Buy a 4 plex...get a duplex

21 Replies

I am fairly new to BP and the wealth of information is absolutely amazing. Quick background on myself. I had several rental units prior to Hurricane Katrina (yes, from the New Orleans area) and all of them were wiped out. I in turn sold all but one of them off due to the unknown of what was going to happen with the area. I kept one unit due to it not being worth selling. Fast forward 10 years later and I am getting back into REI

My plan to get started again with REI was to start with flips to help finance Buy/holds. In my process of looking for flips I came across an interesting deal. There is a 4 plex that has been on the market off an on for about 16 months. The lady that owns the property is looking to downsize the number of properties she has. It is listed at $309,000 and all four units have been rented out for no less than 12 months. 750 / 775 / 750 / 725 are the rental amounts which are a little below the average for the area. From what I calculated using the BP tool, NOI of $12,500 and CapRate of 4% ( that's low, right?). I could not calculate the cash flow as I have no idea how to finance this deal. The great thing about this deal is to help offload the property she is now including a duplex she had on the market for a while for $175,000 at no additional costs (probably because it is only worth about 100k). There is currently one tenant in the duplex that pays $845 and one unit available. I am not sure what the going rental rate for that area is.

Key note: She is only accepting cash offers which I do not have that amount of cash available.

Questions:

  • Should I combine these together as being one deal and run the numbers that way or keep them separated?
  • What is the best route to take to be able to offer cash? HML? If HML, how hard is it to get a bank to refinance a rental property? (I will be checking out the BRRR podcast tonight)
  • This seems like a good deal but is it really?

If there is anything else I need to know please point it out.  

Thanks in advance for the help.

So she is throwing the duplex in for free for whomever buys the 4-plea? If this is so then yes, run the numbers as a 6-plex, because that is the total cost of the property... Sounds like a decent deal and a lot better then the small cap. How is your credit and DTI and will you qualify for traditional/commercial lending?

Where is this located at?

@Nick Britton

Yes, she is throwing in the duplex. Trust me, I asked that question about 10 times in 10 different ways to be sure I was understanding her. I don't understand the logic but I'm not going to argue. Credit is good, DTI is OK, probably higher than it should be. I have a meeting setup with manger of a local portfolio lender to see what my options may be. My concern is she was very adamant about cash offers only and only way I can see that happening is with a HML. I will run the numbers again, including the duplex and see how they come out. Do I calculate the Income on what I should be able to bring in or what is currently being brought in?

@Linda Lieu

Jefferson Parish

If you are afraid of loosing the deal why don't you throw it under contract with it written that the duplex is included, while using a financial contingency in the contract will protect you. There are many lenders out here that might be able to help you depending on the deal (@Sean Richway)

What part of town is it in? Have you had anyone pull some comps? The first thing you want to do is make sure she is even close to the actual value with her asking price. Just because it was listed at that number doesn't mean it will appraise at that number. 

Being occupied, I assume that they need no work? What about the double?

My guess is she wants cash offers because somewhere along the way she found out that the property is difficult to finance. Are you sure it is a legal 4 unit? 

@Michael Fink , you should def analyze this deal based on how it is currently operating. Otherwise you are doing a proforma, which is not what your CF will be based on. I take the approach to be as conservative as possible with all numbers in the P&L/ I&E statements. This way if it fits my criteria on a conservative approach, I know I can add-value and be in the gravy.

    If she is so adamant about cash AND she is liquidating by throwing in the duplex, put it under contract with the right escape clauses. Then research it to death. "If it sounds too good to be true, it probably is", always holds true. Try to understand her current position and reason for wanting to sell as well as the properties history as a buy & hold. 

     How often do the tenants change over? How many evictions have they both had? What condition is the property in? Most importantly what is happening around these properties? (I was in NO in June and there was a lot of construction going on. This lead me to believe NO was in the expansion cycle.)

   These are all questions you should seek to answer. Why? Because you will be "buying" these problems (good or bad). 

     Finally, if she is desperate, "some money ALWAYS beats no money". If you can close even with conventional financing, she will take it, TRUST me. One way to make her take this option is to offer her a "non-refundable" and/or higher deposit (like $5K). So in essence she keeps your earnest money if you can't close. On the flip side you protect the deal/non-refundable earnest money by being pre-approved for the loan. Even include this paperwork in the offer.

