$400k, 1 to 4 unit property with 1% rule. Anywhere?

78 Replies

Originally posted by @Account Closed :

The point I tried to drive home is the flaw in looking at the 1% rule and pay $70k/unit for a $700/mo rent compared to $170k/unit for $1,700/mo rent. Same 1% rule with different expenses and cap rates. 

I think this is a fair point that 1% is a broad brush that covers up important details. But the 1% rule is there to try and stop average Joe investors getting into a disaster and at least give some hope for success if they are patient.

The place I rent and live in right now has about 0.3% rent to value. Great for me but terrible if I had bought it as an investment. I also noted a nearby property was up for sale recently at $970k when I looked up the sales history on zillow it was last sold in 2007 for $940k so lots of possible traps for average joe investor around here. I think the OOS 1% type deals at least give hope for the middle of the pack folk. Is it false hope?

I would love a 0.8% San Jose property BTW :-)

@Phil Mcnally

Your start was to have (10) 30 year fix conventional loan, 1-4 units, 500k properties. That is theory, which is a good goal. However, wouldn't a good starting point be ONE? This would give you the experience, management, and cash flow. It's like Monopoly.............do you start building hotels on Park Place and Boardwalk?

Also, the guy who seems to know it all. He didn't start off like that. I'm sure he started small and built up. He asks the question, why do they approach him with these awesome deals? Well, it is because he started small, built up or trade up. Also because he pays all cash which demands a discount, and will sure to close. however, he does not mention that when he pays all cash, he quickly refinance and cashes out up to 75% LTV, which leaves a original down payment of 25%. you never pay all cash because you can buy more when you leverage. You can find these deals on a smaller scale by going through wholesalers. Brandon discusses the wholesale process in various blogs.

Terry

Originally posted by @Terry Lao :

@Phil Mcnally

Your start was to have (10) 30 year fix conventional loan, 1-4 units, 500k properties. That is theory, which is a good goal. However, wouldn't a good starting point be ONE? This would give you the experience, management, and cash flow. It's like Monopoly.............do you start building hotels on Park Place and Boardwalk?

Also, the guy who seems to know it all. He didn't start off like that. I'm sure he started small and built up...

Hi Terry

I did not make it clear at the start but I have owned rental property since 2008 and will be at the 10 limit soon. This got me thinking of next steps. Do I look for commercial loans to keep going or could I have used the conventional loans better. I thought it could be a good idea to pay off one of my early small loans (or 1031 exchange etc) to free up a loan slot and find a fat expensive property to take its place. If I did this with all of them I could double or triple my current portfolio value. As I started to look I was surprised how difficult it was to find $500k 1%ers vrs $250k 1% ers and started this discussion to see what others found.

So I agree with you and I did start small and get some experience in an average joe investor kind of way. This idea is my build up to a bigger portfolio plan without yet having to take on commercial loan strategies. I have some properties in the $150k range. Exchanging these for $300k properties would be quite a step up. But why not max out each available loan if it can be done with a good chance of success.

I am not ready or educated enough to think about big apartment complexes. I also hope that my lack of knowledge can be mitigated to some degree if I have ten properties in a variety locations compared to a single large basket. I have already proved to myself that I can pick a bad deal :-) But I got lucky or did better on others and across the group things are beating my other choices like stocks and bonds so I am feeling confident enough to step it up a little. The 30y fixed loan gives a very long time for deals to come good.

phil

@Phil Mcnally

The goal is be in a position to buy commercial properties, ranging from 10, 50, 100, depending on cap rate. The economies of scale works best with large commercial buildings. 

I'm not sure why you didn't just say that at beginning, then you would be guided to commercial properties. There is no next step other than commercial when you reach ten. You can probably sell smaller non-performing, but at some point either you have to accept your ten, get another person to put properties in their name, or just go commercial.

Terry

Originally posted by @Terry Lao :

@Phil Mcnally

The goal is be in a position to buy commercial properties, ranging from 10, 50, 100, depending on cap rate. The economies of scale works best with large commercial buildings. 

