4 Plex

8 Replies

Hey guys, I'm back with another 4 plex eval...I know it's not as good as other areas but I'm really perplexed with what to do.  Some of you will talk sense into me I'm sure but that's why I've come here!  Curious to hear what you think:

Purchase Price - 397,000

Rental Income - 3250

Mortgage - 2400 (FHA - PITI)

Water/Sewer - 180/month (for the whole building) (paid by owner)

Dumpster - 70/month (paid by owner)

Management - 300/month

Once again, I know these numbers aren't as good as other areas.  Salt Lake's market isn't so hot for buying rental units (especially if you don't have a ton of money).  These numbers only squeeze out a few hundred dollars each month (if even).  BUT...the reason I'm considering it is because of the purchase price...I think an appraisal could come back significantly higher than 397 (probably 430 or so?) especially if we're able to raise the rents.  If I could refinance into a conventional loan in a year or two then all of a sudden the situation gets a whole lot better.  

I've been looking for a multi-unit now for 6 months and am anxious to get something going in real estate (this would be my first deal).  Would it be worth going through with it even if it's not incredibly profitable for the first year or two?  Or should I just hold off and pick up a single family home with some roomies?  There just isn't much opportunity here for me!

If you refinance into a conventional (assuming you can) wouldn't you have to come up with the difference in LTV? I'm asking out of curiosity.

Originally posted by @Josh Butler:

Hey guys, I'm back with another 4 plex eval...I know it's not as good as other areas but I'm really perplexed with what to do.  Some of you will talk sense into me I'm sure but that's why I've come here!  Curious to hear what you think:

Purchase Price - 397,000

Rental Income - 3250

Mortgage - 2400 (FHA - PITI)

Water/Sewer - 180/month (for the whole building) (paid by owner)

Dumpster - 70/month (paid by owner)

Management - 300/month

Once again, I know these numbers aren't as good as other areas.  Salt Lake's market isn't so hot for buying rental units (especially if you don't have a ton of money).  These numbers only squeeze out a few hundred dollars each month (if even).  BUT...the reason I'm considering it is because of the purchase price...I think an appraisal could come back significantly higher than 397 (probably 430 or so?) especially if we're able to raise the rents.  If I could refinance into a conventional loan in a year or two then all of a sudden the situation gets a whole lot better.  

I've been looking for a multi-unit now for 6 months and am anxious to get something going in real estate (this would be my first deal).  Would it be worth going through with it even if it's not incredibly profitable for the first year or two?  Or should I just hold off and pick up a single family home with some roomies?  There just isn't much opportunity here for me!

HI Josh,

In order to refinance into conventional your loan must be 75% of your value or appraisal value. If you're only buying it slightly under market with FHA (presumably 3.5% down payment) you'll be at 96.5 Loan to Value (LTV) on the first day you buy the property

(bit higher if you factor the upfront financed MI of 1.35% into your loan to value would be ~97.80% CTLV - combined loan to value)

I've worked with many investors on these scenarios. Just be careful to plan it correctly.

Based on your figures you'd have to come in with a substantial amount of cash to pay down your loan to 75% of appraisal in order to "take out," or refinance out of the FHA loan.

One solution beyond having a grip of cash is to buy the fourplex considerably under-market but the likelihood of that is two fold because you have to abide by the "health and safety," standards of FHA financing which can be daunting at times when looking at REO's, auction sales, and etc.

Best of Luck,

Medium new american funding logo  Albert Bui, New American Funding | [email protected] | 949‑514‑5106 | http://albertbui.com | CA Lender # 345453, WA Lender # 345453, TX Lender # 345453, TN Lender # 345453

@Ed S.  

Yeah it would have to happen after having 25% equity.  I figure if I were to raise the rents up to 900-950 over the next year or two, and pay down the mortgage, after my 3.5% downpayment I would be pretty close to 25% equity.

@Albert Bui  thanks for the response Albert.  Yeah I would definitely be ok buying something at a discount.  We're trying to get the seller to go lower but not sure what kind of luck we'll have.

Originally posted by @Josh Butler:

@Ed S.  

Yeah it would have to happen after having 25% equity.  I figure if I were to raise the rents up to 900-950 over the next year or two, and pay down the mortgage, after my 3.5% downpayment I would be pretty close to 25% equity.

@Albert Bui thanks for the response Albert.  Yeah I would definitely be ok buying something at a discount.  We're trying to get the seller to go lower but not sure what kind of luck we'll have.

Another cool tip with FHA is that if your agent is you (representing yourself) or a family member you can contribute/gift the real estate commission as part of your down payment so this would help jump start your equity in the property and or lower your loan to value so you'll be ever closer to that 75% LTV mark to refinance.

Structured correctly your FHA loan could jump start your financial freedom track, good luck.

Medium new american funding logo  Albert Bui, New American Funding | [email protected] | 949‑514‑5106 | http://albertbui.com | CA Lender # 345453, WA Lender # 345453, TX Lender # 345453, TN Lender # 345453

Multi Family is the way to go and I think you have the right idea. Though it sounds to me like you are under the impression that if you raise your rents you will raise your property value. This typically works only with commercial properties. i.e. 5 units and greater. A 4 plex is considered a residential, which is the only reason you can purchase with FHA. So the only way you're going to be able to finance is if the market goes up or you pay down the principle. Keep in mind that by the time this happens interest rates will have probably gone up enough to where you are more likely to be paying less even with the mortgage insurance on your FHA loan. So if it doesn't make sense today don't gamble on it making sense tomorrow. How much do you like the home? The numbers you posted...is that with all units rented or is that with you occupying a unit?

@Albert Bui  if you represented yourself would it be standard to have the seller pay you buyer's commission or is this a deal you would have to work out with them?

@Michael Garcia  

Good points.  I had thought that with an income producing property, it's value was largely based off of how much income it produces.  But maybe that's different for something smaller like a 4 plex?

And yeah, the interest rate difference was also a concern given the likely rise in rates that will happen.

The numbers I posted were without me living in it, but this would be an owner occupied unit (at least initially) so I would be paying some of that myself as a 'renter'.  It isn't exactly high lifestyle living so I wouldn't live there forever.  Just enough to do some fixing up (which is also needed).  

My desire to 'get on base' is probably overriding the logic behind getting on 'this particular base'.  The funny thing is there's an adjacent 4 plex right next to this one that is also for sale, and there's an investor (newbie as well) who is completely gung ho about it.  Same sale price...condition of the unit....everything is exactly the same.  He either does not know what he is getting himself into, or will be able to make it work and I'll still be looking! 

@Josh Butler  

You are on the right track, but don't get in a hurry.  I have been looking for close to a year since I got back into the market and have found nothing yet.  This seems to not be a good buyers market at this time in my area too.  It is far better to wait and save up more for down payment and to get more R.E.  education than to rush in and get a bad deal that sets you back.  

Keep on looking.