First Investment Deal Help: 4 Plex

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First Investment Deal Help: 4 Plex

Lynn Tran
Member since 2022 · 14 posts · 2 votes

Hello Bigger Pockets Family! 

I would love your advice for this 4 Plex property I'm on contract with where I'm worried if it's worth its trouble for the first year. Its in a good growing area in south Louisiana, but currently in a less than desirable area of town that's used to, but reduced, known to be dangerous but its shifting into a working class spot with new grocery stores and lots of growing neighborhoods nearby. 

The building is 4 units, each with 2 bed, 1.5 bath that has been nicely renovated in 2019. HVAC is noted to be 2 years old, new stairs for second story, new sheet rock. Roof is noted to be 8 years old. 3 units has granite countertops and 1 a has butcher block countertop. It says 2 year old appliances and plumbing. I'll be inheriting the current tenants. At the walk through, I only got to visit 2 of the units but they seemed to take care of their home. One that I met and she seems like a great tenant to keep. Realtor and I are curious if the other 2 unit tenants are less than desirable.

I'm going in for an inspection on this upcoming Tuesday.

I'll be using a FHA loan and will be putting 3.5% down. This is the general work up:

Purchase Price: $285,000

Closing Costs: $9,395
Down Payment: $10,000
=$19,395 Cash to Close

Monthly Note: $2,120.76 Based on locked 5.625% apr 30 year loan
(Principle & Interest: $1,610.90; Mortgage Insurances $194; Estimated Escrow $315 = $2120)

Monthly Property Taxes: $250

Monthly Insurance: $210

Monthly Maintenance: $100​

Total Monthly Expenses: $2,680

Total Income based on $750 mo x 3 units: $2,250

Total Income based on $750/mo x 4 units after year 1: $3,000

The going rate for rentals is $750, possibly could bring it up to $800 in the future. Please note with my FHA loan I will be living in 1 unit for house hacking, so I will have total income of $2250 for the first year. I will attempt to rent out a room in the unit but unsure how it will work out. What do you think of this deal and is it worth it? It's -$480 a month the first year where I worry about keeping it afloat, but I can manage it with working my job as long as my tenants at the other 3 units do not leave. The next year I will profit $320/mo once I move out and get another tenant in.

Any advice helps!

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Scott E.
Contractor · Scottsdale, AZ · Member since 2010 · 2k+ posts · 3k+ votes
4y

Most experienced and sophisticated investors will look at these numbers and say that the margins are far too thin, and suggest that you walk away from this "deal." You're not accounting for things like vacancy and cap-ex, plus there doesn't sound like much room for rent growth.

With that being said, getting into this deal will allow you to live almost for free while you live there, and it will cash flow a bit when you move out which is impressive considering you're financing 96.5% of the deal and have to pay mortgage insurance.

If you feel strongly about the location, I say go for it. Aim to lower your interest rate and drop the mortgage insurance through a refinance at some point in the next 3-5 years. And in the meantime you'll just deal with tight margins. Shouldn't have much come up for cap-ex due to the units all sound recently renovated.

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  • Scott E.
    Contractor · Scottsdale, AZ · Member since 2010 · 2k+ posts · 3k+ votes
    4y

    Most experienced and sophisticated investors will look at these numbers and say that the margins are far too thin, and suggest that you walk away from this "deal." You're not accounting for things like vacancy and cap-ex, plus there doesn't sound like much room for rent growth.

    With that being said, getting into this deal will allow you to live almost for free while you live there, and it will cash flow a bit when you move out which is impressive considering you're financing 96.5% of the deal and have to pay mortgage insurance.

    If you feel strongly about the location, I say go for it. Aim to lower your interest rate and drop the mortgage insurance through a refinance at some point in the next 3-5 years. And in the meantime you'll just deal with tight margins. Shouldn't have much come up for cap-ex due to the units all sound recently renovated.

