Is a 4-plex for $150k that brings in $2080 in rent/month good?

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Is a 4-plex for $150k that brings in $2080 in rent/month good?

Nichole Ovens
Rental Property Investor · Boulder, CO · Member since 2016 · 55 posts · 23 votes

Hello, 

This is my first post on Bigger Pockets. I love all the podcasts and forum articles. Love, love love this site and hope one day to meet Scott Trench, Brandon Turner, Josh Dorkin and Mindy Jensen some day...maybe next time I get back out to Colorado to snowboard or visit the family.

In the meantime, I aim to get a couple properties under my belt, but I want to do it right this time. I have a "tired landlord"/friend who fixed up a 4-plex and two other properties. He wants to sell them all to me for what he has in them. $150k for the 4-plex which brings in $2080 in rents, a 4bd/2ba for $114k that brings in $900 or $950, and a 2bd/1ba for $75k that brings in $750 in rents. 

I have never consider multi-family properties until getting more involved in Bigger Pockets and now having my handy-man/remodeler boyfriend move up. I wondered if anyone could advise as to questions to ask the seller for due diligence and the best way to get the down payment.

Currently, I am still carrying debt from a very lengthy divorce and can't get everything settled around child support...so wonder if it might be better to wait until I get all of my debt cleared or move forward to build wealth to help me clear the debt with this or a similar investment...Note: I have about $15k in credit card debt but my net worth including my primary residence, car, and 401k is okay. I thought I could take a loan against the 401k or transfer one of my old retirement accounts with a previous employer to a self-directed one so that the entire purchase and proceeds are all handled within the retirement account and thus would not count as income for tax purposes.

Thanks all!

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Thomas S.
Member since 2016 · 13k+ posts · 12k+ votes
9y

Until you have learned enough to fully understand investing and be able to answer your posted question yourself you should not be considering investing . While studying financing, investments, property management, tenant screening and landlord tenant law you will have the time to save and pay off your bad debts.

The 4 plex is worth considering, the two SFHs are not worth your time (no cash flow).

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  • Nathan P.
    Investor · Salt Lake City, UT · Member since 2016 · 89 posts · 41 votes
    9y

    Hi Nichole,

    From the numbers you give two of the properties meet the 1% rule. Meaning that the rents are 1% or more of the value of the home. This does not necessarily mean you have a great deal immediately but it is a way to quickly analyze properties for potential. There are obviously a number of things to analyze besides just numbers when looking for properties.

    Some of the things I would look for are.

    -What kind of repairs have been done  to the property recently (i.e. Roof, HVAC system, etc.)

    -Could the 4bd/2ba possibly be split into a duplex?

    -Are the rents around market value? Get online and see what other similar properties are renting for.

    Last thing people use self directed IRA's all the time for real estate purchases. I would be extrememly careful with a 401k loan. Because if you leave your current employer or fired the balance will be due immediately on that loan. I wouldnt want to be stuck with an employer because I owed them a debt.

    2Reply
  • Paul Bowers
    Real Estate Investor · Macedon, NY · Member since 2016 · 251 posts · 290 votes
    9y

    @Nichole Ovens have you talked to the landlord about possibly carrying the mortgage?

    2Reply
  • Nichole Ovens
    OP
    Rental Property Investor · Boulder, CO · Member since 2016 · 55 posts · 23 votes
    9y

    I thought about seeing if he would owner finance the down payment.  I don't think he can carry because I know he has a mortgage with a very conventional bank in town.

    0Reply
  • Todd Dexheimer
    Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
    9y

    He could possibly sell with a lease option. This would allow you to get in on seller financing. The deals could be good or bad, depending on a lot. Location? Is it a bad area or good? What utilities does the owner pay? If owner only pays water and sewer, then that would help a lot. Repairs done and needed? Property taxes? Insurance expenses? If he has a financial statement showing the profit and loss that would be helpful. As a rule of thumb the expenses are 50-60% of the income. 

    1Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    9y

    Until you have learned enough to fully understand investing and be able to answer your posted question yourself you should not be considering investing . While studying financing, investments, property management, tenant screening and landlord tenant law you will have the time to save and pay off your bad debts.

