Hello BP community! This is my first time posting so I apologize if I leave anything out. I have only owned 2 single family income homes. I have never bought a 4-plex so I am really feeling out of my element. Also, I am in Canada. So some of the requirements will be different than USA. I will try to give as much detail as possible. I will be managing this property myself. I have noticed the net cap rate is usually lower on multiplexes vs single family homes when I run the numbers. So I am also looking for your perspective regarding this as seen below (question #2). Thanks!
Could the community please give me advise about:
1. Is this a good deal?
2. If you own multiplexes, Do you prefer them? And why?
4 plex fully rented (I will not be living in it)
listed for 229k
20% down payment = $45,800
Gross rental income $33,120/year
Down Payment from LOC at 6.01% on $45,800 = $2,793.84/year
Oil expense $6,800/year
Electricity Expense $1,500/year
Water expense $1,216/year
Land tax $3,183/year
Mortgage payment $9,300/year
Mortgage details: I can buy this as a retail mortgage in Canada at 1.94% for a 25 year amortization because it is 4 units or less.
Total yearly expenses = $24,792.84
Gross rental income $33,120 - $24,792.84 = $8,327.16/year or 693/month.
net ROI: 693 net rent per month x 12 = 8,316/45,800 = 0.18
Time to get invested LOC loan money back out = $45,800/693 = 66.08 months/12 = 5.5 years
For comparison, I just purchased a single family income house for 61k, rented for 1000 plus all utilities and it clears 350/month. Years to get invested money out of this house is about 3.3 years.
@Joe Doucette it sounds like your last single family was a better cash on cash return at about 34% vs 18% on the 4 unit. Question is can you get more like that one? And also, what is your long term goal? Eventually buying tons of single families could become more of a challenge to manage than some larger multi units.
I own some single families, a mixed use and a double. The single families are the easiest to manage because I find tenants willing to care for the lawns and snow removal. That becomes a bit more of a challenge with multiple tenants.
Is there anyway to sub-meter the utilities on the four unit? Or are you legally allowed to just dived the bill and charge the tenants (that could also cause problems though)? If you can get the tenants to cover some of those expenses then that could drastically improve this deal.
@Tim Delaney Hi Tim, Thanks for the feedback. Frustratingly I realized this AM I have not included property insurance for this 4-plex which would further cut into profits. I need the details of the listing (hopefully getting them today) to call the insurance company to figure out this piece. I could see it costing upwards of 2K per year for insurance. Our rates just went way up in this area.
The realtor states the rents are under market value. If I could get rents up it would really help. And I agree with you, shifting the utilities over to the tenants is my preferred way to go. Otherwise tenants are prone to leave windows open in the winter months and cost you a small fortune in heating costs.
Is it always the case that a multiplex of some form will have a lower return that a single family home? I see some run down triplex's on the market currently listed for between 85K and 120K and I am wondering if it would be easier to pull equity out of them after some renovation and then trying to increase rents?
I keep hearing people talk about taking ownership of a property and they want it empty or full. I find this confusing because I believe in Nova Scotia Canada when you buy a building you also "buy" the existing leases. So I'm not sure how someone could take possession of a building as fully vacant (which essentially means all the tenants are being evicted)?
Is that something that is allowed in Canada or the USA?
If you can get renovations done and increase the value by more than the cost of the renovations than that is the way to go. That is what my partner and I focus on. Over this past year I only prefer properties that are vacant. If I was looking at a 3 or four plex I may settle for one or two tenants in place, but they would have to be open to living through a renovation and then paying more when it's done. The reason I prefer to get vacant properties right now is that it is very difficult to get tenants to leave if they don't want to at the moment. Even if the existing owner has leases in place the tenants may not be paying.
Everyone has different strategies - mine is buying properties that need rehab so I can increase the equity and refinance out my investment to maximize returns. Others prefer to put their 20% down and buy a fully rehabbed functioning property that they have to do minimal work on. For the later, you can expect lower returns, no matter how many units it has.
It is very difficult to remove tenants when you buy a building. I invest in BC and we have the residential tenancy act here which covers tenants even if they have no lease in place. You cannot increase their rent more than the allowable amount (frozen right now due to Covid, but usually 2-4% annually) They cannot be evicted. Even if you're doing renos, you have to have permits in place and it has to be major renos that there is no way a tenant could live through. Not just flooring or paint or something, walls need to be removed - kinda thing.
The other way that tenants have to move out is to use the space yourself (Landlord's Use of Property), you (or next of kin relative) need to actually use the space in good faith, then you cannot rent it out again for 6 months.
One technique I've used is to speak with tenants, tell them how much you paid for the property, show them comparables in the area to establish what the market rent is. Then simply ask them "what do you think is a fair rent to pay for this place?" - sometimes they will agree to an increase and they will suggest the amount it should go up (you as the landlord cannot suggest anything above the allowable increase). They may say, "do you even know the rules? you can't raise my rent more than 2%!" in this case you need to be prepared to do major renovations or use the space yourself.
And even still need to be prepared for tenants simply refusing to move out.