Should I buy an owner occupied 4-plex in California? Good move?

Question

Hey guys,

First I would like to say I love this forum! I've learned so much from you guys.

I could really use your advice right now.

I have been debating back and forth with myself if I should buy an owner occupied Multi-Family property (I will live in the property with FHA financing). Or should I just buy a cheap foreclosed condo near my office to avoid living with tenants, some pros consider this the cardinal sin. I would instead invest out of state for bigger returns and leverage property managers. If it matters I am married with a baby.

End goal: Generate $5000/mo cash flow from investment properties.

Pros:
- Low entry cost - 3.5% FHA financing. Won't have to pay 20-25% down on my first MF investment.
- Live for free: tenants pay my mortgage. All of my income goes to savings. This is nice to have in California, where living costs are a significant part of your paycheck.
- Experience in owning MF so I would be better prepared on out of state deals.

Cons: - California prices: 4 unit multi families are going for $350-400k in the desired area. Should I just rent and get better returns on an out of state property? - Living with tenants

Details about the deals I am seeing: - 4 unit multi family in Long Beach. - $400,000. - (2) 2bd/1 ba, (2) 1 bd/1 ba. Total rent: $3600-4000/mo rent. - 5.4 cap rate with 50% rule.

I understand these are not the best numbers but what attracts me is being able to save on my mortgage. Anyone else been in my shoes? Should I dive an owner occupied multi family? Would this be a good step towards my end goal?

Thanks in advance for your advice!

Chris Masons · Answer

Back in 97 my first real estate transaction was a FHA 4 family with a 5th basement apt. I had every intention of occupying the basement apt. until the owner who was currently living there asked me if he could stay. I agreed and stayed at home with my mom for another few years.

That property basically set the backdrop for me to get experience as a landlord, learn how to deal with tenants, enable me to bank a nice chunk of change to buy my next investment. Above all it showed me the power of allowing other people's money tow ork for you.

I Think it is a great move. Ifit will enable you to live mtg free think how much extra cash that will free up for you. This is invaluable esp. in the beginning.

Sounds like it is a sound property in a good location which is all the more reason to move forward. With rates as low as they are today IMO it's a home run. IN '97 my FHA loan was @ 7.875!!!

Just make sure you do your due dilligence on the porperty and tenants.

As far as out of state investing Icannot comment as I have always felt I need to be close to my properties. NOt to say it is bad to invest out of state as I am sure some ofo the greatest deals are out of state for me - I am in NJ.

anyway, good luck with your choice the main thing is to make a decision and do something!

regards, Chris

Swat Khan · Answer

Thanks for all the input guys. Very much appreciated.

Chris: Great work on your first deal. That is awesome. Sounds like the same strategy that I want to implement and it really worked for you. I really need to develop my bank roll so I could get involved in more cash flowing deals and paying $1500/mo for renting a 1 bedroom doesn’t make sense long term. Owner occupied multi-family seems like a good start.

Matthew: As Chris mentioned, since it’s an FHA financed loan I would be putting down 3.5%. The last lender I talked to was giving me 3.875% interest rates which are incredibly low. If I were to go out of state, it would be Michigan, as I have family there and I’m familiar with the area since I went to high school and college there. Michigan has ridiculous deals for 10-50 apartment complexes. Another option would be the Phoenix area so I could drive or jump on a short 1 hr flight for the weekend.

Brian: Good points. I am going with a 4 plex as the first deal for added security that my mortgage gets paid. By collecting rent from 3 units I have a higher probability to cover rent even when I have vacancies (luckily LB occupancy levels are 95% and above). But don’t get me wrong, if I can find a deal for a triplex with better numbers/CAP rates then I’m all for it. But so far this isn’t the case in the region I am investing in.

Anything else I should look out for?

Also, if the property needs work, is there a lower chance to have it FHA approved? I spoke with a lender who mentioned that he has his own appraiser which improves the chance of the FHA loan to go through during escrow. Any truth to this? I thought the business tightened up and appraisers were selected at random now.

I looked at the guidelines and they mentioned that broken windows, missing stove, hanging wires are all reasons for it to not be approved. Anyone have experience with this? What do you think of 203k rehabs?

Chris Masons · Answer

With an FHA loan he can put as little as 3.5% down Matt. Basically FHA is the only way you are doing this conventionally these days...

IF he can generate a positive with 3.5% down thats a great thing.

Chris

Matthew Paetz · Answer

There's obv. pros and cons to both situations. I have some questions about what type of cash you're putting down. This may make a huge impact on what you're looking into. What part of the country are you looking into if you decide to go out of state?

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