How to determine value on 4 plex for newbie investor

11 Replies

Hello-

I'm looking at a 4 plex with an asking price of 950K (California!) and annual rent of roughly 77K. As I read through the forums and google, I'm seeing 1% rules for cash flow and 50% rules for NOI and expenses. What's a good way at determining value of a property like this? I.E. how far off from asking does this turn to a good investment.

What I can add is that the property is in decent condition and the rent is below market value.  I’d guesstimate the market value of rent is more around 90K annually.  Utilities are passed through and I’d be managing myself, I live right up the street.  I’m a total newbie to all of this, any advice is appreciated!

@Matt Lenzi

$90,000/year = $7500/month

The 1% rule would be to purchase the home for $750000. Or $9500/month rental income.

A Morgage for $950000 with a 4% interest rate with 20% down is $3628.36

The 50% rule is = (Income x 0.5) - Principle & Interest

$7500 x 0.5 - $3628.36 = $121.64 Cash Flow

In my area, the 1% rule is a minimum and the 50% rule is conservative. But the quad I am looking at is 200k bringing in $2100. You will need to think about whether $3750 is realistic for expenses. Maybe that’s way too high. Also, you should probably consult with someone in your area.

Thanks @Nathan Hui ! Using conservative numbers, the property is at a 6% cap rate.  I should be getting the last 12 months of income and expenses soon to get a better idea of what I want to value the home at.  And yes, $3750 is pretty high for expenses in this particular case.  Once I get more info, I’m sure I’ll have more questions.. but this site has helped me tremendously! 

@Matt Lenzi like every conversation revolving around real estate investing strategies, there is a lot of nuance.

If you had money to invest in 2012, which one do you think would have made you more money?
A) A 14% cash return 8 unit in Toledo, OH
b) A break-even cash return on a 4 unit in San Diego, CA

When you're first beginning, you see option B as no bueno and option A as no brainer.  Spend enough time on BP and you'll see that cash flow is king.  But in some scenarios, there is more to the argument than just numbers on a spreadsheet.

If you have the ability to live in a 4plex in California and break even from the other 3 units (plus having a roommate in 4th unit), then over time, the purchase price doesn't matter.  Why?  Because historically speaking, the appreciation seen in California real estate will trump any cash flow numbers from secondary markets.

BUT....

You shouldn't invest solely on appreciation.

So what do you do...

This property being a "deal" depends entirely on your financial situation and your goals within this game.  If you can house hack this 4plex and bring your Cali living expenses to $0, the purchase price doesn't matter.  If you don't care about the down payment money and really believe in your market over the long term, then the purchase price, cash on cash return, etc doesn't matter.  Looking back, do you really think a 5% return vs 7% return really matters if you could have bought a 4plex in San Diego, CA and held it for 20 years?

The point is...

Whether this property is a deal or not is completely predicated on your situation and the opportunity cost of the money you will be putting down on this property.

@Matt Lenzi , since you this is a 4 unit. Finding comparable sales in the area of properties that are similar to yours would be helpful. If you're looking at a 4 unit - why not step it up to a 5 unit. It would be more beneficial to you. Now you can use the income value approach, instead of the sales comparable approach. Not to mention you have tax benefits that are much more favorable to commercial investors. 

@Tj Hines  since you this is a 4 unit. Finding comparable sales in the area of properties that are similar to yours would be helpful. If you're looking at a 4 unit - why not step it up to a 5 unit. It would be more beneficial to you. Now you can use the income value approach, instead of the sales comparable approach. Not to mention you have tax benefits that are much more favorable to commercial investors.

I'm not sure I agree with you here, Matt. I do believe (and someone who is better at this than I am can feel free to jump in here) that residential multiplexes are valued using, primarily, the gross rent multiple (GRM). The GRM is more akin to the income value approach than sales comps because it's a multiple based on the rents received (or projected) from the units.

Matt, there's a book calledInvesting in Duplexes, Triplexes and Quads by Larry Loftis. It's very good, easy to understand, and covers all parts of residential multiplex owning (from looking for deals to how to manage your property).

Originally posted by @Spencer Cornelia :

@Matt Lenzi like every conversation revolving around real estate investing strategies, there is a lot of nuance.

If you had money to invest in 2012, which one do you think would have made you more money?
A) A 14% cash return 8 unit in Toledo, OH
b) A break-even cash return on a 4 unit in San Diego, CA

When you're first beginning, you see option B as no bueno and option A as no brainer.  Spend enough time on BP and you'll see that cash flow is king.  But in some scenarios, there is more to the argument than just numbers on a spreadsheet.

If you have the ability to live in a 4plex in California and break even from the other 3 units (plus having a roommate in 4th unit), then over time, the purchase price doesn't matter.  Why?  Because historically speaking, the appreciation seen in California real estate will trump any cash flow numbers from secondary markets.

BUT....

You shouldn't invest solely on appreciation.

So what do you do...

This property being a "deal" depends entirely on your financial situation and your goals within this game.  If you can house hack this 4plex and bring your Cali living expenses to $0, the purchase price doesn't matter.  If you don't care about the down payment money and really believe in your market over the long term, then the purchase price, cash on cash return, etc doesn't matter.  Looking back, do you really think a 5% return vs 7% return really matters if you could have bought a 4plex in San Diego, CA and held it for 20 years?

The point is...

Whether this property is a deal or not is completely predicated on your situation and the opportunity cost of the money you will be putting down on this property.

 Option 3:  Buy a 8 cap in Houston.  Watch it almost double in that time frame while cash flowing.  The idea that it's bleed money and pray for appreciation, or roll in cash flow but have flat values is wrong. 

Originally posted by @Tj Hines :

@Matt Lenzi , since you this is a 4 unit. Finding comparable sales in the area of properties that are similar to yours would be helpful. If you're looking at a 4 unit - why not step it up to a 5 unit. It would be more beneficial to you. Now you can use the income value approach, instead of the sales comparable approach. Not to mention you have tax benefits that are much more favorable to commercial investors. 

 There are zero tax differences between 4 and 5.  It's a magical difference for lenders to qualify a loan as traditional 1-4 family -- subject to cheap 30 year financing, and commercial loan products.  Even when you buy, a 5 unit will still be appraised not just on income but comps per door, land value, etc.   

People get this fact so wrong.