Building a 4 plex

[Ivan Roberts]

I really would love to own a fourplex in the future. In the area where I am looking, it doesn't seem that their is any of them! Has anyone got financing to build a fourplex and rented it out? Good idea, or does the rule buy low rent high apply here still?

[Mike H.]

I would always argue against building. But I do think there are some reasons why building may be better.
1) Prices on multiplexes are not always as discounted as you think. Some areas just have not had any significant discounting on their multi-unit properties at all. I'm guessing its because those types of sellers tend to focus more on cap rate than on comps.

I just know that here in Illinois, most of the multiplex properties are going for as much per door as the lower end homes. It makes absolutely no sense to me. And this was like this even during the absolute bottom of our market. 4 plexes here were doing for 85 to 90k a door when I could buy 140k houses for the same thing. And rents on the houses were 30 to 40% more. The logic of it made no sense.

2) Product quality. You might be able to get a discount on a 4 plex but depending on your financing, you might end up coming out of pocket quite a bit (30% purchase, plus rehab out of pocket) and ending up with a 30 or 40 yr old building.

Or you could build and just pull out the 30% of the construction costs.

3) Lots are dirt cheap (pun intended) right now.
You can literally steal lots right now. But that may start moving in the other direction soon. So by saving a ton on the lot, you may actually cut your construction costs down even more.

4) Do the numbers work. Thats the one thing that people tend to leave off. Every area is different. Some areas, duplex or fourplex rents just don't make sense to build. With rents at 650 or 700 for 1,300 sq ft units. The numbers don't make sense.

At best, the lowest numbers I've seen for construction (based solely on the posts on BP and a little google work) are 60 to 70 per square foot. So there's no way to make the numbers if you're paying 85k or 90k a door for construction (not including the lot) and only getting 700/mo in rent.

Yet there are some areas where you can get 1,200 to 1,250 a month in rent for that same 1,300 sq ft unit. Now thats a little different there.

Do the numbers work? I think they do.

Lets say you get a lot for 20k.
You build at 65/sq ft. That comes to roughly 90 per door.
You put down 30% or 27k per door and finance the other 63k.

If you can get financing at 5.5% amortized over 30, your payments would be: $357/mo, taxes and insurance another 300/mo or so.
You'd be making roughly 550 to 600 per month per door before repairs/vacancy.

But you'd have a brand spanking new unit. How much repairs do you think you're going to be doing over the next 5 years?

So the question is, do the numbers on a fourplex work if you're putting down 108k to get 2,400 a month or 29k per year. Maybe occupancy is 95% so then you're at 27.5k and subtract another 2,500 a year (50/mo per door) for repairs. That leaves you at 25k a year in profit.

Thats a decent return. But now add in your principal paydown - another 3,600 a year or so AND appreciation (how about 2% or 7k/yr) and now you're talking about 35 or 36k a year in returns on that 108k.