Investing in a four plex

7 Replies

I am trying to find a good quadruplex in eastern Minnesota or western Wisconsin, and I’m curious to know from people in the area if I should be looking for good cash flow in the area or if I should focus more on appreciation? Any and all advice is much appreciated!

I would be looking for strong cash flow in those markets, depending on your price point. It doesn't mean you won't also get appreciation, but I would rather buy something there that is in good shape and turning money than something that will need a lot of cap ex going into the winter.

@Corlin Anderson I do think it depends on the submarket, but the reality is you should consider both.  For example, if you ignore appreciation but find a 2% deal in a rural area, you will win that metric, but if the house costs $60k, then you are only generating $1200 gross revenue and after all expenses, the amount left over is not great, and your appreciation potential is next to nothing.  On the other side, deals that are negative cash flow deals and your banking on appreciation are closer to gambling than I like.  A balanced approach that favors appreciation but requires adequate CF is my preferred strategy. 

@Corlin Anderson a lot depends on your financial situation and what your reasons are for investing in real estate. If you looking for additional income, to replace a job, etc, cash flow is likely what your looking for. If you don't need the additional income, looking to generate long term wealth, tax sheltering benefits, etc buying for appreciation may come more into play. In MN and WI I would focus on cash flow, over the long term real estate goes up in value and you'll likely see some appreciation. Appreciation however will not pay the bills in challenging times!

Both, but you can emphazise one more than the other. Most markets will allow you to dial it in to your preferences: as you push appreciation up, cashflow usually comes down. So it's a classic optimization problem, you have to find your sweet spot.

I used to be all about cash flow when I got started and over the years it became less important, while the potential for appreciation has become more important for me. With higher price points and higher rents also your monthly principal pay down increases. And that is a guranteed ROI (vs appreciation).

Which brings me to another favorite metric of mine: rent per unit. I am not interested in growing my expenses and headaches, so the fewer doors we have to manage the better. Milwaukee has a decent inventory of 4plexes, but most of them are low rent (per unit). And while it sounds good at first (total rent, total cash flow) - you can literally buy a duplex that will produce the same rent with just two units. This also means only 2 kitchens, bathrooms, waterheaters, etc and not 4! 

@Corlin Anderson

This is your first post, this seems likely to be your first deal. If it is, I would worry less about the great cashflow-versus-appreciation debate. Get something that can be insured, that has a straightforward building design, that doesn't need a lot of work, that doesn't have real problem-tenants-in-place deep in the ghetto. I've always believed that it's better to work to hit a single than to try to hit a home run in your first deal, in the larger scheme of things. Use this first deal to get your feet wet, to learn if this is for you.

@Corlin Anderson , I hope all is well with you. Great question. I say go for cash flow, because it can deal with problems if they arise. If you go for appreciation and a boiler goes out. Equity in the property can't pay for a new one, cash flow does. 

Four units are the way to go, in my mind. I purchased my first investment property with a FHA and it was a four unit. Less than 2 years later, I have 15 units because I started with a four unit instead of a duplex. Leverage is the name of the game. More doors per loan helps you scale and gain a higher ROI. My goal is $150 a door, but I currently I average $300/door.

I hope this helps with your decision. If you have any questions or want to discuss further, don't hesitate to contact me.

Beleza,

Charles Anthony