    The 4 plex is worth considering, the two SFHs are not worth your time (no cash flow).

    10Reply
  • Jim D.
    Investor · United States · Member since 2015 · 415 posts · 487 votes
    9y

    Great you are taking steps to get started. My two cents:

    1. If it's your first time owning a rental, I would probably recommend just doing one home to get started. You will learn a TON the first time around which will help you really hone in on what your next purchase should be. Of the three he presented to you, the 4-plex looks the most promising.

    2. I would throw all your extra money possible at the credit card debt first and completely eliminate it before investing in any real estate. No sense working your butt off to earn a 15% return on the rental if you're losing 17% interest on the back end. 

    Good luck!

    3Reply
  • Nichole Ovens
    OP
    Rental Property Investor · Boulder, CO · Member since 2016 · 55 posts · 23 votes
    9y

    Thanks all! The rule of thumb of expenses being 50-60% of income was exactly the kind of thing I wanted to know. Because he is a friend from my church, I didn't even want to start down the road of asking more questions until I was completely ready to move forward. I have made three purchases from friends one great (but there ended up being some drama), one okay (but some angst), and one terrible (the friend was trying to offload their problem to me and make money being the vacation rental person).

    So I have become VERY cautious about doing business with a friend.

    My credit card debt is all at 0% interest or 4.99% ... I won't carry credit card debt above 5%. But I appreciate what was said about not  borrowing from the 401k.

    I may let this ride a bit longer until I have all the debt paid off, or he comes back to me again with more desire to unload.

    0Reply
  • Nichole Ovens
    OP
    Rental Property Investor · Boulder, CO · Member since 2016 · 55 posts · 23 votes
    9y

    Oh, as to condition and location...the 4plex and houses are the nicest on their blocks. He is a contractor and probably fixed them up too nice for what he needed to do, but I would want my BF  to give them a good look (as he is a home improvement/remodeling guy). However, he is going to be tied up working on a flip for a local investor for the next 14-16 weeks, so he won't have time to do any work for me (based on the last time he worked on a project).

    I like the idea of potentially turning the 4/2 into a duplex! Marvelous idea. The street the 4 plex  and 4/2 are on is very nice and backs up to a park.

    Ultimately, I want to get my guy closer to our home working on properties that I/we own (or that we are JV partners on). I dont like seeing him leave early in the morning every day to drive 25-30 minutes away and working long days to turn an ugly home into a big profit for someone else.

    1Reply
  • Bill S.Pro Member
    Moderator
    Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes
    9y

    @Nichole Ovens so a couple thoughts. Before assuming you can turn a SFH into a duplex you need to make sure that zoning allows for this. At the same time. Converting SFH to duplexes is much more difficult to do well than it appears on the surface. The best duplexes have split utilities and dividing the heating system and the electrical into two parts on a SFH is not cheap or easy. Dealing with them un-split is a major headache.

    IMO it's never a good idea to have the best house/property on the block or neighborhood. When prospective tenants come to see your property they will be turned off by the neighbors. Having the best house sounds good but in practice it's usually under performs and is a headache to find tenants for.

    Personally I would consider the 4-plex and not the houses based on what you have said but there is far too little information to make an informed decision.

    Not really sure why you are waiting to get this or that cleared up before you invest. Sure having the debt paid off would make you more attractive to a bank for lending you money but there are tons of other routes to travel so don't let that be your roadblock. Get The Book On Investing with Low and No money down by Brandon Turner. It will have some good ideas to consider.

    I would not recommend using the 401K to buy RE with unless you really know what you are doing (which you don't). Taking out a loan to buy with might be ok but you should know that if you separate from your employer you might have to payoff the loan. If you don't payoff the loan it's like you took a disbursement you get the penalty and it counts as income. 

    2Reply
  • Nichole Ovens
    OP
    Rental Property Investor · Boulder, CO · Member since 2016 · 55 posts · 23 votes
    9y

    Hi Bill, thanks for clarifying. I probably exaggerated to say they were the best houses on the block. I am pretty sure I don't want the $75k house. The 4 plex is right next door to the SFR 4/2. Both are nice and both are updated.

