4-unit owner occupied investment as my first property?

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4-unit owner occupied investment as my first property?

Mike Batir
Real Estate Investor · Milwaukee, WI · Member since 2012 · 1 post · 1 vote

Hello. My name is Mike and I am brand new to to investing in real estate. It has always seemed like a no brainer to me to have tenants paying your mortgage/making you some money but it seems like nobody wants to get into it. Besides the horror stories of horrible tenants which you have to expect I just don't see how this is a bad idea.

A little about me.....I am 26, in my first job outside of college making 100K and will be paying about $1300 a month for my college loans over the next 25 years. I do not have any family that I am supporting and am currently renting a 1BR apt for $875/month. I will not be needing a house of my own anytime in the foreseeable future and it seems like an owner-occupied investment property is perfect for me. I know (or maybe I have no idea) a 4-unit building will be a challenge but at this point it seems like a solid move. With units occupied 70% of the year the mortgage would still be covered completely with out any contribution from me. I know taxes will be additional but if I am throwing away 10.5K a year in rent, why not put it into an income property?

Any help, advice, caution, or reassurance that can be provided would be much appreciated.

Mike

1Reply
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Scott R.
Real Estate Investor · Amarillo, TX · Member since 2008 · 547 posts · 214 votes
14y

Will you be living in this property, you mention buying it owner occupied so I'd assume youd actually move in?
my one piece of advice, coming from a similar aged investor.
NEVER ADMIT YOUR THE OWNER!
its way best way, and the tenants are more laid back and themselves around you! your just the maintance man/manager working for someone who owns the property, probablly lives out of state, and is a dick..
Being new in the game, you dont always think things through 100% if put on the spot, it's too easy to give in and people try and take advantage of you at a young age, new in the game, this ALWAYS gives you an out, gives you time to consiter anything,

tenant wants to have a dog, put on the spot you might agree, but as the manager you'll ask the owner and get back to them. !
there rent is going to be late, well you'r required to charge them the late fee, its not your rules, its your job. you dont get the money and it doesnt effect you at all,
they almost seem to think your more on there side if you live in the multi unit and are not the owner
Hundreds of small situations, and your tenants are more likley to tell you stuff IMO if they think you are not the owner.
TRUSE ME it works! :)

17Reply
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  • Steve L.
    Investor · Rancho Cucamonga, CA · Member since 2008 · 1k+ posts · 684 votes
    14y

    I think this is a good move, depending on how much fourplexes cost in your area. Long-term you definitely don't want to live next to your tenants but you can get 30 yr fixed financing for dirt cheap going this route.

    Your should read many of the threads on this site, the 50% rule is a good spot to start.

    The market value you for the unit you occupy should still be paid to that investment and you should save that money for your next investment.

    1Reply
  • Scott R.
    Real Estate Investor · Amarillo, TX · Member since 2008 · 547 posts · 214 votes
    14y

    Will you be living in this property, you mention buying it owner occupied so I'd assume youd actually move in?
    my one piece of advice, coming from a similar aged investor.
    NEVER ADMIT YOUR THE OWNER!
    its way best way, and the tenants are more laid back and themselves around you! your just the maintance man/manager working for someone who owns the property, probablly lives out of state, and is a dick..
    Being new in the game, you dont always think things through 100% if put on the spot, it's too easy to give in and people try and take advantage of you at a young age, new in the game, this ALWAYS gives you an out, gives you time to consiter anything,

    tenant wants to have a dog, put on the spot you might agree, but as the manager you'll ask the owner and get back to them. !
    there rent is going to be late, well you'r required to charge them the late fee, its not your rules, its your job. you dont get the money and it doesnt effect you at all,
    they almost seem to think your more on there side if you live in the multi unit and are not the owner
    Hundreds of small situations, and your tenants are more likley to tell you stuff IMO if they think you are not the owner.
    TRUSE ME it works! :)

    17Reply
  • Raymond B.
    FL · Member since 2009 · 2k+ posts · 357 votes
    14y

    Mike Batir:
    Welcome to the forum.
    I suggest that you spend some time, reading the following:

    http://www.biggerpockets.com/forums/52-rental-property-questions-landlording-issues

    http://www.biggerpockets.com/forums/52/topics/18371-help-me-understand-this-deal-and-5-2-rule

    Raymond

    1Reply
  • Jeff Arndt
    Investor · Pittsburgh, PA · Member since 2011 · 117 posts · 78 votes
    14y

    You are outlining my exact starting out strategy. I currently live at home and I'm shopping for investment property. My plan is to buy a 4-unit property with the hopes of everything being free. Including taxes, insurance and even savings for future repairs.