    8Reply
  • Reid Chauvin
    Lender · Nashville TN - Licensed in AL AR DC FL GA LA MD TN, TX and VA · Member since 2021 · 583 posts · 338 votes
    4y

    @Lynn Tran - You note that your Estimated Escrow pmt is $315, but then you also have property taxes and insurance listed out as well, totaling $460. Generally, the escrow payment is comprised of the monthly property taxes and homeowner's insurance, so you might be duplicating those numbers. I would double check on that, and also try and understand why your escrow is only $315 if your taxes and insurance are $460, and if that is accurate.

    Out of curiosity, where in South LA is this? 

    2Reply
  • Jerry V.
    Contractor · Richardson, TX · Member since 2022 · 265 posts · 146 votes
    4y
    Quote from @Scott E.:

    Most experienced and sophisticated investors will look at these numbers and say that the margins are far too thin, and suggest that you walk away from this "deal." You're not accounting for things like vacancy and cap-ex, plus there doesn't sound like much room for rent growth.

    With that being said, getting into this deal will allow you to live almost for free while you live there, and it will cash flow a bit when you move out which is impressive considering you're financing 96.5% of the deal and have to pay mortgage insurance.

    If you feel strongly about the location, I say go for it. Aim to lower your interest rate and drop the mortgage insurance through a refinance at some point in the next 3-5 years. And in the meantime you'll just deal with tight margins. Shouldn't have much come up for cap-ex due to the units all sound recently renovated.

    Scott, nice reply!  Question though.. can't you avoid the PMI by structuring 2 loans? I.e. 1 for 80% the other covering the 20% ?  Not trying to go off topic or the issue at hand, just a thought that occured to me. Thanks!
    0Reply
  • Lynn Tran
    OP
    Member since 2022 · 14 posts · 2 votes
    4y
    Quote from @Scott E.:

    Most experienced and sophisticated investors will look at these numbers and say that the margins are far too thin, and suggest that you walk away from this "deal." You're not accounting for things like vacancy and cap-ex, plus there doesn't sound like much room for rent growth.

    With that being said, getting into this deal will allow you to live almost for free while you live there, and it will cash flow a bit when you move out which is impressive considering you're financing 96.5% of the deal and have to pay mortgage insurance.

    If you feel strongly about the location, I say go for it. Aim to lower your interest rate and drop the mortgage insurance through a refinance at some point in the next 3-5 years. And in the meantime you'll just deal with tight margins. Shouldn't have much come up for cap-ex due to the units all sound recently renovated.

    Thank you for this! This makes a lot of sense. Sorry I didn’t include vacancy but it’s 1% vacancy per Google for the city. 

    I think it’s a sweet deal otherwise when I think of the equity being produced. But it makes me nervous to think it’s barely making ends meet with this one. I pray that I can refinance in the future to make it a better deal. I think it can be expected that the monthly mortgage is higher since I only am doing 3.5% down for this deal. It’s completely renovated but the roof is 8 years old so I think I’ll need to account for that in the future but I feel would be perfect to manage this property and kinda test my limits. I think I will breath easy after the first year. Hopefully recent events won’t sway the market of local possible tenants.

    1Reply
  • Lynn Tran
    OP
    Member since 2022 · 14 posts · 2 votes
    4y
    Quote from @Reid Chauvin:

    @Lynn Tran - You note that your Estimated Escrow pmt is $315, but then you also have property taxes and insurance listed out as well, totaling $460. Generally, the escrow payment is comprised of the monthly property taxes and homeowner's insurance, so you might be duplicating those numbers. I would double check on that, and also try and understand why your escrow is only $315 if your taxes and insurance are $460, and if that is accurate.

    Out of curiosity, where in South LA is this? 


    My numbers are mostly accurate except property taxes and insurance. Still getting quotes but these numbers are ones my realtor had originally discussed before getting the other numbers from my loan officer. 

    I’m in Baton Rouge, LA.

