First time investor - Owner/Occupant and Landlord - thoughts?

Question

I'm looking at a 4-plex in Austin that's under HomePath FirstLook, and I would OO for a year.  It's listed at $156K, two 2/1.5 and two 1/1.5 units... one 1/1.5 is rented now at $550, the 2 br could go for $650 as is.  But the place is looking pretty crappy, and I'd have to do renovations.

With a Homepath Renovation Loan, I could get $35K above, and I was thinking I could put $10K into each 2 br, and $7K into each 1 br.

The issue I'm having is the area is not the nicest.  Actually, it's JUST the two blocks with a bunch of 4 and 2 plexes... go 2 blocks into the neighborhood, and it's a very nice, upcoming area with home prices in the mid-$200s.  It's relatively close to downtown Austin, and convenient to other areas.  I would like to think it might become a bit more gentrified and be influenced by the neighborhood, or at least attract some college students, or post-grads, that want something more than just an apartment.  But I don't know.

There have been a few other 4-plexes sold in the past year or so, but there's no suggestion of those landlords making their property any better.  Their crappy looking properties can still make money, so is there any motivation to make the area nicer? Personally, I'd like to have a nicer complex and increase rents by $100... but will that be financially smart? Does is hurt to have a nicer property amongst crappy properties... or is there a possibility that I could influence OTHERS to make their properties nicer?

I just don't know enough to be totally comfortable with the investment.  Any thoughts on matter would be appreciated.

Mark Pollard · Answer

Hi Terry,

I'm looking to do the same thing in Chicago. Owner Occupying a 4- plex is one of the easiest and safest ways to get started in real estate. It has many advantages over other investments:

1. Easiest to finance. You can own 4 units and still get residential financing (less money down, longer term, lowest rate)

2. Less vacancy risk. A vacancy in a quad is only a 25% vacancy and you'd have other renters to help make your payments.

3. Easiest to improve. You don't have to do all the improvements at once. You can try improving 1 unit a little to see if that brings in more rent. You can do improvements at your own pace and it will be convenient if you do the work yourself and if you live in the building.

As far as an investment strategy I think you're on the right track. But, like the others said, I don't know about your area. You can try calling the local police department to find out about crime and the safety of the block. But as far as speculating about gentrification, who knows, but I wouldn't count on it. As long as you feel safe living there that's all that matters. And as long as you are making a positive cash flow you shouldn't even care too much about long term appreciation, that's another strategy altogether.

Scott Hubbard · Answer

While you may be correct that the neighborhood is improving, but do you want to take the risk of betting that your right?

First, you should spend money only on improvements that have a quantitative return on your investment.  If other multi's in your market improve, then you could take another look at doing so.

Second, do not take cues from SFR's as it is a completely different market segment and should not be considered in making your decisions.  If the neighborhood is improving, this does not necessarily mean market rents will increase.

Third, your demographic should be considered when making capital improvement decisions.  For instance, college students typically are on a tight budget and tend to favor lower rents as opposed to nicely renovated apartments.  Generally, they want clean and cheap.

Fourth, if your target market is small family or young couples and the demographic is well represented, then you might get a return on the renovations.  Typically, young couples  will also want value as they are probably saving to buy a home, so I just do not see the value in renovations.

Fifth, the higher your rents are, the closer you draw to competition from SFR's.  SFR's will generally win over Multi's so you your rents are better being offered at a substantial discount to SFR's.

Good Luck

Terry Matula · Answer

That makes sense.

What I wonder, do other investors look at the properties around theirs and could they be influenced to improve their own properties?  So, if I upgraded our 4-plex, and started renting at $100 or above the average,  would other's maybe follow suit? The location is good enough, that I think getting $800-$1K/ month wouldn't be unreasonable, if the buildings weren't so trashy.

The zip code has fairly low crime rates, but those two blocks are not so good. Though it's mostly domestic issues, with some theft and graffiti.

Jon Klaus · Answer

I don't know that area well enough to have a real opinion.  How's the crime?

I'm working on a project in East Austin where the gentrification feels like it's 2005.

Terry Matula · Answer

And as I was saying the neighborhood is very nice, and improving. It's literally just 2 blocks of 4-plexes and duplexes that are less than desirable.

Scott Hubbard · Answer

If other properties have sold and none of them have been remodeled, then why would you spend the extra capital to do so?

Your competition has set the market rents and your likely only going to improve on vacancy.

If I were you, I would first try to look at your competitions units and use this as your gauge. Do not over improve! Instead, look to plumbing, roof, and electrical for improvements.  You will save money in the long run by heading off future maintenance issues.

Terry Matula · Answer

It's just north of the Wooten neighborhood... close to 183 and Burnett.

Jon Klaus · Answer

This could be an interesting property/approach.  If I were just starting now in Austin, I might look at doing the same thing.  The cash flow is OK, not great--the gentrification is the key thing.  There are neighborhoods in Austin where this would have been bad news a few years ago, but now are improving rapidly.  What are the major cross streets nearby?

First time investor - Owner/Occupant and Landlord - thoughts?

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