Is this a decent deal for a Southern California fourplex?

23 Replies

Unit Type: Fourplex (two detached studios + duplex)
Year Built: 1965
Building Size: 1,700 sq. ft.
Price: $440,000
Current Rents: $3,755 ($1,075 + $1,005 + $900 + $675 + $100 storage).  The $675 unit is below market...currently an elderly widow on fixed income lives there, and the landlord has never increased the rent on her.  I would intend on owner-occupying that unit for a year and then renting it out at market rent ($850) to boost total rents to $3,930.  There is also some room for upside on the $900 unit as the current property manager currently lives there getting reduced rents, but I don't want to get too fluffy with my assumptions.
Owner: older lady who has owned the property for 20+ years and wants to retire/cash out.
Tenants: all (except the property manager) occupied by long-term, older tenants.  There is no rent control.  
Area: this is not war zone property.  Median household income for the ZIP code is $115,000, which is much higher than both the state and county averages.  Although rural, it is not too far in the middle of nowhere.  Many people in this area commute an hour to Downtown Los Angeles everyday.
Condition: I drove by.  Looks like the live-in property manager has done a good job keeping things in shape.

Thoughts, anyone?  I'm tired of tire kicking and just reading about real estate.  I want to do something. Last week I was almost ready to just give up on finding an FHA-eligible fourplex in SoCal and wave the white flag and go turnkey in Memphis just for the sake of doing something.  And at 3.5% down and throw in some closing costs, I'm looking at a mere $20,000 outlay.  I've done more foolish things with $20,000 in my short life, so I'm inclined to just pull the trigger on this one.

I'm all ears, people!

if you can swing it go for it A $440k mortgage would be around $2100 per month so would have some positive flow  Use the rental properties calculator to get your final numbers(it is under the analyze tab)

Do you *really* need a place to live, or are you planning to owner occupy the under market unit in order to be able to raise the rent to market?

I personally would feel badly kicking out an elderly person on a fixed income just so I could raise the rent to market...  You are not doing too badly on this deal with the rent on that unit where it is....

Thanks @Steven Picker !

@Amanda Hensley , yes I definitely need a place to live.  My little 2009 Honda Civic doesn't make a good bedroom!  But I see your point.  The way I see it, though, as I'm just getting into the business (this would be my first property), I need to be as strategic as possible with maximizing my profits.  I'm 26 and don't have $500,000 in the bank to be able to spare a couple hundred a month for charity's sake.  In fact, I don't even have half that.  If I was a bit more established in life with a larger bankroll and more properties under my belt, yes, of course I'd consider letting a tenant stay because it's the nice thing to do.  But since this would be my very first property, and I'm not exactly in a position to make a mistake, and I want to give myself as much cushion as possible, I would definitely want to maximize my profits on whatever property becomes my first deal.

I guess it all depends what direction an hours drive it is. In other words, is it east to riverside or north to palmdale. On paper (based on your brief description), I would say you have a good deal but I would dig deeper in to the rent roll. sqft is someone limited for a 4plex alongside those rents that you mentioned. Finally, finding an fha approved 4plex in SoCal that would + cash flow on a 3% dp will be quite difficult considering the amount of liquidity here willing to purchase at very low caps. Having said that, there are opportunities to be had. don't give up. ps. invest locally. if you're not careful, investing outside of your area will be a painful experience. just my 2 cents

What is the bed/bath count on the duplex.  I know SoCal (LA, Southbay) multifamily very well and based on the list price and rents I would assume the duplex is 1/1 1/1.  Amandas question about *really* needing somewhere to live is also very relevant.  The numbers make sense but its hard to call it a deal without seeing comps or knowing a zip.  I would advise to be patient and exhaust investment options at home before you purchase out of state.  You don't want a slow appreciating $50k property out of state to get in the way of a strategic Ca purchase that can net $100k equity in a few years.  Feel free to send a message direct if you would like further analysis without broadcasting your find to the board.  Also, the holidays will slow the market down drastically in So Ca, it may be your best time to look when no one else is looking.  

