First investment a fourplex? Good Idea? Also, creative financing ideas

13 Replies

Hello all, 

I have been eyeballing this fourplex close to where I currently live and would like to hear your thoughts on it. I am in the military so I cant move into it because I will be leaving town in the next few months. I would like to buy this property and hold it for passive income. 

Property is in a B neighborhood and was recently renovated with new granite counter tops, tile through-out, fresh paint and new appliances. Turn key property just outside a military base. Each unit is 2br/2ba, 1400 sf, fenced in backyard, 2 parking spaces each. 

Fourplex Listed at $298,000  (%5 down, 30yr fixed at 5%) 

Currently rented for 800 in all four units ($3200/month) (7ish months left). Listing says it has a great rental history but I haven't seen the numbers/contracts. 

This nifty spreadsheet is broken down by the first month returns, and each year after...

                                                                   1st Month               Year 1               Year 2 


Gross Scheduled Income $3,200.00 $38,400 $38,976
Cost of Vacancy (5.6%) ($181.96) ($2,184) ($2,216)
Gross Income $3,018.04 $36,216 $36,760
Property Management (8%) ($256.00) ($3,072) ($3,118)
Taxes ($214.75) ($2,577) ($2,603)
Insurance ($233.33) ($2,800) ($2,857)
LLC $0.00 $0 $0
HoA $0.00 $0 $0
Maint. Reserve (1yr wrnty) ($64.00) ($768) ($3,898)
Utilities ($192.00) ($2,304) ($2,398)
Other (landscaping) $40.00 ($480) ($480)
Total Operating Exp ($920.08) ($12,001) ($15,353)
Net Operating Income $2,097.96 $24,215 $21,407
Debt Service ($1,530.87) ($18,370) ($18,370)
Cashflow $567 $5,845 $3,036
Year over Year RoC 2.3% 28.2% 12.6%
Cumulative Cash on Cash Return- Year 2 $8,881
Cumulative Cash on Cash Return %- Year 2 36.7%

Now, for the creative finance part... I only have the cash reserves for a 5% down on this property. How would you experienced guys go about getting this financed? I have heard of hard money lenders, but do they traditionally finance a a buy and hold? What kind of down payments do they usually require, and what are the average interest rates? Have you worked with or recommend any hard money lenders? Are there any other routes? Homepath, etc?

All in all, what do y'all think? I think this will be a cash flowing property and a wise investment at a young age. 

Are there any major cost that I may be overlooking?

Hahaa, well I guess I cant copy/paste a spreadsheet in here. lol. Another lesson learned! 

I usually start out using a 50% expense ratio.  I then start putting the components of expenses together.  If I don't get near 50% I want to know why.

In this case you also pay some utilities.  I would probably raise the maintenance some.

You have a 6% or 7% cap property so you need a money source at a low rate.

I don't know about cap rates in your area so don't know if this is a good buy or not.

Good Luck.

Bill

Hi Blake,

My 1st thought is how are you going to manage the property when you leave town.  It can be very difficult to manage a property from a distance.  I can tell you from experience and hearing a lot of horror stories, finding a good property manager can be very difficult.  If you can't be near by to check up on a regular basis, the property can get run down very quickly.  

That being said, a 4-plex is a great way to get started.  I didn't have time to calculate the numbers, but by glancing through looks like this property might work.

@Bill Jacobsen  how do you find the cap rates for your area? Is there a set way, or just word of mouth/knowing the local market?

 @Tim Cooper  I plan on using the current property manager who charges 8%. However, I have not met with them personally but they have been managing the property for some time now and it appears to be in good shape. 

Do you have any tips for how to tell if a PM will fit your needs, or any tell tale signs of a negligent PM? 

Also, any wisdom on getting funding for a deal like this?

You're at about 1% return which is a quick way to gauge a deal. The only appealing thing I see is the 5% down if that is an issue for you.