    0Reply
  • Caleb Brown
    Real Estate Agent · Kansas City · Member since 2018 · 4k+ posts · 3k+ votes
    4y

    I'd do it. House hacks get you in the door. They aren't necessarily amazing but you are owning a appreciating asset and shaving off expenses for your living expense. Along with this you are only bringing 3.5% for the down payment. It also looks pretty turn key. See how inspections go but congrats!

    2Reply
  • Edgard Leite
    Investor · Greencastle, PA · Member since 2020 · 35 posts · 20 votes
    4y

    Lynn,

    I invest in Baton Rouge as well and I have no problem sharing my criteria/calculations with you.

    Feel free to send me a message.

    1Reply
  • Mike D'ArrigoPro Member
    Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
    4y

    @Lynn Tran I haven't reviewed the numbers so I can't comment on it from a returns stand point. My biggest concern would be the area. I'm always somewhat skeptical of high crime areas that are "shifting into a working class spot". What evidence is there that that is actually happening other than a new grocery store? Grocery stores by themselves are not going to transform a neighborhood, especially if they are just small mom and pop stores. If you said that there is a Whole Foods, Starbucks and major retail chains going in, I might feel different but these kinds of businesses do not usually lead redevelopment. What other investment is going in to the area that is going to turn an area known to be dangerous in to a working class neighborhood? What is real estate doing in the immediate area? Is it appreciating at least as fast or faster than the surrounding area? What is the average days on market compared to the area? Are owner occupants buying there or is it predominantly rental? Buying in an area that is gentrifying can pay off big but can be risky. Make sure you really know what is going on in the area.

    1Reply
  • Nicholas L.Pro Member
    Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
    4y

    @Lynn Tran you may also want property management at some point in the future, which will be 8-12% of gross rents.

    0Reply
  • Lynn Tran
    OP
    Member since 2022 · 14 posts · 2 votes
    4y
    Quote from @Caleb Brown:

    I'd do it. House hacks get you in the door. They aren't necessarily amazing but you are owning a appreciating asset and shaving off expenses for your living expense. Along with this you are only bringing 3.5% for the down payment. It also looks pretty turn key. See how inspections go but congrats!

    Thank you for your encouragement! Everything else seems great but the cash return isn’t as nice as expected so it was a little discouraging. But I do want to think of the long term!
    0Reply
  • Lynn Tran
    OP
    Member since 2022 · 14 posts · 2 votes
    4y
    Quote from @Edgard Leite:

    Lynn,

    I invest in Baton Rouge as well and I have no problem sharing my criteria/calculations with you.

    Feel free to send me a message.


     Wow that’s awesome! I would love any kind of help. The more I learn, the more I have a more clearer head. I’ll try to message you tomorrow to get some insight from you!

    0Reply
  • Lynn Tran
    OP
    Member since 2022 · 14 posts · 2 votes
    4y
    Quote from @Mike D'Arrigo:

    @Lynn Tran I haven't reviewed the numbers so I can't comment on it from a returns stand point. My biggest concern would be the area. I'm always somewhat skeptical of high crime areas that are "shifting into a working class spot". What evidence is there that that is actually happening other than a new grocery store? Grocery stores by themselves are not going to transform a neighborhood, especially if they are just small mom and pop stores. If you said that there is a Whole Foods, Starbucks and major retail chains going in, I might feel different but these kinds of businesses do not usually lead redevelopment. What other investment is going in to the area that is going to turn an area known to be dangerous in to a working class neighborhood? What is real estate doing in the immediate area? Is it appreciating at least as fast or faster than the surrounding area? What is the average days on market compared to the area? Are owner occupants buying there or is it predominantly rental? Buying in an area that is gentrifying can pay off big but can be risky. Make sure you really know what is going on in the area.


     The area is within 10 minutes from a large university and in a 1-2 mile radius is the rough neighborhood. That being said, another very success shopping center was built within these ranges and an Ideal Market right where it meets the main store. This area has many areas of land that is in development for houses and some retail. Driving through to the 4unit in the neighborhood and there’s a sum of Hispanic and African American individuals being out. Not threatening but fairly in piece. My realtor has discussed seeing the changes in the area becoming less dangerous with time. I’m not getting this property, betting on it to appreciate quickly considering everything but it would definitely be a bonus! Predominately rental I believe.

