How to analyze a fourplex deal?

9 Replies

I am looking to buy a fourplex in the $200-400k range. I am open to all cities and states, so long as there is low crime, good tenants and solid cashflow.

I have been trolling loopnet for the past few days, and it seems that the vast majority of properties either don't break 1%, or just barely break it. The very few that do break it seem to be in questionable areas, and in fact the very best I found had rents at 1.4% purchase price. I found one in particular that doesn't quite break 1%, but has 4 - 3 Bedroom units, all with separate garages, in a good part of town. It seems like a very stable deal, if the cashflow numbers work.

This doesn't sound too great, and as a SFH investor 1.5% is usually my bare minimum. Of course, with a fourplex we have better economies of scale, but also (I believe) a higher chance for vacancies.

I have heard that investors have done well with 1% rule multifamilies, so I would like to know if I am being too picky. On the other hand, I have heard that loopnet is often not the best deals. What are your thoughts?

I would advise being conservative with your numbers and let the math do the talking!

Generally, I believe you should be aiming for at least a 10% Cash on Cash ROI, if not greater. The 1% rule is a great rule of thumb, but the end of the day, it's just a rule of thumb. Each situation is different!

Don't get discouraged, keep digging until you find that great deal!

Originally posted by @Adam M Drozdowski :

I would advise being conservative with your numbers and let the math do the talking!

Generally, I believe you should be aiming for at least a 10% Cash on Cash ROI, if not greater. The 1% rule is a great rule of thumb, but the end of the day, it's just a rule of thumb. Each situation is different!

Don't get discouraged, keep digging until you find that great deal!

Thanks Adam. For calculating your 10% cash on cash, what estimates do you use?

Of course taxes, insurance, mortgage will be actual numbers. But for estimated maint, capex, vacancy, etc, what do you use?

@Tyler D'Alessandro

Hey Tyler!

I mainly use the bigger pockets calculator for all estimates because it is so simple and easy to use. I run my numbers fairly conservative, I've been estimating 5% for maintenance and vacancy, and 10% for capEX and property management.

Even if you plan on managing the property yourself, you need to keep in mind that you probably can't manage it forever and including it in your numbers gives you a good buffer!

Hi @Tyler D'Alessandro , like @Adam M Drozdowski said I'd rely on the numbers to tell me if it's a good deal. I.e. what is my return looking like? If you're just skimming and see properties listed for 1% they could work, depending on the return you want. I try to keep mine min 1.3%. It's definitely a good gauge to start with, but I'd analyze it to know for certain how it'll perform. I'd say the quicker you can ID a market you want to invest in also, will help you find brokers/agents there and build relationships, at which point they could bring deals to you. Or you can use Listsource to find possible direct mail winners.

Best of luck!

Cheers,

Brian

Originally posted by @Brian Metz :

Hi @Tyler D'Alessandro, like @Adam M Drozdowski said I'd rely on the numbers to tell me if it's a good deal. I.e. what is my return looking like? If you're just skimming and see properties listed for 1% they could work, depending on the return you want. I try to keep mine min 1.3%. It's definitely a good gauge to start with, but I'd analyze it to know for certain how it'll perform. I'd say the quicker you can ID a market you want to invest in also, will help you find brokers/agents there and build relationships, at which point they could bring deals to you. Or you can use Listsource to find possible direct mail winners.

Best of luck!

Cheers,

Brian

Mainly I'm looking for something in already good condition, that I can buy 0% down with a VA loan. If I can move out after a year with positive cashflow of at least $500, I consider that a great success.

@Tyler D'Alessandro - Since these are residential properties I would consider using Realtor.com, Trulia or Zillow to set up some saved searches and alerts. See what markets start to spark your interest and then reach out to brokers. The mid-west, mid-atlantic and south east states can be good for cash flow.

1% doesn't take into account adding value. If you are going to use the 1% rule, you should use purchase price + rehab costs and the new rental rates. 

Even better is to create a pro forma based on your income and your expenses. This should be a yearly breakdown at minimum. That way, you can see how much cash flow you will make each year.

Originally posted by @Theo Hicks :

1% doesn't take into account adding value. If you are going to use the 1% rule, you should use purchase price + rehab costs and the new rental rates. 

Even better is to create a pro forma based on your income and your expenses. This should be a yearly breakdown at minimum. That way, you can see how much cash flow you will make each year.

 Makes sense. What estimates do you use for expenses? 

Hi Tyler,

You want to base your expense assumptions on a combination of the current owner's T-12 and the market $/unit per year expenses. You can obtain the latter from either your real estate broker, property management company, or by purchasing the information online. I think the best approach is working with your property management company to come up with expense assumptions, since they are the ones who will be managing the asset.