Hi, I have come upon a 4 plex for $ 335,000 that is new and though not luxurious in any way, does have a pool and clubhouse. It is in a somewhat lower rent area and the entire complex of more than 60 4 plexes seems to be for mostly lower income families. There is not much crime and apparently jobs are growing. They say that the rents will be 695$ a month for each apt which I am not sure about..for this area these rents are about 100 too high...but they say that the area is changing...but maybe they can only get 600$.....the area used to be a bit more degraded but they just got a new shopping center and all sorts of stuff like that so it seems to be going up...
I have never bought anything before and would also like a house...I have a total of about 300,000 cash. I have no debt and a decent but not great credit rating.
My income is quite small as I am an artist.
Loveland, CO · Member since 2008 · 1k+ posts · 123 votes
19y
Let's say that you could buy it for $300K cash (which would wipe out your reserves, never a good idea) and each unit would rent for $650, that's splitting the difference on your two numbers.
$650 X 4 = 2600/month= $31,200/year.
I'm assuming that 4 plexes in CA have the same (1% +/-) property tax so that's $3K/year.
Insurance should be another $1500 or so.
That means your GROSS INCOME on your $300K is 8.9%. You didn't mention anything about utilities, vacancies, upkeep, repairs or management. But NONE of those are free.
Even if they only dropped you to 7.9% this is a crap investment. I wouldn't bother answering an ad for something that penciled out this bad.
thank you for that very simple layout....very helpful. But you left out aprecoation or rather equity...I imagine that over the next 5 to 7 years the property will go up at least 100,000?
Loveland, CO · Member since 2008 · 1k+ posts · 123 votes
19y
While it's true that the property "might" go up $100K in the next 5 years, there's no guarantee that it will! I know, I know it's CA and " CA property always goes up"!
No. It doesn't. If you don't believe me ask any of the thousands who bought property in the Bay Area, specifically the East Bay over the past 3 years and can't come close to breaking even today! Also, $100K is 33% of $300K. 33% in 5 years is no great shakes, less than 6%/year, the stock market will beat that in most 5 year periods.
Also, you still haven't covered vacancies, repairs, maintenance, management or any of the "gotchas" that typically will run up your true cost of ownership. Figure on needing to gross 1.75%-2.0% per month, in order to make money on rental property.
Appreciation is a bonus on top of your net cash flow. This unit has loser written all over it.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
19y
Hi girl12345, welcome to the boards. Do you have a real name we can call you?
I'm with all cash, this is a bad deal. There are similar fourplexes all over the place here, and they're bad deals, too.
Do some reading here and you'll find from postings of folks who actually have such rentals the expenses are about 50% of your gross rents. In addition to taxes and insurance, maintenance, vacancies, make-ready between tenants (you yourself said its low rent, so the tenants are going to be very transient), legal fees, advertising, and other expenses, you're going to have a significant HOA fee. That clubhouse and pool don't come for free. I'm guessing someone is doing on-site management, and part of the deal is that you'll pay them.
If you think $600 is a good value for rent, use that over any value the people trying to sell these are telling you. If 240 new units come onto the market at about the same time, it will take the market time to absorb them. If anything, that may depress rents in the area, unless vacancies are very low. If you have 60 new investors trying to fill up their units, prices could get undercut. Either directly, by lowering rents to fill units, or indirectly by "one month free" deals.
So, take the $600/unit. Four units, less 50% for expenses, gives you an NOI of $1200/month or $14,400/year. If you plunk down $300K in cash, like all cash suggests, you're getting 4.8% return. That's very close to bank CD's, and those don't trash you place when they move out.
If you pay $335K and put 20% down, and get 7% for 30 years, your note is going to be about $1800/month. That means you're losing $600/month. The developer may well say "you're cash flow positive" because gross rent, $2400 or $2800 if you believe them, is more than the note. That's sucker math.
Historically, housing prices have risen at about the rate of inflation. In the last six or seven years, they've risen much faster. Does that mean they will keep rising at this much higher rate? Unlikely. At best, prices will remain flat for years to come while the long term trend catches up to the current prices. At worst, prices will fall until they match with the long term trend line. Speculating on appreciation is fine, as long as you realize that's what you're doing. Maybe it will happen. I think its much more likely to not happen. If you want rentals to generate income, you'll have to pay a lot less than this deal.
Thank you guys for this honest advice. Here is the rest of the info in case it matters.
