First Fourplex, Input?

Question

Hey all. So a good family friend's wife is selling her fourplex because they're retiring. It's not totally renovated but its in good condition in a great area and has a very desirable 4 car off street garage and it's 5 mins from my house and on the way to my gym.

Most of the tenants are long term, ranging from a couple years to 8 years. One tenant is less than a year. All good older people.

Flexible on price, but probably won't owner finance and I don't have credit but feel confident I could find an investor.

Main problem: under rented. Since they own it outright, each unit is renting for $500 when I feel it could be $600-650.

I don't really feel like throwing my spreadsheet public but if someone who is experienced with renting multi-families could message me i'll show you the numbers.

I feel it would be hard increasing rents, but it's a possibility because it is particularly cheap. Might be easier to buy an already decent and fully rented fourplex for my first investment vs a multifamily i need to rehab for my first one so I somewhat want to make this work.

If you have any input or need more info, a comment or a message would be super appreciated. Thank you all so much, I couldn't have even begun to crunch the numbers if it wasn't for this place haha.

Alexander Schwartz · Answer

-Fuzziness of financing, definitely something that's fuzzy for me too. No investor would be great but I might've used a credit card 5 times when I was 18 and I owe for 'overpayment' of disability that my grandma used to get until I was 18. So the odds of a bank qualifying me are most likely laughable especially without having the same job for a few years. So if they won't finance no matter the deal, i'd go to my broker/mentor and ask him if he was interested or what other financing options i might be able to get a hold of.

Rents are definitely below reasonable rate and the owner knows it as well but they own it outright so he can afford to keep them low. But to have positive cashflow with these rents, one would need to have a mortgage payment of 1000~ or less. I think it's yearly but that is a good point about figuring out what I have to worrk with in terms of rent. I'll get that info.

Ill have more definite numbers to post later but I dont have an exact on the utilities just yet, or pictures. So rehab ideas will have to wait because he hasnt renovated but I don't think it's 1946 old on the inside.

Thanks a bunch for the input, brought up some good points!

Michael Boyer · Answer

Cool Alexander. Sounds like you are on the right track.

You also gave me (or you) an idea.

The cleanest owner financing is when the owner owns the property outright in my view. I enjoy financing my own paid off properties (did one couple of years ago and offered another this year but got an all cash offer)

Why? I get far more in interest  than I would in a CD or bond. You have a secured interest (first mortgage and promissory note). And since it is a good buyer, it is my most reliable and easiest check every month (and I have zero landlord responsibilities).

Work out what you get paid in interest and you see why banks are doing well.

So you might try to talk about this option more with the seller.

To quote expert on creative financing Jay P. Decima, some key words to help you get seller financing are "more money" ... That is, very often the owner may actually make "more money" holding the 1st mortgage and promissory note than as a landlord (think: no repairs, vacancies, CAP EX, taxes, insurance, etc). This gets their attention.

So the Seller get more money monthly, no management duties and none of the expenses. Without ideal credit, maybe sell them on your energy and interest, along with the building essentially paying the mortgage via rents. Perhaps a decent down would help.

I did my closing with a title company and used their lawyer and all the standard documents in use in my jurisdiction. In fact, I still get flyers with people trying to buy my note. So you can set the sellers at ease that it will be a formal, up and up closing. Maybe even find a title company that works with owner financing ahead of time to talk about the process (so you can answer the seller's questions).

The owner finance situation seems plausible: they want out, you want in; you need financing, they own it outright. So if they also want or need the income, it could work out. I would study those numbers mentioned above more and see what works (are you saying it is a 1946 building, and if so, that may be a major issue with CAP EX). All in all, from the rough outline of the deal, (no credit, paid off, etc), it looks like owner financing is probably how it could possibly happen--but up to the seller there and the numbers working out for you both.

Best of luck.

Jeff F. · Answer

You're going to need a lot more numbers, but if you find out the rents are indeed that low, you'll be able to add a lot of value here and could end up selling the property after a year or so - you just have to be willing to raise the rents on the current tenants and willing to let them walk.

If you want, I'll look at your numbers - I've got a 4 plex myself.

Michael Boyer · Answer

It sounds like a potential lead at this point. My only input would be to get  some of the fuzziness out of the transaction to see if it is feasible.

For example, the financing seems unclear and makes it tougher to see if the deal will work at all or pencil out. The investor idea seems unclear. One idea: doing it without an investor might be cleaner for the 4 unit and allow you to know the loan, terms, etc to run some numbers (check out owner occupant financing or what it would take to qualify; or verify owner financing is on/off the table). Residential financing (4 units or less) can be pretty favorable (low rate, long term, low down--especially occupied, etc)

On the rents you mention as below market, verify if they really are below market. It sounds like you feel they are low, but really look at the condition of the units, the amenities and check out some nearby comparable rentals closely (what is included, etc). Check the listings or property management sites that lists the comps in your area. There could be a reason rents are low. If not, you can always cycle out tenants, or adjust rents at renewals or turnovers. That is actually a fairly simple process. Verify if you have month to month or year leases, for example, to craft a rent adjustment strategy.

Finally, on the condition of the units, I would verify what the building needs in terms of rehab. For instance, is it cosmetic paint and flooring or major renovations of every system and unit. Getting some details on the conditions and costs to make necessary improvements could also help you craft the deal and run numbers.

So again it sounds like a decent lead, in terms of location, size, and with a potentially motivated/reasonable seller, but I would do some more due diligence starting on these areas and go from there. Try the BP rental calculator when you have firmer figures. Best of luck!

Scott Weaner · Answer

@Alexander Schwartz, not sure why you will not give us the details...asking price, taxes, etc.