Two 4-Plexes

Real Estate Deal Analysis & Advice
12yFollow

Two 4-Plexes

Mark S.Pro Member
Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes

I'm currently analyzing the two 4-plexes below. Even if they both check out, I will buy one or the other, not both.

FOUR-PLEX #1 - $125,000
All heating units less than 7 yrs old. Roof replaced 5 yrs ago.
All units are 2BR/1BA and about 800 sq ft. 75% occupied.
Not sure why they're different, but rents are said to be:
Unit 1: $425
Unit 2: $425
Unit 3: $350
Unit 4: $375
Rentometer shows median rent at $630 and 10th percentile at $450. I should be able to raise rents, but let's just go with these for now.

Gross Rents: $1,575/month
EXPENSES:
Vacancy (at 8%): $126/mo
Taxes: $121/mo
Insurance: $117/mo (I totally guessed on this and need to shop it out)
Prop Mgmt: $145/mo (10% only when occupied)
Repairs/Maintenance (at 10%): $158/mo
Cap-Ex/Reserves (at 10%): $158/mo
- TOTAL EXPENSES: $825/mo (which is about 52%).
- Debt Service (20% down, 5% interest, 30 year loan): $537/mo
==============================
Cashflow: $213/month (assuming I buy at asking price and don't raise rents).
Cashflow: $398/month (assuming I buy at $115,000 and raise rents to $450)
This one seems to have HUGE upside with raising rents. I'm much more excited about this one than #2.
=================


FOUR-PLEX #2 - $148,000
Has new roof. 50% occupied. All units are 2BR/1BA and about 800 sq ft.
Rents are $450/unit.
Gross Rents: $1,800/month
EXPENSES:
Vacancy (at 8%): $144/mo
Taxes: $144/mo
Insurance: $117/mo (Again, total guess. Need to shop it out.)
Prop Mgmt: $166/mo (10% only when occupied)
Repairs/Maintenance (at 10%): $180/mo
Cap-Ex/Reserves (at 10%): $180/mo
- TOTAL EXPENSES: $931/mo (also about 52%)
- Debt Service (20% down, 5% interest, 30 year loan): $636/mo
=======================
Cashflow: $233/month (assuming I buy at asking price)
I'm not thrilled at all about this one, however, if I change the purchasing price to about $115,000, I get a cashflow in the $376 - $406/month range.


BOTH AREAS SEEM TO BE "C" CLASS NEIGHBORHOODS, AT BEST. IN PROCESS OF FURTHER RESEARCHING THE AREAS.

Thoughts?

0Reply
78 views

Most Popular Reply

Al Ciampi
Investor · Hendersonville, NC · Member since 2014 · 10 posts · 7 votes
12y

I know what a "C" Class building is but I assume a "C" Class neighborhood is a low income area. Forget the ghettos. Look for areas of strong employment, good schools and low crime rates. Even if the price is low you will have problems keeping good tenants under these conditions. Also whenever I am looking to buy a property I visit the property at all hours of the day. For example....go there in the morning about 9 AM. Are there cars still in the parking lot? If so that may mean that the current tenants are unemployed. Go back to the property Friday night around 10PM. Any people coming and going? Drug or possible unsavory activity?

If the neighborhood is low income, and many are, the area may still be OK. Are the tenants employed? Is the neighborhood quiet? Stop and ask neighbors and the renters themselves how they feel. Check with a local cop who knows the area. Also you must have all the expense numbers. Ask for IRS Schedule "E" for the last three years before you make an offer. If they will not provide you with one move on. Always make your offer based upon actual (Not projected) occupancy and income/expenses....then discount your initial offer by 20%. You will be surprised how many property owners just want to get out of the investment.

2Reply
See this reply in the discussion

33 Replies

Jump to latestLatest
  • Rick Miranda
    Fredericksburg, VA · Member since 2014 · 14 posts · 0 votes
    12y

    @Mark S. Sorry Mark I don't know how to get BP to underline your name in the response. Not sure what your end-state or goals are regarding this prospective purchase. The numbers make sense. What I would want to know is what is the rental demand in that area, what is the population growth rate and industries that employ would be tenants. Are you planning to buy more properties and what do you plan to do with the estimated cash flows; save for more purchases or quicker pay-off…if you're getting that much cash-flow, would you be better off getting a 15 year mortgage...

    0Reply
  • Steven J.
    Urbana, IL · Member since 2012 · 1k+ posts · 425 votes
    12y

    They seem like decent deals. With your first one make sure you're analyzing and using numbers with the property as is. The rent isn't raised yet so make sure you don't trick yourself into thinking that will solve all your problems. Depending on the leases you may not be able to raise rents easily.

    I assume since you didn't include utilities that the tenants pay that. Are you sure there isn't at least one more thing you'll be paying?

