Buying a fourplex/All cash discount?

2 Replies

So I've been reading books and I'm ready to make my first purchase in the rental market fairly soon. 

I have been considering fourplexes and have found a few in an area I think will continue to grow in the next few years. I found 2-3 all in a 490-590k price range. My favorite one is already fully occupied with rental income of 4200 total per month. The other two may be occupied but is not stated in the listing but would likely rent for about the same. 

To break down the numbers if I bought the one that is occupied at listing price-554k. Monthly payments on 20% mortgage plus property taxes(based off selling price which is $1500 per year more than the taxes paid the last two years) and home insurance comes out to 3,168 per month. It's renting 4200 per month(tenants pay all utilities) so net $1,032 net profit per month(excluding maintenance cost). 

My question is if I have the ability to make an all cash offer, how much of a discount if any could I shoot for?

Secondary question- is $250 per door decent cash flow or should I shoot higher?

Appreciate everyone thoughts and advice. If I posted this in the wrong section I apologize.

Hello, Thomas!

Nice job thinking through all of this and trying to plan out the best strategy. There isn’t a set discount that we plan for with our cash offers. It really just depends on the seller’s motivation. There’s a good chance though that they would pick you over someone else or that you could get some kind of discount. If you’re low-balling especially, I would make sure that you’re pointing out that it’s a cash offer. 

With a mortgage, I would take $250/door in cashflow all day! The issue, however, is that your cash flow isn’t going to be close to that amount. In the numbers you pointed out that you excluded maintenance. Then you also have vacancy, capital expenses, property management if you don't manage it yourself, and any utilities, yard work, or whatever extra expenses you may have. 

Often, you may hear of the 1% rule. For most investors, they won’t even look at a property if it doesn’t bring in monthly rent that is at least 1% of the purchase price, or if it at least has potential to with some work. So this one is only renting $4,200/m and they’re asking $554k. Even if it brought in $5,540/m, you still would need to look into all your upkeep and running expenses to see if it would provide actual cashflow. 

The good news though is that you’re looking and analyzing! That’s a giant step in beginning. 

Thanks for the reply and support! I actually just read a chapter this morning about other expenses. I think my capital expenses might estimate to 200-400 per month perhaps. Utilities are payed for by tenants, and management would be done by me as I'll be living very close by and want to experience all that goes into management first hand. Vacancy rate at 5-7% another 5% for maintenance. So including those expenses cash flow would be reduced by about 600-900 a month, or $100 to $25 Per door.  Which doesn't sound very good, do my number look reasonable? Not too aggressive or lenient? 

I have heard of the 1% rule, and if I was going make an all cash offer I was thinking of 400k to abide by the 1% rule.

I believe rents can easily be raised easily $50-$100 each upon renewal, similar apartments in the area can go for 1200-1300. There are smaller apartments going for 1000-1100 currently 

If I brought rents to 4400 per month total that would mean 440k purchase price might be reasonable, following the 1% rule. Mortgage, tax, and insurance cost goes to 2,620 + 920 for CapEx, vacancy, maintenance(if my above numbers are reasonable) for total cost of 3540. 4400 minus 3540 leaves 860 or 215 per door per month.

I know the above is a bit more hypothetical(i.e. if I can raise rents, if I can purchase at 440K) But how do my numbers/ analysis look? Am I in the ball park of reasonable?

Just trying to get a feel for the analytical process, and thinking about numbers that work.

Any advice or critique is much appreciated, thanks!