First investment- owner occupied fourplex. Need advice.

8 Replies

Hello I'm in the process of buying my first property. I don't have anyone in my family or friends that's owned real estate so it's hard to find someone to lead me in the right direction. Property is a fourplex in a mid level neighborhood. It is fully rented, I have lived here for 6 months as a tenant. It is off market. I talked with the owner he agreed @ $200k he would sell me the property. I feel like it's a good starter and am finishing up working with the mortgage company to get approved. I have around $10k in funds assuming a FHA/Freddie loan would be my best financing and would require 3-4% down.(Open for advise there.) I have an appointment with a CPA he mentions starting an LLC. Is that worth the cost if this is my only property? The owner isn't dealing with an agent hes an older gentleman,and just wants to walk away from the deal with his money. Since I don't have an agent to guide me thru the process do I need to hire an agent myself, do I need an attorney? The property is low maintenance, the other tenants are all 5+ years in place, the total rent is 2800 and expenses looks to be under 2000 per month. I basically have an offer accepted and a small down payment where do I go from here?

@Nicholas Butler an LLC is not an absolute necessity, but it should certainly be a consideration. You definitely should add an attorney to your team and speak with him/her about that in more detail from a legal aspect.

From a tax standpoint, an LLC doesn't really do anything for you - your share of income/losses is passed through to you and reported on your individual tax return.

If you have any other tax questions, happy to help.

I have a couple things for you.  I house-hacked a 4-plex as my first real investment property.  

First, in order to get FHA financing, you can't put the property in a LLC. It has to be in your name. FHA loans are for homeowners, and a LLC is a business, so there's a bit of a conflict if a business is trying to take advantage of a programs designed for homeowners. It's not a big deal though, as an umbrella insurance policy probably gives you more protection than a simple LLC (any lawyers can chime in here and tell me I'm wrong).

Since this is your first property, I'd highly recommend having an agent represent you and walk you through the process.   Generally speaking, the seller pays all agent fees, but in this case, since it's off-market, you can work with the seller to come up with an acceptable commission (maybe split it).  Most agents receive in the neighborhood of 2.5%, so that'd be $5k in this deal.  The seller may not be very happy about cutting into his cost, so your purchase price may have to come up a bit if he's going to cover it.  The agent can walk you through all the requirements, and will have leads on lenders.  

When you apply for financing, the lender is going to dive into your finances and still require you be able to cover ~6 months of costs (held in a liquid asset), and may not count the rent generated from the other units.  They'll also require an appraisal to make sure the property is worth what you are paying for it.  Start shopping for lenders immediately.  I'd recommend starting with local banks.  Have the face-to-face conversation with a loan officer and explain everything you're trying to do.  If you aren't getting a good feeling, look towards the national lenders, such as Quicken (who are unexpectedly attentive and responsive).  

As part of the offer contract, make sure to include a significant due-diligence period to go over all the financials, and a good property inspection from a licensed inspector.  You'll want to get all the real operating costs from the owner, including pest, lawn care, taxes, insurance (you can get your own quote), maintenance, utilities, management, etc.  If he doesn't keep good records, then you have a bit of a problem, and will have to calculate it yourself.

Finally, with all the information you've collected, you determine if it is a good deal or not.

Based on what you listed above here's an example ballpark monthly budget:

Principle & interest: ~$1,000 ($195k loan @ 5%)

Taxes & insurance: $300-500/mo (depending on your locality)

Utilities: $200/mo for water (most 4-units has the owner paying water)

Vacancy: $140 (based on 95% occupancy at $2800/mo)

Maintenance/Capital expences: $280 (standard 10%)

Management: $280 (10%)

Total: ~$2,300-2,500, leaving you with a profit of around $100/door, with only $10k invested.  Not bad.  However, since your not going to pay yourself rent, you really just get to live in the place rent free, while your tenants pay off the principle.  

You may be able to start by self managing, since the tenants seem stable.  However, you may go through some growing pains once you have a vacancy and have to find a new tenant.  Trust me, I wish I would have hired a property manager after my first vacancy.  Instead, I did a poor job of picking tenants, and it cost me two evictions and lots of lost revenue before I learned my lesson.  