I'm not sure why you didn't just say that at beginning, then you would be guided to commercial properties. There is no next step other than commercial when you reach ten. You can probably sell smaller non-performing, but at some point either you have to accept your ten, get another person to put properties in their name, or just go commercial.

Terry

Is the goal for everyone to buy commercial properties? 

Yes I agree that big commercial deals that go well can provide huge returns in a short time, but I don't think I am going to get there. Maybe too much to learn and understand before I would be in a position to be confident of a deal of that scale. Maybe ten conforming loan properties do an ok enough job?

So my original question still stands and maybe valid for others in a similar situation. Do $500k 1 - 4 unit 1%ers exist? If so where?

I also think the ten conforming loans could be recycled over time to build a greater that a ten property portfolio without ever going commercial scale. eg

Buy 10 x $100k properties

Over time save rental income and cash out refi enough from the group to pay off one loan = One free and clear property with cash flow.

Buy a new $200k property to fill the slot and repeat each time upgrading the property and loan size as income allows.

Many years later you could have ten $500k properties (if they exist) still on loans and a bunch of other paid off properties accumulated along the way. Maybe you can't live long enough to do this but you get the idea. More of a slow and steady approach.

Or maybe someone has the cash and qualification to get 10 x $500k properties on 30y loans and be happy with a $5mill portfolio that is paying for itself and growing. Doesn't sound too bad. How many people achieve the maximum capacity of conforming loans?

I appreciate the input everything helps fill out the picture.

phil

There's multiple Midwest markets where you can find 1%-1.5% deals all the time.  It is more difficult to find those deals around $400K though.  The higher the value, the lower the rental percentage for sure. 

Can multiple SFR properties be grouped into one loan? If you found someone who had four $100K homes for sale that were all better then 1%, could one loan be used instead of 4? Could someone put those properties into one LLC, and sell the LLC instead of the individual properties?

Originally posted by @Jeff Filali :

Can multiple SFR properties be grouped into one loan? If you found someone who had four $100K homes for sale that were all better then 1%, could one loan be used instead of 4? Could someone put those properties into one LLC, and sell the LLC instead of the individual properties?

Not with the 30y, Fannie Mae loans. Each property would would be a separate loan. I agree once you get above $300k in the cheaper markets the rents are less attractive. But that is why I am searching.

@Gordon Cuffe

We're actually in escrow on a duplex in Sacramento from the MLS in a C neighborhood that could hit 1% if we wanted it to. We'd have to evict the tenants, raise the rents to market, and probably touch up the kitchen a bit. There are couple of caveats though that allowed us to get it cheaper.

  1.  The tenants have potential to be difficult. They've driven off the previous buyer who was likely inexperienced with the neighborhood, where as our agent and us are more touch with the community. 
  2. The property was surprisingly under marketed, which is rare in this market. I suspect the owner has never actually been to the place (from San Francisco) and the agent seems clueless as well. The property is cluttered with junk in the pictures, but when we walked through we were surprised at how good it is underneath. 

We offered list price 250k, pending inspection, but if the seller vacated and cleaned, they could probably list at 300k and sell in a day. 

This is our third year in a row purchasing a property in Fall, and our strategy seems to work fairly well. We scan the listings for all the properties in our target area all summer long, and tour a couple. Come fall, we wait to see which ones come back on the market, indicating there's usually something difficult with the seller. With seasonal demand dropping, we pounce, using our expertise in the area to identify the best tweener properties. (Too expensive for the pros, but just right for us).

Granted, we probably won't make 1% right now; for the time being we'll be favoring the stability of the current tenants (with small rent increases) over accelerated cash flow.