    0Reply
  • Lynn Tran
    OP
    Member since 2022 · 14 posts · 2 votes
    4y
    Quote from @Nicholas L.:

    @Lynn Tran you may also want property management at some point in the future, which will be 8-12% of gross rents.

    I’m going to property manage myself for a while since it’s just 4 units. I’m doing a lot of research to make sure it goes smoothly!
    0Reply
  • Brian Mackey
    Real Estate Agent · Baton Rouge, LA · Member since 2019 · 84 posts · 33 votes
    4y

    Lynn, where exactly is this fourplex. The area that your describing is on the rougher side. I’m an investor in Baton Rouge as well!  I’ve house hack three times here in BR.  Maybe we can go over some of the things that I’ve looked at when buying. You definitely don’t wanna be somewhere unsafe your first go around and there are some very bad areas of BR. 

    2Reply
  • Alecia LovelessPro Member
    Member since 2019 · 3k+ posts · 2k+ votes
    4y

    @Lynn Tran If the building is in good shape I’d strongly continue to consider this assuming the inspection doesn’t turn up anything too big.

    If I were you I’d save the cash flow each month after you get it fully rented once you move out following year 1 instead of taking it as a draw and keep it for future repairs/maintenance whether it’s little things that come up or the roof down the road.

    Only having to pay $500 or so your first year to cover the mortgage and expenses isn’t a bad way to get started especially since you’ll only be putting 3.5% down.

    1Reply
  • Lynn Tran
    OP
    Member since 2022 · 14 posts · 2 votes
    4y
    Quote from @Brian Mackey:

    Lynn, where exactly is this fourplex. The area that your describing is on the rougher side. I’m an investor in Baton Rouge as well!  I’ve house hack three times here in BR.  Maybe we can go over some of the things that I’ve looked at when buying. You definitely don’t wanna be somewhere unsafe your first go around and there are some very bad areas of BR. 


    Hey Brian! Sounds like you are seasoned in the area. I'd love to go through some things with you in regards to investing in BR if you're available. If you don't mind, I'm shooting you a message soon!

    0Reply
  • Lynn Tran
    OP
    Member since 2022 · 14 posts · 2 votes
    4y
    Quote from @Alecia Loveless:

    @Lynn Tran If the building is in good shape I’d strongly continue to consider this assuming the inspection doesn’t turn up anything too big.

    If I were you I’d save the cash flow each month after you get it fully rented once you move out following year 1 instead of taking it as a draw and keep it for future repairs/maintenance whether it’s little things that come up or the roof down the road.

    Only having to pay $500 or so your first year to cover the mortgage and expenses isn’t a bad way to get started especially since you’ll only be putting 3.5% down.


     Thank you Alicia for putting it in this way for me. It really puts things in perspective. It isn't a bad deal at all but I was nervous about long term of barely making the ends meet long term when I move out and I do end up with some income, but would eventually need some repairs, vacancy fees, etc long term. Ultimately little to no cash flow in the future. Thinking ahead, I think in the end I would need 5 years to see if possibly rent can rise enough to make it worth it to keep or will need to sell but at least the equity it brings would be wonderful.

    0Reply
  • Drew SygitBusiness Member
    Property Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votes
    4y

    @Lynn Tran various thoughts:

    1) You should know the taxes and insurance and not be estimating them at this point.

    2) NEVER buy without an inspection. So, get into those other units!

    3) Don't be foolish and only use a 1% Vacancy Factor because it's on the internet. FYI - the factor should also account for NONPAYING TENANTS. If you're buying in anything but a Class A area, the factor should be at least 10%.

    4) Where are the numbers for utilities? Doubtful all the units have separate electric, gas & water meters. 