@Nicholas Aiola thanks that kind of goes along with the reading I've done saying LLC is great once you need it, but in the beginning if this property is all I'm invested in, it wouldn't be worth the trouble, until later when I have more equity and other investments.
@Jack P. Great advise,, I do plan on managing the property myself but I do plan on taking a very professional approach so I don't end up with dead end renters. If my rent is free should I still send myself a check from my personal bank account to an account specific for the complex? Is it more important to show the property getting 4 rent checks for higher income, Or show less profit in hopes of owing less taxes? As far as financing is a bank loan my best bet,, do private lenders or hard money ever fund high LTV for a buy and hold? Just trying to make sure I'm going about it the best way

@Nicholas Butler I'd second what @Jack P. said about using an agent for your first property purchase to walk you through the whole processes. That being said, you might call a couple of agents in your area (check BP as there may be agents on here in your area or people in your area on here that can recommend someone) and see if they'd be willing to help you close for a flat fee rather than a % of sale (to save you some money) since you already found the property and they won't have to do as much legwork. Good luck!

Don't worry about fudging the rent numbers by paying yourself.  It all works out the same in the end.  Actually, it may cost you more, since you're tax burden is the difference between your income and expenses.  By paying yourself, you would be showing additional income for the property.  I'm not a CPA, but if you paid yourself $700/mo in rent, that would look like your property received an additional $8k in revenue for the year.  And since rent payments are not tax deductible, you don't get that money back.  As you lay it out, if you didn't pay yourself, the property probably shows as a loss on paper.  However, if you paid yourself $700/mo, you may end up paying taxes on it (albeit not much).  

If for some reason you wanted to establish a record of income for the property being rented at full value ($2800/mo vs. $2100), I guess it may look favorable for a lender when trying to secure financing for your next property, but that's a stretch.  

I wouldn't pay myself.  It's more complicated, and I don't really see much of a benefit.  

As for your financing, the federally-insured programs (Fannie/Freddie/FHA/VA) are 9 times out of 10 going to give you the best rates and terms. They are low-risk for the lenders, so they cost less. People use private lenders and hard money because they don't qualify for traditional financing, either because of the property type, or other circumstances (such as investment properties).

@Nicholas Butler I would defanatly get an agent or a lawyer that understand the closing process and will guide you. Do ask for a discount, you have done most of the leg work and just need help with closing. Regarding the next setup I would go on leandingtree and submit a request for a loan with your criteria. Maybe get a Google phone number and provide that because your phone will be ringing all the time. You will get some good offers, I advise you to narrow them down to three and call those banks/brokers. Make them fight LOL. Remember in real estate everything is negotiable if they say we can't do that. Tell them the other bank did it. You do not have anything to lose they have. Also I would advise you to work with two banks if possible. This a bit tricky but some of the banks will allow you to lock the rate and at the same time you are not committed to the close with them so you have your best term loan and a backup bank incase the first one does not fund your loan at the last minute. Always be prepared for the worst and hope with the best. Also, start of shopping around for insurance and inspection. Do not trust the inspection too much. If you see something that is not right always check. Always double check what people tell you. The worst will happen you will learn more. Always be polite with all the people you work with, except when they are not polite with you. So you got your loan in the bag now. You have an insurance policy on the property. Inspector that will inspect it. Just one additional idea will be if you can get some more funds so you can put 20% down so no insurance on the 2nd loan and better interest rate.
Few more things to do: 1. Ask the seller for all the lease agreement and ask him to complete a specific form with details of each lease. That form is signed by the tenant and the seller so no issues after the sale. Can't remember the name of the form. BP will help with this!!! 2. Do your self a favor and make sure you set the rules with the tenants or they will drive you crazy. An example, I tell all my tenant to contact me via email first. However, I make sure to answer the email in quickly 5mins. So they know that if they send and email and I'm free they will get a response. Always provide a phone number but explain that is in case of emergency. 3. Setup an account with cozy.co and setup your property on it. Application, deposit and rent via the platform. This will help you to scale and make it easy on you. 4. Also look how you can save money on experience. For example, if you are paying for water install new toilets, faucets and etc. The more expenses you cut the more money you will make. Good luck