There is a 4-plex close to me.  It's a foreclosure listed through Hubzu.  The address is 378 S. Main St Amherst, OH 44001.  The list price is $15,900.  That's not a typo, but it's an auction and realistically I think it will sell between $75,000 and $110,000.  Depending on what kind of repairs it needs to make it rent ready it could be a really nice property.  Amherst, OH by the way is probably an A- neighborhood, with very low crime, and excellent schools.  It's considered extremely desirable especially for renters.  I posted it because I saw it and thought it could be a good deal, but it's not what I am looking for right now personally.  It looks like there are (2) two bedroom units and (2) one bedroom units.  A very conservative estimate on rents would be $650 a month for each two bedroom and $575 for each one bedroom.  You could likely ask more, but I am being conservative.  If after repairs your total price is $125k then the rents would bring in just under 2% a month...

Those both sound promising but again show how good deals may not exist in the $400k - $500k range. I realise this request for a $500k, 1% property seems a bit annoying to some reading the thread and there are obviously easier deals to find at lower prices but I really am interested to find out if a $500k 1% property exists, that also fits the criteria of a conforming loan.

I will try and actually do some searching and link a few properties that might be close and see what you all think. Also anyone who see something that might fit feel free to post a link.

Unless there are some BP rules that prevent this type of posting. I consider it educational purposes.

eg

https://www.redfin.com/MN/Minneapolis/1615-Lowry-A...

$400k - apparently rents for $895 a unit (x4) = 0.9% approx 

phil

Originally posted by @Jamie Rose :

Anchorage, Alaska you can find 4plexes for 400k and 1,000 or greater rent fairly regularly.

 I started looking tonight out of curiosity and you really can...

https://www.realtor.com/realestateandhomes-detail/...

https://www.realtor.com/realestateandhomes-detail/...

https://www.realtor.com/realestateandhomes-detail/...

Now where to start with the unique situation of Alaska. Oil price dependent economy and high heating bills paid by the landlord it seems but hey I asked for a place that has $400k - $500k 1 - 4 units at 1% rents and there it is.

I am going to read more. 

phil

I like that you posted some examples @Phil Mcnally .  I'm also looking for a $500k property that fits the 1% rule or more specifically cap rate of 7-8%+.  My reasons are a bit different; I need to 1031 and closing on one property versus multiple seems less stressful for my first exchange.  

Over the last six months, I've been running numbers on fourplex and duplex combos in the midwest and I've found that the COC return is not a whole lot better (sometimes lower) than what I can get on a SFR managed by myself. It seems that commercial is the way to go to get better economies of scale but I'm not sure if I'm ready for that yet. Let me know if you find anything of interest, I'll do the same.

@Phil Mcnally - I'd say heating bills are just as often covered by tenants here - and our economy is oil tied - but Anchorage is also a vibrant city that is a hub for the entire state - and locked between ocean and mountains land is at a premium. I think medium term we'll get to see appreciation - and the rents in the meantime are nice - 1% isn't hard and 1.2% is very doable. If a natural gas pipeline deal gets struck - that appreciation will come quickly. 

@Phil Mcnally . Your examples for Anchorage are all C/D properties in high-crime areas. Anchorage is a very patchy town, but anything north of the highway is usually low-quality tenants. The market trajectory is flat to down since late 2015. There should be some opportunities for A/B/C properties with your 1% benchmark for the next two years at least until the state financial situation is sorted out (new taxes coming). Claimed rents are also inflated lately as rents have dropped since December 2016. Best of luck in your search!

@Phil Mcnally to expand on Jamie's comment and your valid concerns: 

Regarding the high heating bills many landlords pay for the building, they are only really high between the months of October/November and April with the summer lows being very low. On average, a typical 3600-4000 sq ft building with an average efficiency heating system will cost between $3,200-$3,800 annually. How does this compare to A/C or electric costs that owners incur in hotter climates? Do most owners pay that bill? I have always been interested in comparing our utility costs to costs in places like Southern California, Las Vegas, Kansas and other places that were mentioned in this post. Tenants 95% of the time pay their own electric here and owners typically pay heat, water/sewer and trash which can average $500-$600 a month for a "typical" 4 plex here in Anchorage. 