Thanks for responding. I understand where you're coming from. If you truly need a place to live, then that doesn't seem unethical to me. If you already owned a house and were just going to move into this one in order to 1) get OO financing, which is usually way better than investment financing and 2) follow your city's laws on tenant eviction / rent increases (I'm assuming you have those), then to me personally, that would be unethical (although quite legal). There are plenty of others who would disagree with that and say, it's just business.

Kudos to you for getting started!  I wish you the best of luck!  A fourplex is a big undertaking as your first property, but many others have done well with those.  I'm sure you will, too!

@Logan Allec Wow Logan that's exciting, I don't really have any input except it seems like all the numbers align. I'm excited for you and hope it works out.

Just fyi based on 3.5% down the payment would be about $2900 (PITI) not $2100.

If you going to live in one of the units and you need a place to live it's a no brainier, JUST DO IT!

Before another investor buys it, Southern CA real estate if very competitive in good areas.  I would suggest complete a due diligence including but not limited to:

current leases

prop. mgmt plan

service calls, repairs on units, building

city inspections

rent roll/pro forma

maintenance requests

tenant interviews

Hi

Logan A.

I'm in L.A too so it's always interesting to see people willing to take on buy and hold deals in the SoCal market today. Many investors that live here do seem to be buying out of state. It does sound like you are getting frustrated and want to take action, but at the same time you don't want to just jump into a deal. 

It's really hard to say if it's a deal of course because SoCal is a big area. 

I'd be looking at what is happening right in that area. Is there new development nearby , is that neighborhood growing or changing? 

I'd also look at the zoning for the property and if there is potential to build a larger development in the future. There is a trend in L.A of people tearing down older multifamily buildings and building several single family homes on the same lot... small lot subdivisions. Seems like something like that could be a great possible exit strategy for the future. 

Also I do think getting an FHA loan for a 2-4 unit can be a great strategy too

@Victor Argueta , that's a GREAT point about the rent roll.  Now that you mention it, paying $1,000 for such small units does seem a bit off.  And yes, I hear what you're saying about the difficulty of finding cash-flowing fourplexes in LA.  I've looked in northeast LA and mid-city for the past six months with no luck.  So much cash floating around out there waiting to be invested in property.

@Clarence Johnson , you called it.  All units are 1/1.  I appreciate the offer for assistance.  If I get serious about this property, I might take you up on it.

@Amanda Hensley , yup I'm sick of paying rent and paying someone else's mortgage!  As to your point regarding rent increases, this property is (thankfully) in a non-rent-controlled area, unlike many properties within the LA city limits.

@Nick Coonis , thanks!

@AJ S. , thanks for the encouragement to JUST DO IT.  In the grand scheme of things, if it cash flows with only $20k put into it, and the market crashes, it's really not a big deal.  Thanks for the tips regarding due diligence.

@Joseph M. , thanks for the tips about zoning.  That's actually a good idea since the lot size is 10,000+ sq. ft., so there could be potential there.  Have you personally done any of this tearing down to building SFRs on the same lot?  In terms of the neighborhood, this is a rural area that's adjacent to a rapidly-growing suburb of Los Angeles.

Logan A. That sounds like a good sized lot at 10,000sq ft. I haven't done development myself but it's something i've been interested in for a while and am always trying to learn more about. If more development comes to that rural area , there is the possibility of the land value even going up a lot more without developing it too...of course this is all speculation. 

Good luck again !

@Joseph M. , great points.  Maybe I'll call some agents in the area to see what their feel is for the potential for this rural area.  Don't want to rush into something on the hope that values will go up due to development, but if it cash flows, why not?

There are many factors here. 

Overall it seems like you should do it, especially at age 26.