    Don't let anyone or the media tell you that lenders won't loan to you. Wrong! I called an FHA insured lender and I was pre-approved in minutes. Just provide your job offer letter and your diploma and you should be all set.

    Next find a quality INVESTMENT Realtor. The first Realtor I talked to wanted to sell me the curtains and how beautiful the back yard was. Make sure to find one that has investment property of their own.

    3Reply
  • Chris Masons
    Investor · Union, NJ · Member since 2011 · 838 posts · 295 votes
    14y

    This is a GREAT Strategy IMO. It is how I got my start in Real Estate only I took it a step further and instead of occupying an apt. I stayed living at home with Mom paying very minimul rent.

    This enabled me to save quite a bit of money for the next investment which ended up being my primary residence at the time which was a 2 family so that tenant ended up paying 3/4 of my Mtg on that house.

    Having other people's money work for you can be a great way to build a bankroll and or free up capital for you to invest elsewhere!

    occupying a 4 family is great too b/c you will be there to oversee and manage the building which is a huge plus.

    Just make sure the numbers work which in this market I am pretty sure they will.

    goodluck!

    Chris

    1Reply
  • Chris Woods
    Member since 2011 · 7 posts · 3 votes
    14y

    I purchased a fourplex using an FHA loan about 8 months ago and I think it's a smart move for your first purchase. It also depends on your market if this will make sense. One obstacle I did have with using an FHA loan is that I would lose properties to investors offering cash. Most of the properties in my area are bank owned and they didn't seem to want to mess with an FHA loan when there were cash offers on the table. I was able to get a good property from a bank that was looking for someone that would owner occupy. This also depends on your market and if the numbers make sense but I wrote offers slightly above asking and didn't ask for anything back. In regards to not letting the tenants know you are the owner, I think that is a very good idea. The
    tenants think that I work for the owner so they don't really bug me that much. I worked out a deal with a property management company where they charge me a very small fee to "manage" the property since I am on-site and handle almost everything. Best of luck in your search and keep us updated.

    Chris

    0Reply
  • Becky Watkins
    Investor · Seattle, WA · Member since 2011 · 84 posts · 10 votes
    14y

    I have been trying to wholesale for almost a year now so that I can have enough cash for a downpayment. I still don't have that, and now I'm reading above that the cash buyers will be more powerful competition. And I've read other places that fourplexes are overpriced and don't provide as much relative cash flow as SFR. I'm stuck trying to figure out what to do, because I'm getting a low response rate to my yellow letters, and not one deal yet (everyone who has actually called said they are working with the bank on a refi or can only short sale). Is fourplex a good way to go with an FHA? Even though I don't have experience (we do have three years experience in managing apartments) in real estate investing, should I try to use private/hard money? I only have about $10k cash from our personal fund.

    0Reply
  • Nathan Emmert
    Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes
    14y
    Originally posted by Becky Watkins:
    I have been trying to wholesale for almost a year now so that I can have enough cash for a downpayment. I still don't have that, and now I'm reading above that the cash buyers will be more powerful competition. And I've read other places that fourplexes are overpriced and don't provide as much relative cash flow as SFR. I'm stuck trying to figure out what to do, because I'm getting a low response rate to my yellow letters, and not one deal yet (everyone who has actually called said they are working with the bank on a refi or can only short sale). Is fourplex a good way to go with an FHA? Even though I don't have experience (we do have three years experience in managing apartments) in real estate investing, should I try to use private/hard money? I only have about $10k cash from our personal fund.

    Private/Hardmoney is the last place you want to go with your 1st investment. As you don't have a relationship with them, the down payment requirements will be as high or higher than conventional funding. Interest rates on Private money will run you about a 3% premium to conventional, Hard Money runs about a 7% premium.

    FHA is a great way to get into a property with a small down payment, that's it in a nutshell. You get to put your investment to work instead of having it collect dust while you try to collect additional monies.

    As for 4plexes... everyone believes additional units equals additional cash flow. I have found 4 plexes to be highly targeted/coveted and thus they often sell at a premium. At the end of the day, it's about cash flow. I have a 2 plex that rents at just over 2% of purchase price... a 4plex that rents at 1.7% of purchase price... which was the better deal?