    I don't know that you'll be able to negotiate the second one down to 115k for purchase.

    Be cautious of Rent-O-Meter. I find that site can be all over the map with what rents can be. You may have better luck comparing to what rentals are on craigslist and property management companies.

    You'll notice a lot of folks on here talk about the $100/door rule. The idea is that you should be cashflowing $100 per unit in the property. Keep in mind its a rule and you don't need to stick with it but maybe you can do better yet.

    Keep us updated and what you choose!

    0Reply
  • Mark S.Pro Member
    OP
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes
    12y
    Rick Miranda My short to mid-term goal is to generate enough passive income to cover my significant other's current salary so that she can stay home for a couple of years if she chooses when we start our family. She doesn't earn much. I'd only need about $3,000 net / month right now to do that. Based on deals I'm finding in the area, though, it'd take me a while to hit that number. I make more than enough from my W-2 to take care of everything even with zero passive income, but I like the cushion. I'd want a 30-year to Cashflow better and both build up a cash reserve quickly and then plow cash into more properties. I'm a tad right in cash right now and the down payment will take a good chunk of current cash. Most of my money is tied up in investments/retirement accounts. While I would not want to have to to touch these funds, there are Roth contributions available without taxes or penalty, as well as 401k loan as a last resort. I want to build up a cash cushion quickly, but worst case scenario, I know these funds are there. Hope that helps with your question. Sorry for the long answer.
    0Reply
  • Raymond B.
    FL · Member since 2009 · 2k+ posts · 357 votes
    12y

    @Rick Miranda,

    To make the @ work, do the following:

    Hold down the shift key and type @?

    Look below this Window, and you will see a list of names of people that have posted in this thread.

    Click on the name of the person that you want notified via an email, that you responded to them.

    If you are a Colleague with anyone that has NOT posted in the thread, and you want them to see your post, hold down the shift key, type the @ and the first 4 letters of their First or Last Name.

    Then look below this Window and click on that person's name.

    Raymond

    0Reply
  • Mark S.Pro Member
    OP
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes
    12y

    @Raymond B.

    Any thoughts on these two deals?

    0Reply
  • Raymond B.
    FL · Member since 2009 · 2k+ posts · 357 votes
    12y

    @Rick Miranda,

    After reading your post, and the replies, they seem to be good deals.

    What kind of demand is there for 2 b/r 1 bath apartments in that area?

    An associate of mine will NOT purchase any rental property, with less than 3 Bedrooms.

    Raymond

    0Reply
  • Elizabeth Colegrove
    Hanford, CA · Member since 2013 · 5k+ posts · 1k+ votes
    12y

    @Mark S.

    I would be very careful about basing "potential" rents on rentometer, zestimate, etc. I personally have not found them to be accurate or correct.

    0Reply
  • Mark S.Pro Member
    OP
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes
    12y

    @Raymond B. , that is an interest comment about your associate. Most 3BR rentals around here are SFRs, or maybe a condo. What type of rentals does he/she buy - higher end, etc.? There are plenty of people that would rent a 2/1, including individuals living alone and wanting an extra BR, or single parent with a child.

    @Elizabeth Colegrove , thanks for your comment about Rentometer. I will continue to check other sources, but these numbers seem in-line.

    @Steven J. , thanks for your comments. Sorry I missed responding to you earlier. Good point about the rents. I believe tenants pay all utilities. I will make sure to try to find this out when I go to look at the property. The only thing I can think of is possibly getting stuck with water, but I will do everything in my power not to have to pay anything. I was going for at least $100/door per month, which is why my end number with current rents on deal #1 is a bit disappointing.

    DO ANY OF YOU, OR ANYONE YOU KNOW, OWN FOUR-PLEXES IN "B" NEIGHBORHOODS OR BETTER? I feel like I'm going to be hard-pressed to find any 4-plexes in nicer than a "C" neighborhood.

    0Reply
  • Al Ciampi
    Investor · Hendersonville, NC · Member since 2014 · 10 posts · 7 votes
    12y

    I know what a "C" Class building is but I assume a "C" Class neighborhood is a low income area. Forget the ghettos. Look for areas of strong employment, good schools and low crime rates. Even if the price is low you will have problems keeping good tenants under these conditions. Also whenever I am looking to buy a property I visit the property at all hours of the day. For example....go there in the morning about 9 AM. Are there cars still in the parking lot? If so that may mean that the current tenants are unemployed. Go back to the property Friday night around 10PM. Any people coming and going? Drug or possible unsavory activity?

    If the neighborhood is low income, and many are, the area may still be OK. Are the tenants employed? Is the neighborhood quiet? Stop and ask neighbors and the renters themselves how they feel. Check with a local cop who knows the area. Also you must have all the expense numbers. Ask for IRS Schedule "E" for the last three years before you make an offer. If they will not provide you with one move on. Always make your offer based upon actual (Not projected) occupancy and income/expenses....then discount your initial offer by 20%. You will be surprised how many property owners just want to get out of the investment.

