

Both of these deals look similar on paper. They’re both 7.2% caps at 10.4x gross rents. They’re both returning \$1,090 x 12 = \$13,080 per year in free cash, which is 13% per year on your \$100,000 down payment.

So, why is the fourplex a better deal than the duplex, everything else being equal? Well, imagine you have a vacancy in one unit. For the duplex, this means that, until the vacancy if filled, your income is \$2,000 / month. This means that you can cover your expenses of \$1,000 per month but you’re going to have to come out of pocket to cover \$910 of the mortgage. That’s no fun.

Now consider the fourplex. Until you fill the vacancy, your income is \$3,000 / month. You are still able to cover the \$1,000 in expenses. You can also cover the mortgage of \$1,910 and still have \$90 left over. Obviously, that’s not great. But you didn’t have to part with any of your own money. And that’s why, all things being equal, the fourplex beats the duplex – the income stream is less dependent upon any single tenant.

A caveat. In real life, all things are not equal!! Sometimes fourplexes are bid up and pricing for duplexes is just better.

And sometimes, you’re not a perfectly rational, economic buyer. By this I mean, sometimes you actually care about how the property feels to live in, because you’re going to be living there. It’s hard to resist the lure of making your first purchase a single family home. There’s no shame in making the first one a duplex instead of a fourplex. You’re still doing way, way better than if you bought the single family.