 What part of LA is it? Is it LA county? I'm assuming inland somewhere?  I've been in real estate in LA for 10 years

Go for it! Its Probably going to cash trickle more than cash flow but thats all you need for your first Multi:-) Its also a great option since it is so small and you won't be paying nearly as much in maintenance as you would for 2 or 3bed units. It will be a great portfolio builder and help you to get into more deals.

Just make sure you have a good inspector go through it. Since it was built in '65 there is certainly a possibility that it needs a lot of upgrading. You don't want to have to turn your $20k investment into a $35k investment in the first year;-)

Seems like these rents are kinda high for such a small space in rural area. At the end... if you're looking for cash flow only these numbers work. Without knowing the area I can't tell if it's a good deal appreciation wise. I like what @Clarence Johnson

 said: "You don't want a slow appreciating $50k property out of state to get in the way of a strategic Ca purchase that can net $100k equity in a few years."

you said - 

There is also some room for upside on the $900 unit as the current property manager currently lives there getting reduced rents...

so I would assume you could be the property manager yourself if you are as concerned with CF as you say - and take that apartment - in the end, you have to live with yourself and since there are no rent regs you can throw out the widow and  tell yourself any other buyer will do the same and likely be right. Since you plan to throw her out - see if you can help her move and find some place for her, Medical is very helpful for assisted living I believe - or perhaps get her family to do so, if she has family.

I think someone else mentioned the 10:1 price rent ratio - I use this as a rule of thumb so the way it is now it doesnt work, but if you can improve the rents it will work. the price doesnt seem high for 1700 sf in LA.

Logan A.

Be very careful about unit properties for FHA. FHA has a little know guideline that states all units market rent or lease agreements which ever is lower must be equal to or more than the total P.I.T.I and MI. Example:

Sales Price: 440K  

P.I.T.I & MI = $2,824.49  ( remember to factor in the 1.75% up front fee into the loan amount )  I'm basing this on an interest rate 3.75% which is higher and adding .85% MI monthly.  I'm guessing taxes at 1.25% and insurance at $150 per month.  

Take 85% ( FHA allows 85% of lease agreement ) of the lease agreement and you will come up with $3,106.75. I did this on the fly so it looks like you're going to be good. But this is something that messes up a lot of deals so please make sure those rents are truly on the low end.

When you order the appraisal it will include a 1007 which is essentially a rent roll.  If these rents are less the UW will go with the lower of the two.  Putting more down would be the only way around this if it pops up.  

I hope this helps and have a great day.  

Sounds like a great way to get started!  I would do it!

@Logan Allec , speaking as someone who has almost nil knowledge about the LA market, I say, if the property checks out okay, GO FOR IT!

From the little I know about the LA market, an hour's drive isn't the worst thing in the world, and getting a 4-plex with those numbers just seems like a no-brainer to me.  Hell, if I was single and childless and could swing that deal, I might just move across the country to make it happen.  Again, I don't know a lot about the LA market, but what I've heard about the appreciation in SoCal says this should be a good deal for you, short term and long term.

And it makes even more sense to me if you need somewhere to live.

Keep us posted...

For people saying this looks like a good deal, how much does the current housing market affect your decision? I know the market is pretty good right now, so if it went down or crashed this year, would it be better to wait till prices came down?

Even if the market crashes, rent prices would still stay the same, correct?

Sorry im a total noobie trying to learn everything I can. 

@Steve Lee , I ended up going for it.  Although prices are not what they were 3-4 years ago, buying the property made a heck of a lot more sense than paying somebody else rent every month.  It'd be a different analysis if I already owned my primary residence.

Obviously if the market crashed this year, it would be better to wait.  But you can't predict those things.

In my part of L.A., a decrease in home prices wouldn't affect the rents very much, but that's very case-by-case, market-by-market.

@Logan Allec That is awesome! A late congrats! How has the investment treated you so far? Any big differences or surprises from the calculations you laid out in the first post? Did it end up being close to what you had calculated in terms of rent prices etc?

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