    2Reply
  • Mark S.Pro Member
    OP
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes
    12y

    @Al

    @Al Ciampi undefined

    Not sure what's up with my Internet connection and if this post will properly tag you. You would ask for schedule E BEFORE making an offer? I would think that they'd only furnish this AFTER an offer was made, during the due diligence period.

    Anyone else ask for this BEFORE making an offer?

    0Reply
  • Bob Hines
    Real Estate Investor · StL, MO · Member since 2008 · 294 posts · 152 votes
    12y

    I can't speak for the area this is located in, but in my area, I wouldn't be interested in 2 bedroom units that would only rent for $450. That is around what most of the 1 bedroom 4 plexes rent for around here for comparison. If 2 bedrooms are only renting for $450, that might mean the property is in bad condition, has a bad layout (walk through bedroom) or the area is bad. Make sure you check these possibilities out thoroughly.

    0Reply
  • Al Ciampi
    Investor · Hendersonville, NC · Member since 2014 · 10 posts · 7 votes
    12y

    I routinely ask for the Schedule 'E' before making an offer. But if your uncomfortable with this type of request make sure that you place in your offer ' Subject to your unconditional approval of a verified schedule 'E' ' any seller who has been transparent about their financials should have no problem with this. Remember we're only talking about one 4 plex . Additionally every time I have examined the sellers schedule E I have found additional/ higher expenses than initially claimed by the seller's agent. Most of the time it is simple innocent omission, however this gives you an opportunity to revise your offer accordingly. Every region of the country has different protocols when it come to making an offer so I guess you have to respect the local customs.

    1Reply
  • Mark S.Pro Member
    OP
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes
    12y

    @Bob Hines

    Yes, these rents seem on the low end. I will keep what you said in mind as I check them out.

    @Al Ciampi undefined
    I mentioned this to my realtor and he, at first, thought I meant before we even saw the place. I told him, no, before we make an offer; he then seemed okay with it.

    We're supposed to see it tomorrow, but just got word that for whatever reason, we'd only be seeing 1-2 units. I said no offer unless we see all 4. Why only 1-2? Waiting for response...

    0Reply
  • Bob Hines
    Real Estate Investor · StL, MO · Member since 2008 · 294 posts · 152 votes
    12y

    From what I have seen, when there are occupied units, most of the time you view the unoccupied units and make the offer contingent on seeing all of the units. This is because it can be hard to schedule showings with giving the tenants enough notice based on leases and laws. I wouldn't automatically call it a deal breaker if you can't see all units on an initial viewing. If you view the last 2 units and they are trashed, you can counter or walk away.

    1Reply
  • Mark S.Pro Member
    OP
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes
    12y
    Yeah, that's basically what my realtor said; we'll see how it goes tomorrow. Weather here has been nuts. Hopefully it doesn't get rescheduled.
    0Reply
  • James Mudd
    Real Estate Agent · Realtor - Dallas, TX · Member since 2013 · 342 posts · 55 votes
    12y

    ...so when looking for a 4-plex, the goal is to achieve at least $100 per door? Am I correct?....so as long as you can net $400 in cashflow (on a 4-plex) monthly, than its a good investment?...I know there is more to it, just trying to make sure I have the basic concept.

    0Reply
  • Mark S.Pro Member
    OP
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes
    12y

    @James Mudd , yes, I believe so.

    All, owner is meeting realtor and I this afternoon at property. What should I / should I not be asking him? Thanks.

    0Reply
  • James Mudd
    Real Estate Agent · Realtor - Dallas, TX · Member since 2013 · 342 posts · 55 votes
    12y

    I will be following this post. I'm thinking of skipping the duplex and going straight to a 4-plex...more doors for my DTI...thanks for the topic @Mark S.

    1Reply
  • Aaron Montague
    Rental Property Investor · Brookline, MA · Member since 2013 · 1k+ posts · 777 votes
    12y

    I'd want to see all 4 units to see if there are any large issues. Literally holes in the floor/walls, etc.

    Ask for an accounting of the last 2 years of rents. The seller SAYS the unit gets $425/month, but that isn't all that great if the tenant has only paid 9 of the last 12 months. The schedule E mentioned above is a great way to figure out if the property is going to give you a retirement or endless headaches.

    I like $100/door/month, so I'd have to negotiate on both of these places a bit. I wouldn't count on being able to raise the rents for a while. Nice if you can do it, but not a guarantee.

    Take lots of pictures of common areas, siding, roof, beams, water heaters and furnaces. Having a visual reference will make your life much easier when thinking about how much each of these places is going to cost you in both the short and long term.