    Thank you for pushing me forward not to necessarily wait to get all the debt paid (might be a lifetime, with the ex who loves going to court!) It has been this that has held me back from pulling the trigger on my dreams of REI.

    So, I need to find creative ways to rebuild in spite of debt and the ex husband. I also need to be cautious not to get too complicated this year or get more income that will trigger another return to court.

    I need to find a good real estate investor friendly accountant and lawyer in the area to help me structure deals.

    Is there any way I can stay abreast of your Denver meetups? I consider the front range home with family and friends all over there. I want to make it to one of your events next time I go back home to see family or snowboarding.

    Thank you!

    0Reply
  • Victor S.
    WorldWide · Member since 2016 · 1k+ posts · 1k+ votes
    9y
    Originally posted by @Nathan P.:
    I would be extrememly careful with a 401k loan. Because if you leave your current employer or fired the balance will be due immediately on that loan. I wouldnt want to be stuck with an employer because I owed them a debt.

     Not all plans require immediate payoff. Mine doesn't. 

    Nichole, check with your employer's plan administrator first.

    0Reply
  • Bill S.Pro Member
    Moderator
    Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes
    9y

    @Nichole Ovens most of the local meetups are on meetup.com. My landlord roundtable is as well as the others that get mentioned here frequently.

    1Reply
  • Justin B.
    Investor · Gaithersburg, MD · Member since 2013 · 660 posts · 441 votes
    9y

    The short answer to your title: Yes

    The slightly longer answer: It depends on several things, mainly taxes, insurance, location (Bad neighborhood where you can only get questionable tenants?) and state of the property (Does the roof or AC/Heat need to be replaced?).

    A well maintained, C/C+ neighborhood with fair taxes, most likely a yes.

    1Reply
  • Richard Elvin
    Investor · Cleveland, TN · Member since 2016 · 280 posts · 187 votes
    9y

    I'm a newbie, but could you wholesale the 4-plex? If it's a decent deal it could put a few thousand in your pocket. Personally I would prefer the cash flow, but if you can't take the deal, maybe you can still make some money. Just my thoughts. :)

    1Reply
  • Nichole Ovens
    OP
    Rental Property Investor · Boulder, CO · Member since 2016 · 55 posts · 23 votes
    9y

    I am going Pro so I can have unlimited access to the analysis tools. I am going to run it through the calculator and share.

    0Reply
  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    9y

    All this conversation and nobody has asked the obvious but super important question, so I will: What are the comps? The comps will tell you if you are getting a good deal on the properties or not. The fact that the owner wants to sell them for what he has in them means absolutely nothing if the market value (based on sold comps) does not support that price.

    1Reply
  • Ronda R.
    Investor · Atascadero, CA · Member since 2015 · 238 posts · 90 votes
    9y

    @Nichole Ovens I don't know why I can't tag you - Geesh sometimes it works and sometimes not. Anyway. . . maybe you and your boyfriend should be looking around for a distressed property to buy, rehab and flip. You could get some bills paid off and then do some buy and holds or at the least force some equity for a buy and hold. If you have those kind of skills you many not want to buy something that has already been fixed up.

    2Reply
  • Nichole Ovens
    OP
    Rental Property Investor · Boulder, CO · Member since 2016 · 55 posts · 23 votes
    9y

    We do want to do that, but this particular opportunity is so close and could be quite an easy way to see if the multifamily rental thing is even my cup of tea. 

    I have found that often I just don't know without trying.

    0Reply
  • Nichole Ovens
    OP
    Rental Property Investor · Boulder, CO · Member since 2016 · 55 posts · 23 votes
    9y

    Good question about the comps. I am not sure, these don't come on the market often. I also hesitate to ask my realtor friend to run comps for me as I don't want to get any more fingers in the pie. 

    I know a foreclosed version of the same (though it is set up for commercial business) was listed at $175k. 

    Is there any other way to find comps besides having a realtor run them?

    The owner is a realtor and I could ask him to run them, but I think there could be an automatic conflict there and the results could be skewed.