    Lastly, remember you only get 1 FHA bullet. If you want to move in 2 years and get another FHA loan, you'll have to refi this 1st one... to refi, you'll need a 20 - 25% equity stake. You either need to buy significantly below FMV... buy in an area that expects very high appreciation... aggressively pay down principle... or be prepared to put 20% down on your next Owner Occupied home (i.e. non-FHA).

    1Reply
  • Becky Watkins
    Investor · Seattle, WA · Member since 2011 · 84 posts · 10 votes
    14y

    Ok I guess I'll keep trying to wholesale to raise the capital for a downpayment. I'm just getting impatient because after a year, the farthest we've gotten in a deal is a call from a letter. The only people who have been interesting in selling were those who can only short sale or are already on the MLS. Thanks.

    Regarding the 2%/1.7%, what does that mean? And which one is the better deal?

    0Reply
  • John T
    Member since 2010 · 17 posts · 0 votes
    14y

    This is exactly how I got started out... Bought my first property which was a duplex and supplemented the mortgage with the rent I was collecting. Then instead of going and living an extravagant lifestyle, I kept building my portfolio.

    Now I'm working on owning the majority of rental property in the town I've established myself in.

    Good luck and let me know if you have any questions!

    0Reply
  • Becky Watkins
    Investor · Seattle, WA · Member since 2011 · 84 posts · 10 votes
    14y

    John, did you live in the duplex?

    0Reply
  • Raymond B.
    FL · Member since 2009 · 2k+ posts · 357 votes
    14y

    Becky Watkins:

    2% means that you get 2% of the purchase price for the monthly rent.
    Example: Purchase a rental property for $50K., monthly rent would be $1000.

    1.7% of the $50K would be $850.

    If you're going to be a landlord, I suggest that you spend some time reading here:

    http://www.biggerpockets.com/forums/52-rental-property-questions-landlording-issues

    http://www.biggerpockets.com/forums/52/topics/18371-help-me-understand-this-deal-and-5-2-rule

    Raymond

    0Reply
  • Becky Watkins
    Investor · Seattle, WA · Member since 2011 · 84 posts · 10 votes
    14y

    My husband has been a community manager ("landlord") for three years, so we understand that side of it.

    I read the second thread you linked and it's very discouraging.

    Following that rule, a fourplex where we rent out three units for $1k/ea, the building would have to be $150k. That won't even buy a SFR except in the shadier parts of LA.

    I was also working off the assumption, because I read it somewhere once, that one unit would cover the mortgage, but I just used a calculater on Wells Fargo, and it said the payment for a 30yr fixed 3.75% FHA loan would be $3,258.48. The rents wouldn't even cover that. Back to the drawing board, I guess.

    0Reply
  • Nathan Emmert
    Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes
    14y

    Becky, remember your unit is included in the 2% "rule". So if 4 units would rent for $1,000 each... the rule says you should target about $200,000 in purchase price ($4,000 in rents).

    I have found with 25% down, I can drop the ratio to 1.5% and still achieve a 15% Cash on Cash return given 30 years @ 5% interest.

    The nicer parts of CA aren't going to cash flow well. I'm sure you can find the 2%... the question will become, do you really want to live there? You may be better off just buying a place you want to live forever that has a basement unit which reduces your cost some and allows you to save money on your mortgage (i.e. invest more long term).

    0Reply
  • Becky Watkins
    Investor · Seattle, WA · Member since 2011 · 84 posts · 10 votes
    14y

    No, we don't want to live in California forever, but we're not ready to move either.

    We were actually considering your town once, because my husband's employer was expanding there, but the community manager position was snatched up quickly.

    0Reply
  • Keith Schulz
    Investor · Verona, WI · Member since 2008 · 134 posts · 79 votes
    14y

    Mike,
    I started with an owner occupied duplex, and I have a client that started with an owner occupied 4 unit. As long as the numbers make sense for when you eventually move out. I'd say this is the best way to start. You enjoy the advantages of residential owner occupied financing, and you'll quickly learn property management skills managing 3 rental units. I found it easier to manage a rental that I was next door to vs a properties 30 miles away.

    Good luck!

    0Reply
  • Brandon Laughridge
    Real Estate Investor · Kansas City, MO · Member since 2011 · 43 posts · 9 votes
    14y

    How long does one have to live in a unit of an OO FHA financed fourplex before it's legal to move out and rent it to someone? I'm interested in buying one but don't really want to live out in the burbs for any longer than I have to.