@Brandon Hopkins  How did you get 1% return? From my calculations, the first year return on cash is 2.3%, and it increases from there. 

I was referring to the percentage of monthly rent to purchase price. 300k purchase, $3000/month rent would be 1%, you're slightly better than that. The financing could make it a good deal however. Leaving the area will certainly cause your expenses to increase cutting into your margins.

Oh ok, thanks for the clarification. Yes, this deal will rely solely on the financing. Finding the right lender and negotiating the price will be key. 

I wish I did have a good way to gauge a property manager (PM).  I thought I had a good one at one time.  Here are some of the things he did that I can recall.  (This was about 18 years ago.)

  • I found out he wasn't even going to show vacancy's, his secretary just gave them keys and they went to view apartment on their own.  
  • He was "churning" tenants.  He got a whole months rent when he moved a new tenant in instead of 10% regular PM fee.  So the more often he moved tenants in and out the more income he made.
  • He got bad tenants in that drove out the good ones I already had.
  • He admitted he hadn't even driven by the property in nearly a year.  He said he was too large and didn't have time to drive by his 1,000's of units every month.
  • I believe he was running it down thinking he was going to buy it from me really cheap when I had to sell.  He was very mad when I sold it out from under him and didn't give him a chance to buy it.  

The main thing you have to do is your due diligence.  Interview the PM and ask a lot of questions about how he will manage the tenants and property.  Just like tenants, no matter how careful you are you may get a bad PM.  

The instant you feel there is a problem, fire the PM and get a new one in there.  A good property can get run down very quickly.  That is what happened to me and discouraged me so much I pretty much got out of the rental income business for many years.  

Wow, that's pretty crappy. Thank you for sharing your wisdom. 

@Blake Woodham  I didn't read all of the other replies, but I generally advise newbies against starting out with multi-family properties.  Multies have a unique set of risks, and you can lose your asymptote with multies.  The biggest problem is this:  If you make a mistake, or the market turns, or whatever - and you end up with negative cash-flow -> then, the value of your property drops significantly.  So it may be harder to get out of it because potential buyers will be looking at your crappy cash-flow.

Single-family houses, on the other hand, can often be sold to an owner-occupant who will not even care at all about how much you rented (or didn't rent) the house for.

Just my 2-cents from a guy who has some experience with this.

Originally posted by @Bryan L. :

@Blake Woodham  I didn't read all of the other replies, but I generally advise newbies against starting out with multi-family properties.  Multies have a unique set of risks, and you can lose your asymptote with multies.  The biggest problem is this:  If you make a mistake, or the market turns, or whatever - and you end up with negative cash-flow -> then, the value of your property drops significantly.  So it may be harder to get out of it because potential buyers will be looking at your crappy cash-flow.

Single-family houses, on the other hand, can often be sold to an owner-occupant who will not even care at all about how much you rented (or didn't rent) the house for.

Just my 2-cents from a guy who has some experience with this.

For the most part income approach is used on 2-4 unit multi's but comparable apprroach in "reality," is given the most credence for value purposes on these 1-4 unit properties.

If the market tturns and comps start coming out lower in sold prices then not only single family's but 2-4 units will go down as well so by saying multi's will lose value based on negative cash flow seems to be more of an issue with 5+ multi-family not 2-4.

I've reviewed appraisals for my borrowers back and forth on 2-4 unit deals and while the underwriter writes down that income approach was considered its generally comparable approach that was given the most weight.

Your point about SFR being more liquid is true however since SFR can be unloaded to an owner occupant easier than a 2-4 unit generally. However, the SFR with the market turning will start to have lower comparable sales as well as it has to compete with the other listings available on the market so to say the multi will sell lower and SFR will not is not necessarily true but may depend on each individual market.

Can someone explain how someone can put down 5% on an investment property with a 5% 30 year term.

The only way I can get close to a 30 yr 5% term is with 30% down.  

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