    Overall, given the low amount you are investing, this appears to be a decent hack to start with as the tenants will be covering at least part of your housing expense. Also, having 3 tenants will provide great experience & learning opportunities.

    [email protected]248-209-6824
    Logical Property Management4.9458 Reviews
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    2Reply
  • Lynn Tran
    OP
    Member since 2022 · 14 posts · 2 votes
    4y
    Quote from @Drew Sygit:

    @Lynn Tran various thoughts:

    1) You should know the taxes and insurance and not be estimating them at this point.

    2) NEVER buy without an inspection. So, get into those other units!

    3) Don't be foolish and only use a 1% Vacancy Factor because it's on the internet. FYI - the factor should also account for NONPAYING TENANTS. If you're buying in anything but a Class A area, the factor should be at least 10%.

    4) Where are the numbers for utilities? Doubtful all the units have separate electric, gas & water meters. 

    Overall, given the low amount you are investing, this appears to be a decent hack to start with as the tenants will be covering at least part of your housing expense. Also, having 3 tenants will provide great experience & learning opportunities.


     When I asked my realtor about the numbers, this is a "round-about" of what he quoted, so its not fixed at this time. Definitely will not buy until my appraisal and inspection! I was able to walk through 2 properties at this time. The inspection is scheduled for next week.

    I Googled the area and it is expected at 11% vacancy that I am aware of. Should I buy this property, I plan on keeping all funds made by this property for any future funding and repairs needed.

    Each unit has their own separate electric and water, so the tenant pays for their own utilities.

    I appreciate your input Drew!

    0Reply
  • Carl ScottPro Member
    Rental Property Investor · Atlanata, GA · Member since 2020 · 3 posts · 1 vote
    4y

    @Lynn Tran Go for it!! Margins are thin but you are house hacking. My first house hack margins were thin but after living in the property for 3 years it all worked out and it allowed me to save up for more properties! Also it teaches you how to become a landlord.

    1Reply
  • Lynn Tran
    OP
    Member since 2022 · 14 posts · 2 votes
    4y
    Quote from @Carl Scott:

    @Lynn Tran Go for it!! Margins are thin but you are house hacking. My first house hack margins were thin but after living in the property for 3 years it all worked out and it allowed me to save up for more properties! Also it teaches you how to become a landlord.


     Thanks Carl for your support!

    0Reply
  • Brian Mackey
    Real Estate Agent · Baton Rouge, LA · Member since 2019 · 84 posts · 33 votes
    4y

    Hey Lynn I shot you a direct message.  Not sure if you’ve seen it just yet. 

    0Reply
  • Tyler LingleBusiness Member
    Real Estate Consultant · Indianapolis, IN · Member since 2021 · 440 posts · 292 votes
    4y

    All deals are, for the most part, thin on the margins right now. But will it get better by waiting? Likely not. Interest rates have no indication of going down soon and neither do home prices. Locking in a cash flowing asset right now is honestly critical. Again, just my two cents. 

    [email protected]
    Roots Realty Co. 561 Reviews
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    1Reply
  • Carlos Gonzalez
    Investor · Phoenix, AZ · Member since 2015 · 346 posts · 170 votes
    4y

    @Lynn Tran

    Take it. Mine was a worse fourplex and the numbers were worse than yours but I made it work. That fourplex is a great oportunidad

    1Reply
  • Lynn Tran
    OP
    Member since 2022 · 14 posts · 2 votes
    4y
    Quote from @Tyler Lingle:

    All deals are, for the most part, thin on the margins right now. But will it get better by waiting? Likely not. Interest rates have no indication of going down soon and neither do home prices. Locking in a cash flowing asset right now is honestly critical. Again, just my two cents. 


    I am curious if people are not going to buy houses as quickly with the interest rate rising. Prices of property are definitely high, but I feel like they could go down a little bit in the next year or so since the market was so hot during pandemic. It has to slow down at some point, bringing the numbers down. That being said, I do agree that we shouldn't wait for a deal to happen and getting a cash flowing property is ideal!

    0Reply
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