How do I reverse engineer an offer for a 4-plex?

[Brian V.]

I've been reading about "house hacking". I want to live in a 4 unit building for free and have the other 3 units pay the mortgage, all expenses, and a bit of extra cash flow. I have read story after story of people who got started investing this way, and I think its something my wife and I would like to do.

I've contacted a Realtor and begun receiving listings for 4-plexes in my desired areas. I've also been searching loopnet, zillow, realtor.com, and other sites. I'm struggling to even know what I'm looking for. It would seem most of these 4 plexes were built decades ago and are ugly. I own a 10 year old house, and its pretty. I want to live somewhere moderately pretty if I'm going to sell my house.

Anyway, I found a property I like. Its very nice, and its in a very desirable area. They are asking $920,000 for a 4 plex with a 4% cap rate. So forget about cap rate for a minute, and let me provide some numbers.

Unit 1 - 3/2 - - $1400 a month in rent. (I actually want to live in this one for free)

Unit 2 - 2/2 - - $1250 a month in rent

Unit 3 - 2/2 - - $1250 a month

Unit 4 - 2/1 - - $1150 a month

Gross income $60,600

Expenses $23,215

NOI $38,585

If I live in the 3/2 for free that's about a $16800 reduction in income.

So lets say that leaves me $21,785 or about $1800 to service debt?

Based on this info, how much should I offer? I'm thinking $450,000 with a $50,000 down payment. That is half of what they want! Is it insulting to throw the offer out there? How can I structure this deal? I was just gonna try to go FHA. How can I offer more? I only have $50,000 for a down payment when I sell my house. I would really like to live here though. But I don't want to pay "rent", although I currently pay $950/month for my mortgage now with my current income.

How do you reverse engineer an offer price? Is it ok to insult sellers? I like where I live now. I don't have to move. I'm not under any time constraints...is it wrong to have the attitude that I can make 50 "wish" offers and maybe land 1? 

[Jim Blackburn]

Hello Brian Varbel

One of the best ways a new investor can get started, in my opinion is by purchasing a 4 unit property as their very first purchase.

San Bernardino ... Here the county loan limit for a 4 unit property is 729,800. That enables you to buy around 760k with just 3.5% down payment.
The seller can cove closing costs & escrows. That's about 30k cash. Plus we need to be sure to have another 3 months in reserves. Call it 15k. So you need about 45k total.

We live in one unit, and rent out the other 3. In some cases the rents from 3 may be enough to cover the living expense in unit we live in. In most cases, the rental income will make our cost of living in our unit much cheaper than it ever would be if we bought our own condo or single family house.

This is an FHA loan. Typically you can only use FHA one time. Unless you have a really good letter of explanation that details the reasons why you are moving out of your current primary and into a new house using FHA a second time. (Ie. having a baby, moving to other side of town for job, etc.) If the exception is granted, then we get to use FHA twice allowing us to control more real estate with only 3.5% out of our pocket!

Where many investors make a big mistake, is buying single family or condo first... then trying to acquire a 4 unit later. It's much more difficult to convince the underwriter that you are moving out of a comfortable private space , and into a building shared with 3 other families. Then you are stuck putting down 25% to acquire that 4 unit as investment VS the 3.5% FHA as primary residence.

Long story short.. by purchasing the 4 unit as your first property, you're able to acquire, control, and benefit from the appreciation of 4 units with just about 27 down (3.5%) vs about 180k (25%). How long would it take us to save up 180k?
My vote is a 4 unit purchase with FHA on our very first buy.

Ask anything.
Jim