I've considered investing in real estate for a long time, but have only recently come around to the idea of actually doing it. (I also haven't been in a position financially to do it previously, either.) That said, I've been going through a crash course of reading books, articles (many on BP), and talking to other real estate knowledgeable people I know. I haven't done any of this before, but I'm quite motivated. That said, can anyone tell me if taking on a four-unit (owner occupied) as a first purchase is a bad idea, as in too much to handle? I'd prefer not to make big mistakes when spending this kind of money. Thanks in advance! (I'm sure glad I found BP!)
Are you talking hypothetically or do you have a specific property in mind? Hearing some numbers would be helpful to process it with you.
Are you wanting to manage it yourself or hire a management company?
Do you have reserves set aside for any potential repairs?
How are you planning to buy it, with cash, 100% financing, or both, or...?
How much time do you have to dedicate to a project like this?
Are the 3 units you won't be living in rented or vacant?
I don't have a specific property in mind, but there are a few available, one four unit that I like more than the rest, but not enough to call it the one I will buy for sure. There is also a three unit. Further, there are duplexes, but mostly not in the best areas. I'm considering all of these.
I am planning to manage it myself, but that's a great question because I haven't done it before and my job is fairly demanding. Sometimes I will travel for a week here and there (on rare occasions it will be more than that). I'm expecting that I will have to have some sort of backup person to help when I'm out of town or simply don't have the time to deal with whatever comes up. The property that stands out slightly more than the rest will require repairs and updates, not necessarily immediately but soon (as far as I know).
My wife and I still have some debt, but we haven't been chipping away at it quite. Our reserves would be a low interest (6%) credit card until we got into a better position.
I'll be almost completely financing it.
Time... great question. I rarely pay anybody to fix something that breaks (might have to change this)... but I'm on call 24-7 with work (I'm a manager/technician for an ISP) and don't have a ton of time, I make time for things that are a priority, but work takes precedence.
The 3 units are currently rented, but I don't have specifics on how long their leases are or when they moved into the property.
What you are proposing is referred to as house hacking and it can be a great way to go. Honestly, managing 2 or 3 units vs 1 isn't much more work at all. Once you have your tenant screening process in place, your lease docs, etc you may as well do more than one. The bad news is, you're broke. I would get some reserves built up, save a down payment, stuff like that. Right idea, wrong time. There's nothing on on fire here and you don't need to be a motivated buyer. I'd hate to see a tenant to not pay and your hvac go out under you leaky roof, turning you into a motivated seller!
Well, we need more space. Where we are living now is pretty tight and only going to cut it for another year or so, thus I've started looking. The thought process went... we could get a bigger apartment, but for the money, why not a single family home. Then, if we're going to get a single family home, why not a duplex? And then, triplex and four unit popped up, and I'm considering them, but if I have a few months of vacancies in addition to a major repair I'll be in trouble. Risk would presumably be less in a duplex where we can more easily cover the payments if there is a vacancy.
Perhaps a better question is, how much vacancy should I plan on? One unit vacant for three months in a three or four unit and I should be fine. More vacancies than that in addition to a repair and I'll be in trouble.
How much reserves is the right amount? $20,000? We have less than that in debt
Vacancy rate largely depends on your location. Here in DC a well priced unit goes within hours and a moderately priced one can be rented in a couple of weeks. If you're in an area where you'll have a 3 month vacancy, that's not a good place to invest.
You mentioned vacancy being less of a factor with a duplex, but in an owner occupied duplex, 1 vacancy = 0 income. In a quad, 1 vacancy = 2/3 income.
If you're living in a quad, the other 3 units should be more than covering your mortgage, meaning you should have plenty of free cash flow to build reserves quickly to cover vacancies, maintenance, and CapEx. If rent from the three occupied units doesn't cover your mortgage, it's probably a bad investment.
I recommend the following pro forma for Rochester properties. The vacancy rate will increase if you get into the worse sections of town, and will hold up otherwise. The others are industry accepted standards and should not be decreased. They can be increased if you want to be even more conservative.
Gross Yearly rent
Minus 35% for the following reserves (10% Property Managment, 10% Capital Improvement, 10% Vacancy, 5% Repair)
Minus all operating costs (will vary by property)
On a SF you can pass off water, typically in the city of Rochester there is just one water meter and you cannot bill your tenants a percentage on a multi unit. You must build that into your rental rate.
I don't include lawn service, snow service, or washer / dryer and I don't recommend you doing it either.
That leaves taxes (city and county if in the city proper), and insurance.
This will leave you with cash flow.
Divide by the purchase price, plus rehab, plus closing costs and it will give you a cash on all cash return. You want a decent location, with a decent return. In Rochester you can hit 10% and still be in a good area. If you get into Park Ave, Southwedge, Upper Monroe, etc it will be less. The best locations can have near 0% cash on all cash. Not good, especially if you add financing.
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