Can I buy a fourplex or not?

Question

Credit score: 700-ish
Salary: 75K plus $15,000 from another rental property
I can have 20 to 26,000 in the bank for reserves but would also need to use it for the down payment (3.5%) if that's legal, to use it for both.
I've got about 25,000 line of credit and have about half of that in debt I'm repaying.  Two student loans, at about $20,000 total. 
No car loan. No boat debt, dumb debt, etc.
Here's the problem: my tax returns from the last two years don't reflect my current salary, not by a long shot (25K-ish). I've got a cosigner with stellar credit (750+) but with him signing, he doesn't have assets/healthy salary to back up the score. NINA possibly, but I do now have the income.

If I can buy a fourplex in the DC area, %1,700-$2,400 in rent per unti per month, can I just take a higher interest rate for my tax return and cosignor issues?

Dale Osborn · Answer

The problem with 4-plexes is they are usually so overpriced the income does not support the price. If you get into one of these instead of helping, it will become a big anchor around your neck that may pull you under financially.

Bill Gulley · Answer

Jon is right but the quetion is, will it appraise? Conventional loans will cover 1-4 without a problem per the guidelines, but will the conservative appraiser find acceptable comps in that area to justify the deal? That's the hard part....good luck, Bill

Jon Holdman · Answer

I think you're trying to find a four plex for $600K with rents of $1900 per unit.  So, my first question would be is this a deal.  Let me assume normal investor terms but a conventional loan.

Price: $600,000
Down: $150,000 (25%)
Loan: $450,000
Payment: $2697.98 (P&I only, 6%, 30 years)
Gross rents: $7,600
Expenses: $3,800 (50% rule)
NOI: $3,800
NOI per year: $45,600
Cash invested: $150,000 (plus closing costs)
Cash on cash return: 8.8%

Not an awful deal, but not a screamer, either .  I'd like to see that cash on cash return up in double digits, preferable high double digits.  Yours is even less with closing costs.

Now, what if buy this with OO FHA financing with 3.5% down and a 30 year, 5% loan?

Down: $21,000
Loan: $579,000
Payment: $3,108 (5%, 30 years)
Gross rents: $5,700 (only three units)
Expenses: $3,800 (these don't change, but in reality will be slightly lower since presumably you won't be a problem to yourself.)
NOI: $1,900
Cash flow: -$1,208

So, you're essentially paying a rent of $1200 instead of $1900.

I'd want to be sure to have at least $10K in cash or readily available credit to be into a rental like this.

Now, can you qualify.  Not sure what current lending guidelines are, so I'll use the old fashioned 28% percent limit.  Not sure what taxes and (landlord) insurance will run you on this, so I'm just going to guess it at 20% of the payment.

PITI: $3730
Monthly income: $7500 ($90K/year before taxes)
Percentage: 50%

Pretty sure that will not fly under anyone's rules.

What if you can include the rental income?

Gross rents: $5,700
less 25%: $4,275
PITI: $3,730
Net rental income: $545

By this calculation, you're ahead.  Whether or not an FHA lender will do this calculation or not, I don't know.  You may have a hard time getting any lender who will do this loan at all.  Four plexes are sort of a no-mans land.  While they're theoretically qualify for conventional loans, not many lenders want to do those loans.

Jon Holdman · Answer

Is "700-ish" less than 720 or 720 or better?  Middle score is usually what's considered.

You'll only get 3.5% down if its an FHA owner occupant property.  If you're going to rent all four units figure 20% minimum, maybe 25% or 30%.

You can't use the same dollars for down payment and reserves.  They go away after you buy, so they're no longer available as reserves.

No income is the killer.  You're going to have to qualify for the loan.  With enough searching you MIGHT be able to find a lender that will consider the rental income.  All those funky loans like NINA no longer exist.  Can you refile the previous couple of years taxes and show more income?  Can you substantiate current income with pay stubs and an employer verification?

Be sure to read in the rental property forum about the true expenses of rental property before you jump in.  You imply this property  has a purchase price around $600K.  With $2400 per unit in rent, that's a good deal.  With $1700, not so much.  A $600K four plex with rents of $1700/unit/month loses $200 a month.  That assumes 30 year, 6% financing.

Account Closed · Answer

Just look around. I was able to get a FHA, owner occupied loan for a 4 unit. Same thing, the appraiser wasn't able to find 4 unit MFUs in the same school district (rare). My realtor found 3 units around the same price. Good luck man.

Jon Holdman · Answer

Yeah, I left out some of the details.  Here's what I wrote:

What I left out was this part:

NOI: $3,800/month
P&I payment: $2697.98/month
Cash flow: $$1,102.02/month
Cash flow: $13,224.24/year
Cash invested: $150,000
Cash on cash return: 8.8% (13,224.24/150,000)

Getting from the gross rents of $7600 to NOI of $3800 is just the 50% rule, discussed ad naueseam elsewhere in the forums. That includes operating expenses, capital investments and vacancy losses.  If you're running your properties at a ratio well below that, congratulations.  You're the exception rather than the rule.  Assuming you're talking about a significant number of properties over multiple years and not a handful for a handful of years.  I'm luck many months and my only expense on any particular property is the insurance and taxes.  Then again I have a Feb like I'm having one one of my properties where I have not tenant and significant expenses and this ratio will be more like 250% of scheduled rent.

Chris Crane · Answer

Jon, can you explain your went from a NOI of 45k to a coc return of of 8.8%? 8.8 is very specific which makes me think you have a calculation that includes taxes, insurance or some other variable that wasn't explicit in the calculation... if he runs this property the way I run my property he will be laughing all the way to the bank on 25% down 6 percent... do you have a reserve account or other consideration? Thanks- I am new to the forum and trying to understand the nomenclature.

Jeremy Bates · Answer

Thanks so much Jon.  Thanks to everyone else too. Sounds like a solid maybe, but saving for a year might be the best idea right now.

Bill Gulley · Answer

Might have missed it, are you living in one unit? Anyway, Brian is correct IMO with your deal as a commercial loan.

There are a few exceptions to income for residential owner occupied. You mentioned school loans, if you were a student the previous two years and that's why your income was lower, but you were working, you current income can be used on a conventional loan. Another exception is active military duty.
You might do your deal as an owner occupied initially. Good luck, Bill

Can I buy a fourplex or not?

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