Would you buy a 4 plex at market/retail price?

8 Replies

Hey all,

Looking at a 4 plex for $165,000. Needs minimal rehab, is in a C neighborhood and is fully occupied. Rents are at $500 each. Came out to $350/mo cash flow total (just under $100/door) with a 11.40% COC return.

Since I'd be using family for the down payment and would like to do a cash out refi in a year or so (to pay them back plus 10%), not having instant equity (buying at a discount) presents a problem for a future cash out refi.

This property still cash flows but would not be a "deal" since I'm not buying below market.  This would be my first property so I'm excited but want to be cautious at the same time.

To buy or not to buy?  Thank you.

What percentages are you using for your expense numbers and how much are you putting down? If you are buying at market, then there is little chance that you will build up enough equity in a 'year or so' to enable you to refinance and pull cash back out. Can you FHA and house hack this place so that you don't have to borrow funds for the dp?

Hey Steve,

Personally, I would not go through with this. You make your money on the buy side. If you buy below market value, you protect yourself from a potential depreciating market. Purchasing at retail with other people's money could turn into a disaster if you cant refi or a class C tenant leaves in the night or damages the unit. Based on the numbers, this would not be worth the risk. I would practice tactical patience in this case (I know, it's hard!) and continue looking. Good luck with your search! I'm in the same boat!

-Paddy

Myself I would not go through. because of the neighborhood as well as the returns. It's important to consider what your money would make you in other Investments. myself I'm a firm believer in having a cushion especially with the future considerations of refinancing to get your money back out. Personally I would suggest finding a quad that needs slightly more Rehabilitation work if you have the initial capital to secure and facelift. This would allow you to buy below market value and refinance at market value. Your refinance should more than cover itself and offer additional capital for you to use. Out of every 100 potential Investments I look at 5 turn out to be worth looking closer at and maybe one worth securing.

Hi Jeff Brower. Thanks for the reply. I'm doing 20% down with 5% each for vacancy, repairs and CapEx. 10% for PM. This property is in the southeast and I don't anticipate is moving away from San Diego. It's 75 and sunny right now 😉

I certainly see the benefits of house-hacking but it's not an option for us.

I re-did the numbers and at a purchase price of $135k, the COC, cash flow and equity #s are looking better.

Always appreciate the feedback!

I am not a big fan of using a percentage of rent for maintenance and cap expense.  At your listed rent you have $50/month per unit for maintenanc/cap expense.   That is significantly too low for someone with a total of 4 units and likely low for someone with 400 units.  Using these cap ex/maintenance numbers you project $100/month cash flow.  I project negative cash flow.  

Purchase at market with no listed forced appreciation opportunity at likely negative cash flow.  Add to this remote/OOS.  I would not walk away but I would run away and I do not think lowering the price is going to help.  The issue is the market rent and the OOS.  You need a higher market rent or forced appreciation to make this work. 

Good luck.  

@Steve Weihe This might not help but I don’t think I’d pay “retail” for a “C” property. I use quotes for retail but very few people can tangibly say what that means. Does it mean listing price? Does it mean appraised value? Does it mean 95% if the appraised value? It’s just a nebulous term. So are there cases where I would pay retail? Absolutely, and they are unique to me.

If there was a property that just had a new slate roof (not just throwing another layer of asphalt shingles on a roof) two years ago it would have disproportionate value to me. Why? I have a kid that will need to go to college and having a projected roof life longer than that timeline has value to mean. Post-college I can eat a giant roof repair easier than before.

This is a random example (somewhat based in real life) where a slate roof would have a greater value to me than someone who was 20 years old or 60 years old.

I would also posit that a “B” property has disproportionate value for an out-of-state investor. It’s more stabilized, higher quality tenants, easier to get decent PMs, etc. The local investor might be able to get “hands on” with a “D” property. I can’t so that has a much, much, much lower value to me.

So despite pro-formas that I build some of how I view the value of the property definitely relates to “fit” for me as an investor. And, not for nothing, but the rarity of a preferred type of asset in a given market also plays into it.

Originally posted by @Andrew Johnson :

Steve Weihe This might not help but I don’t think I’d pay “retail” for a “C” property. I use quotes for retail but very few people can tangibly say what that means. Does it mean listing price? Does it mean appraised value? Does it mean 95% if the appraised value? It’s just a nebulous term. So are there cases where I would pay retail? Absolutely, and they are unique to me.

If there was a property that just had a new slate roof (not just throwing another layer of asphalt shingles on a roof) two years ago it would have disproportionate value to me. Why? I have a kid that will need to go to college and having a projected roof life longer than that timeline has value to mean. Post-college I can eat a giant roof repair easier than before.

This is a random example (somewhat based in real life) where a slate roof would have a greater value to me than someone who was 20 years old or 60 years old.

I would also posit that a “B” property has disproportionate value for an out-of-state investor. It’s more stabilized, higher quality tenants, easier to get decent PMs, etc. The local investor might be able to get “hands on” with a “D” property. I can’t so that has a much, much, much lower value to me.

So despite pro-formas that I build some of how I view the value of the property definitely relates to “fit” for me as an investor. And, not for nothing, but the rarity of a preferred type of asset in a given market also plays into it.

Andrew, your response very much reminds me of the people who post with questions like, "What cap rate should I be using at this point in the market?"

That's putting the cart way before the horse.  As you know, Andrew, you have to bid based on what the value is to you.  The current market cap rate is what other investors value the property at right now, and at any given moment that could be a bad thing for you to tag along on.

"Retail" or "current cap" rates fluctuate depending entirely on how much of a frenzy investors are in.  The very same property could have different prices at different points in the cycle, all things being perfectly equal.  Does that mean that the property has a higher intrinsic value at the top of the market than it does at the bottom of the market?

If you answer that question in the affirmative, I, for one, would much rather be buying when the "intrinsic value" is in the toilet than when it's in the stratosphere.

I don't know what "retail" means. In a "C" property, I look for $200 cash flow per door figuring expenses at 50% of CURRENT gross rent assuming units are individually metered and landlord only pays water, sewer, trash and a downpayment of 25% on a 20year. I might go $175 for a real nice property. In any "C" I'd look for room to raise rents.

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