I am getting the property for 335,000 (paying 20% down) but in the time it took to construct it ...2 years...it has appreciated to 365,000. I am paying $150 a month for on site management, grounds keeping etc. The property is in one of the fastest growing cities in the US with good job growth. I live in S.California. I figured that because the building is brand new there wont be much repair work for at least 5 years. I am a longterm type investor and was just planning to keeep the thing for 10- 15 yrs?
I saw somewhere on this site that the rents, even if covering the mortgage, are taxed at some really high rate (45%)...and as income. Which seems silly because I am not in the 45% taz bracket. But then I read that even though your property is going up in equity, you can claim "depreciation" of the building each year and lower your taxes.
The last thing I am confused about is that, seeing as I live in S.Calif....you cannot get a 4 plex here for less than a million dollars. I have found a brand new one in an area that has no rent control, low unemployment, high job growth, good renters market, low crime, for $335,000 with reputable onsite management....So my question is : If this deal sucks how is it possible to get something better.....
Or is it really that you are saying that as compared with a decent stock performance...this is bad.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
19y
Lisa,
It sounds like you're proceeding, so probably nothing much to say as far as it being a good or bad deal.
How can you get a better deal in CA? You probably can't. Prices are way out of whack with rents. That's one clue there is a serious buble under way.
Rents are NOT subject to any crazy tax. As you mention, you do get to take depreciation on the property as a deduction, and that's very likely to make your taxable income negative. Meaning, the rent less expenses less interest on your note less depreciation is almost certainly less than zero. This is a "passive loss". If your own income (AGI) is under 100K (assuming your single, 150K for a couple), then you can deduct up to $25K in passive losses against other income. If you have too much income to take that loss right away, you need to carry it forward each year until you sell, and then you can take it.
When you sell, your gain will be the sales price less selling costs less your basis. Your basis is your purchase price less purchase costs less depreciation. You tax is divided into two parts. First, the part up to or equal to the depreciation is subject to depreciation recapture, currently 25%. The remaining gain is subject to capital gains tax. That's at your ordinary rate if you held it less than a year, currently 15% if you hold it over a year. Any carryfoward losses get applied, too, though I've yet to figure out exactly how. So, yeah, you get the depreciation each year, but the IRS gets it back when you sell.
A good accountant will be in order, if you don't already have one.
When I say its a good deal or a bad deal, I both mean vs. other investments and vs. other rentals. Your deal has you putting down $67,000, and making monthly payments of $1400 (6%, 30 years, I'm guessing the developers are helping you out a little on the loan.) You're going to collect $2400 to 2800/month. After expenses, you'll have $1200-1400/month. That will just about cover your note. The only return you're getting on the $67K investment is the possible appreciation. If you're lucky, and you don't need any maintenance, then you may have some money in your pocket. New or not, you will have vacancies to deal with, property management (placing ads, screening tenants, doing evictions), taxes, insurance, and make ready costs (paint and carpet cleaning or replacemnet between tenannts.) You say you're long term. Eventually, you'll need a new roof. Best to be accounting for that by setting aside some each month for these long term expanses.
Residential Real Estate Agent · Los Angeles, CA · Member since 2008 · 1k+ posts · 9 votes
19y
Welcome to the club,
And as you can all ready see many of our members have a lot of knowledge that may help you out! Hope you find exactly what you need and value all the knowledge that you will recieve from our fellow biggerpockets members!!
Thanks again Jon and everyone,
I am passing on the deal. I just looked at it from a point of view of what I would end up with in 20 years....I will have probably spent somewhere between $250,000 to 280,000 and would probably end up with a property worth about $650,000 if all goes well.
I compared that with the fact that just $130,000 in a simple Vanguard index fund that is getting 11% a year compounded over 20 years...comes to around a million dollars.
Thanks again for all the advice, its all actually pretty shocking compared to what other people tell you. Best, Lisa
Real Estate Investor · London · Member since 2008 · 3k+ posts · 74 votes
19y
Lisa,
:welcome: to BP.
CA investing is tough. What some will do is buy and resell a few properties before keeping one as a rental. You end up leaving a lot of equity in the rental so that it cash flows.
Others look out of state for better cash flow.
Realize that some of the advice you will receive is very specific to what people see when they walk out of their door. Some live in markets where 3% appreciation is a good year and 7% makes the front page of the local paper. Some are used to cash flow that CA investors can only dream of.
You have to adapt what you to do to fit the market. You also have to look at the details if you invest at distance compared to within driving distance.