    0Reply
  • Chris Giordano
    Torrance, CA · Member since 2012 · 2 posts · 1 vote
    13y
    Originally posted by Raymond B.:
    Mike Batir:
    Welcome to the forum.
    I suggest that you spend some time, reading the following:

    http://www.biggerpockets.com/forums/52-rental-property-questions-landlording-issues

    http://www.biggerpockets.com/forums/52/topics/18371-help-me-understand-this-deal-and-5-2-rule

    Raymond

    Good forum guys, my first post.

    The above links were great place to start... But I'm feeling like Southern California is it's own animal??

    Re the 2% rule: here a decent 4-plex is $800k+ and around a million in nicer/higher rent/lower crime areas. These are 4 two bedrooms ideally, but often a mix of 2's and 1's. Important to note however that market rent in these areas is around $1400 to $1500 for a decent clean 2 bedroom. So.... Your $900k 4-plex is generally cash flowing $5600 if all works out. The 2% rule is more like a 0.6% rule!

    I guess you cold argue that SoCal is over inflated and the rule *should* hold true but these values are sustaining, and the market is turning. Comps and recent sales seem to further support the asking prices.

    Then I read the 50% rule... Oh man. If half that $5600 is headed towards non-loan costs, and the other $2800 is supposed to cover the mortgage... What a scary thought. You'd have to put down an extra-ordinarily large amount to hold the 50% rule. Almost half. By then any capitalization seems reduced so far--$400k cash for almost no monthly return--forget it. Besides, even of you did it, you'd be no where near the 2% rule and right back where you started...

    Any SoCal investors with feedback? What am I doing wrong? Are the rules/ratios different in our space??

    BTW I would be an owner/operator, using 3.5% down/FHA loan, approved in the high 900's but open to suggestions. However... I have to live in the 4-plex to make this work, so needs to be nice/good area and I don't have the cash to put down for a traditional loan.

    1Reply
  • Chris Giordano
    Torrance, CA · Member since 2012 · 2 posts · 1 vote
    13y
    Originally posted by Brandon Laughridge:
    How long does one have to live in a unit of an OO FHA financed fourplex before it's legal to move out and rent it to someone? I'm interested in buying one but don't really want to live out in the burbs for any longer than I have to.

    I second this.... Anyone know?

    0Reply
  • Account Closed
    Accountant · Denver, CO · Member since 2012 · 154 posts · 61 votes
    13y

    One year in Texas.....but I believe it may vary by the state and the specific loan.

    0Reply
  • Allan Landfried
    Real Estate Investor · Niles, OH · Member since 2010 · 26 posts · 7 votes
    13y

    I bought my triplex using fha... I had to live there 2 years.

    0Reply
  • James Mudd
    Real Estate Agent · Realtor - Dallas, TX · Member since 2013 · 342 posts · 55 votes
    12y

    @Mike Batir

    ....just curious. Did you get into a 4-plex?...if so, what is your experience?

    0Reply
  • Rob Hayes
    Real Estate Broker · Downers Grove, IL · Member since 2012 · 93 posts · 57 votes
    10y

    This is a very old discussion... But I was curious if anyone had any insight on new Fannie Mae guidelines. My wife and I are trying to get a low down payment (5% down) conventional loan on an owner occupied 4 flat. I've been investing for a number of years, and thought that this was very possible. I'm currently working on getting pre-approved for this exact loan, and my loan officer just informed me that ALL 4 flats, owner OR non-owner occupied must have a minimum of 25% down. He did tell me that we could get an FHA loan with 3.5% down, but for a number of reasons I would prefer to get a 5% down conventional loan. Does anyone know about some newer Fannie Mae guidlines?

    0Reply
  • Ty Golera
    Real Estate Broker · Long Beach, CA · Member since 2012 · 17 posts · 0 votes
    9y

    Hey Rob, yes your loan rep is still correct.  No 5% down on 4 units and actually never was that I can recall the last 25 years.  

    0Reply
  • James Dempsey
    Atlanta, GA · Member since 2017 · 15 posts · 3 votes
    9y

    I bank with Navy Federal and am planning on "House-Hacking" my first investment property as well (duplex-quadplex). The lady at my bank said FHA loans (through Navy Federal, at least) cover up to a Duplex, but NOT a triplex or quadplex. Any info on this? She said it's probably the same with other banks and lenders, since FHA is federal.

    0Reply
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