On the topic of oil. We are very dependent as a state on oil, this is very true. That said, we have been growing as a more and more economically diverse state and city. Oil has effected some jobs and we have experienced some negative job growth in the last 2 years with the expectations that job growth will be flat next year and increase in 2019. All of that said, we have had some HUGE oil discoveries lately that are greater than any oil discoveries in the world in recent years. With low oil over the last few years, exploration has significantly decreased worldwide and there are predictions of an oil shortage by as soon as 2020 http://business.financialpost.com/commodities/ener...

Anchorage is slightly less dependent on oil as the state is with strong, rapidly growing, employment in the medical field and a large army and air force base. Anchorage as a whole has many transient/ short term job opportunities thus create a lot of renters rather than home owners. We have enjoyed under 5% vacancies for the last 5 years and are just now experiencing a 5% average with the small amount of jobs that were lost. Anchorage for many years has had a housing shortage and has only partially balanced out with the job loss. Any sort of job increase/ population increase, will get us right back to that shortage and will lower vacancies again and cause rents to increase as they have steadily over the last decade. 

Might also want to consider the 1.5% per year property taxes, and the approx. $100/unit Water/Sewer Bill.  Weather or not you get tenants to pay for gas depends on how the 4 Plex is set up with 1 or multiple meters.

My analysis utilizing 3.5% down FHA loan on a 4-Plex in the Anchorage area is that the returns are marginal with a fair amount of risk. Also my analysis when including 5% of rents for Cap Ex and 5% of rents for maint shows properties to be cash flow negative.

The 1% rule for Price to Income and 50% rule for income to expenses should be used just as rules of thumb for quickly qualifying deals for closer analysis.  If you're buying based on these metrics you can quickly get into trouble.  They also don't need to be strict numbers.  Just use it as a quick analysis you can use on the fly to decide if its something worth looking closer at or not.

Originally posted by @Connor Dunham :

@Phil Mcnally . Your examples for Anchorage are all C/D properties in high-crime areas. Anchorage is a very patchy town, but anything north of the highway is usually low-quality tenants. The market trajectory is flat to down since late 2015. There should be some opportunities for A/B/C properties with your 1% benchmark for the next two years at least until the state financial situation is sorted out (new taxes coming). Claimed rents are also inflated lately as rents have dropped since December 2016. Best of luck in your search!

 Yeah the little I read makes it sound like local knowledge was more important than ever.

Thanks all for the Anchorage updates I am interested to learn more and will keep reading.

Originally posted by @Warren Z. :

I like that you posted some examples @Phil Mcnally.  I'm also looking for a $500k property that fits the 1% rule or more specifically cap rate of 7-8%+.  My reasons are a bit different; I need to 1031 and closing on one property versus multiple seems less stressful for my first exchange.  

Over the last six months, I've been running numbers on fourplex and duplex combos in the midwest and I've found that the COC return is not a whole lot better (sometimes lower) than what I can get on a SFR managed by myself. It seems that commercial is the way to go to get better economies of scale but I'm not sure if I'm ready for that yet. Let me know if you find anything of interest, I'll do the same.

 Yes similar reasons to me in that we are looking to 'upgrade' as far as we can while shying away from the commercial step. I will keep updating as look at different areas.

There are not many multifamily 4-plex in north DFW but I recently came across these three 4-plex in Frisco next to each other for sale by the same owner at ~ $400k each which rent for ~ $1000/unit making the 1% rule you are looking at: https://www.realtor.com/realestateandhomes-detail/...

They all have sale pending on them but show that it is possible even in DFW. 

I rather like one multiplex @ $400k than [email protected] $100k or 2 at $200k each making 1%. I would like to explore more real examples locally in the DFW area as they are far and few for sure!

Hi All
Just wanted to follow up with the news that this morning I closed on a 660k, four unit in Anchorage AK that satisfies the 1% rule and qualified for a conventional 30y fixed loan at 5.35% (rates up recently). It would not have happened without suggestions on this thread. Thanks @Jonathon Rodriguez for doing the deal.


I will come back in a few years and tell you if it is working out :-)

phil