    Best of everything with these. Keep us up to date on your findings.

    0Reply
  • Raymond B.
    FL · Member since 2009 · 2k+ posts · 357 votes
    12y

    @Mark S.,

    Yes, my Associate purchases SF Homes. They must have a minimum of 3 BR, and they must be in an Area that his Wife could walk in, without any fear.

    Raymond

    0Reply
  • James Mudd
    Real Estate Agent · Realtor - Dallas, TX · Member since 2013 · 342 posts · 55 votes
    12y

    the reason is because most people prefer a 3 bedroom place....the demand is higher therefore more likely to rent to a family...they will tend to stay longer etc. A 2 bedroom will tend to attract people in transition.

    0Reply
  • Al Ciampi
    Investor · Hendersonville, NC · Member since 2014 · 10 posts · 7 votes
    12y

    It's ok just to look at the 2 units right now. If you are still interested simply add to the offer the clause' subject to your approval of the remaining two unvisited units' try to deal with the agent in a cooperative manner and will his/ her trust. Follow thru with an inspection by a knowledgable home inspector also which should be in the contract. Remember that even though the agent works for the seller make sure that he or she knows that your goals are to acquire additional properties. Never let emotions sway you from being professional at all times. Best of luck!

    0Reply
  • George P.
    Property Manager · Livonia, MI · Member since 2011 · 4k+ posts · 1k+ votes
    12y
    Originally posted by @Raymond B.:
    @Mark S.,

    Yes, my Associate purchases SF Homes. They must have a minimum of 3 BR, and they must be in an Area that his Wife could walk in, without any fear.

    Raymond

    We do that too. My wife has specified the area and I stick to that. This way I can send her over to talk to a contractor or have her come and meet the tenant at the house without any fear.. 3 beds only.

    0Reply
  • Mark S.Pro Member
    OP
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes
    12y

    Okay, everyone, so here's the latest:

    Went to 4-plex number one today. Arrived about 35 minutes early and drove the neighborhood. Oh...my...goodness! Run down houses, a truck on blocks behind the 4-plex, people that appeared to be up to no good everywhere, etc. Definitely appeared to be a "D" class neighborhood. Surprisingly, the quad was surrounded by houses and not other quads, which was cool, but certainly not an area I'd be interested in. It's too bad, too, because it's only about a mile from the downtown area that has so much to offer. I called my agent and had him cancel the meeting. If it's like that on a Tuesday afternoon, I can only imagine the weekends.

    After further researching the area, we ruled out 4-plex number two (which, if you can believe it, is in a worse area than this one!). We did go see another 4-plex in a neighboring town. This one probably needed about $30,000 work that was evident to the untrained eye among all 4 units. It's also listed on an auction site with a starting bid that is WAY more than I'd be willing to pay for it with those repairs. I would CONSIDER that opening bid if it was next to move in ready, but absolutely not with those estimated repairs. The units were pretty rough - holes in walls, missing or badly damaged appliances, banged up doors, torn up floors, carpets torn up, fixtures needing repair/replaced, water stains on ceiling, settling/foundation cracks going off corners of door frames, damaged bedroom doors, stained carpets, etc.

    I wish I could have written an update that I put in an offer on it, but I guess I just have to keep looking!

    0Reply
  • Lee Smith
    Residential Real Estate Broker · Indianapolis, IN · Member since 2009 · 477 posts · 304 votes
    12y

    Couple of things to keep in mind. Most tenants do not stay when you take over a property. I handle property management for many clients, and we always lose a couple of tenants during a takeover. We make it brutally easy too. We say "Nothing is changing! We still want you as a tenant! Just make your check out to SBH Inc, and mail it to:......." Still we lose tenants.

    Have some money in reserve for repairs after purchasing a property. Most owners start deferring maintenances when selling properties or considering selling properties.

    During inspection phase, have a contractor go through and give you quotes for getting units rent ready should the tenant leave immediately.

    Make an offer subject to review and approval of inspection, schedule E, and current leases as well. We recently closed on 2 duplexes that had 3 tenants in place, only to find out 2 of the tenants were children of the owner. Guess who left immediately after closing.

    Here in Indy(Indianapolis), people pay more for quads or larger. They are happier to get less of a return. I attribute it to the "I own an apartment building!" ego boost.. Of course they are also leveraging on those deals, and lenders don't want to write a loan for less than 50k.

    You may want to consider duplexes or triplexes. Here in Indy, quads are considered commercial properties, and not residential. So we pay 2% of assessed value in property taxes for residential, and 3% for commercial.

    Are you planning to manage this yourself? You may want to interview property managers, just in case... Ask the property managers what they think of certain areas, and drag them to a few viewings to see what they point out.. Property managers may know some off the market deals as well.

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free