    0Reply
  • Zachery Buffin
    Investor · Away · Member since 2017 · 167 posts · 131 votes
    9y

    You said this comes from someone who was/is a landlord currently. Ask for help use him as your mentor. I think you have to look at your situation more in-depth as an exchange of risks. There is your credit card debt, divorce proceedings, opportunity in real estate, and life in general. Life never slows down, you never catch up, but in raw numbers it is impossible to say if you should or shouldn't do this deal. 

    We would have to know a lot more about actual numbers and data on how rentals do in your area. That being said, I am heavily into leaning forward into life and opportunity. These properties, if you buy some/all, will provide great tax benefits in the form of depreciation as well as rental income. You will also be able to claim more tax breaks by forming a business to manage your rentals, it is important to get an accountant here to help you. 

    There is a lot more to gain here than you have to lose, this is the foundation of freedom and the building of real wealth. As long as you can pay down your credit card debt with your normal income you can keep everything in your real estate business in a separate account that you can then use to buy more real estate.

    You should consider picking up everything in the package as well even if they don't necessarily cash flow well. 1031 exchanges can be a powerful wealth building tool that can see you into more multifamily properties faster. They may also be a way to get into lease to own contracts with tenants as well. These are all options and different paths to take, there are so many ways to build wealth with real estate that it seems silly to ever pass on good opportunity. Best of luck and let us know how it goes!

    @Todd Dexheimer It is important to say that expenses are roughly 50% NOT including mortgage/loan but yes as far as rules of thumb go this is relatively sound. 

    @Thomas S. I don't know how sound that advice is, sure you should have some knowledge but you will never know everything and be able to answer EVERY question yourself. I think this is one of those rare opportunities where something very "lucky" has happened here and if you wait to feel 100% comfortable it will pass you by.

    1Reply
  • Zachery Buffin
    Investor · Away · Member since 2017 · 167 posts · 131 votes
    9y

    @Nicole Ovens

    Also you can run comps with zillow or redfin, Tennessee is a full disclosure state so the price paid is readily available. Just look in the neighborhood and run through the similar size, bed/bath, acreage, style, etc. and then narrow that down a bit with only deals closed in the last 6 months to a year. It is very time consuming without the mls but it can be done. If you give me the address in a pm I can use the mls to do it a bit faster for you.

    1Reply
  • Rick Hernandez
    Lender · Marion, IA · Member since 2014 · 59 posts · 27 votes
    9y

    I evaluated a four plex with similar numbers.  At the end of the day I felt the return was not good enough.  Are all the utilities separated out?  This would make a big difference.  Good luck.

    2Reply
  • Todd Dexheimer
    Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
    9y

    @Zachery Buffin said "You should consider picking up everything in the package as well even if they don't necessarily cash flow well." 

    I could not disagree more. Cash flow is king, don't buy a rental without cash flow, unless you have extra money to throw around. That is the quickest way to failure.  

    1Reply
  • Zachery Buffin
    Investor · Away · Member since 2017 · 167 posts · 131 votes
    9y

    @Todd Dexheimer I didn't say to pick up properties that didn't cashflow at all, even though that can be viable under different conditions; I said she should consider them even if they don't cashflow WELL. We can all have different tolerance for what we consider to be good and bad cashflow, it is also important to note that not all investment strategies emphasize cashflow. You can absolutely invest in properties that do not cashflow at all or even have negative cashflow in the short term if your exits permit and end with an overall positive exchange. There is no ONE way to invest in real estate but the important thing here is to encourage learning and discourse about options. I don't think it is ever the right thing to simply just tell someone not to do something or that you absolutely wouldn't in your experience. Sure we are here to help people avoid mistakes but different places have different situations and different opportunities. 

    I am sorry if this comes across as negative I am really not trying to be at all. I just believe that positive encouragement and help on making deals work for people by offering options for them get them farther than blanket statements of no or don't do it. Again I really do apologize if this feels like I am attacking anyone or something like that I don't mean it in that spirit. Cheers!

    0Reply
  • Todd Dexheimer
    Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
    9y

    @Zachery Buffin no insult taken. I am looking at the context of the original post and it looks like she's trying to buy rental real estate. In that case cash flow is the most important thing to consider, especially in her situation. Taking action is massively important, but being strategic is equally important. 

    0Reply
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