Good luck.

@Kimberly Jones

Comps put it at a good asking price. The only work I am aware of is there is carpet that may need to be replace. I will be viewing both properties Friday to be sure there are not surprise issues. 

This an elderly lady that is off loading some property and is looking to get the cash out. I don't follow her logic on the deal but what I understand from her is she just doesn't want the 4 plex and the duplex needs 'some'  work that she doesn't want to deal with.  That some part is cause for concern but I'll have a better idea on condition after Friday. What exactly do you mean by 'legal 4 unit' ? 

By "legal 4 unit" I mean is it REALLY a 4 unit or did it get turned into a 4 unit somewhere along the way? You know how folks here are, they don't always check in with the city when they make changes. ;)

@Robert E. Medlock II

Great info. On the 4 plex all the tenants have been in there for at least 12 months. I'm not sure about the duplex but I will find out. The 4 unit area is mainly a SFR area with blots of multi units in the suburbs of New Orleans. Low crime area, within a couple of miles of anything you would need (shopping, restaurants, fast food, etc...), Close to a park and several schools. Duplex is an older part of town with older homes. Low crime area as well.

@Kimberly Jones

No, it's a legal 4 unit. Built for that purpose. Both properties are on the East bank of Jefferson Parish about 4 miles apart. 

Ah, so you aren't talking Orleans Parish. JP doesn't play, it's here in the city that folks tend to get creative with properties. 

Your background is very interesting Michael, I have to say mine is very similar.  I have been involved with real estate for many years with my father and after Katrina he unloaded 4 properties in Mid City (duplexes, 4plexes) because of the uncertainty at the time.  Given that he purchased many of them in the late 70s/early 80s for around $90-100k a piece, he was very happy with the appraised value after a 20+ year hold.  That said, I have always enjoyed the business and have been getting back in myself.  He did hold on to one property (4plex in Mid City, great location right of Canal St. by the Bulldog) and it never has a problem with vacancy.  As far as this deal is concerned, I typically do agree with the age old mantra "if it sounds too good to be true..." but in this case it just seems like she is an elderly woman who doesn't want to deal with it anymore and is motivated to take her money and run.  I think that if she truly is as motivated as she says she is, then she may be open to working with you to get the deal done if you are truly interested in the units.  Do you mind if I ask how you found these units?  In any case, best of luck as it does sound like a great deal and would be a nice holding to add to your new real estate portfolio.

Besides HML for a cash deal are they any other options to be able show up with a cash offer?

@Mark Hamdan

After I view the properties and if the deal still seems legit I will hope to be able to close and potentially do more business with her. As far as how I found it, a buying agent looking to get more involved with REI who I just started working with put me onto it.

Truth? She really can't control what you show up at the closing table with as long as it closes, it really isn't any of her concern UNLESS she is looking for a 15 day contract. Is she willing to give you a normal 30 day contract? If so, technically speaking, the contract doesn't specify it be YOUR cash, as long as she walks with hers. Are you able to speak directly with her or are you working through an Agent? If you can speak direct, I suggest you be really nice and work your way into asking her why she is making that request. I am going to call in @Braden Smith to back me up on this. If a property has been on the market for 16 months, there is definitely a reason. If it isn't about the value, then she has most likely just had the painful experience of dealing with too many people that wanted to, but just couldn't pull it off. She is most likely asking for a cash contract because too many people have used the financing contingency as an out clause and she is tired of it.

@Kimberly Jones

I have not spoken to the seller yet and have thus far only worked with my agent. I figured before I went that far I should at least check out the properties and see if there are any obvious property issues.

Good point on the reason she is pushing for cash.

I do know she turned down a cash offer for a little less than she was asking and from what I'm being told by my agent,  she is regretting doing so. I'm going to speak more in depth about this deal with my agent and see if I can get any more details. 

Again, to all who have put in your two cents thus far,   Thank you. 

I agree with @Kimberly Jones . 16 months on the market is a long time and from what I have seen and know, that means there is an issue with the property which is usually one of two things:  Either the flood insurance is too high or there is a significant issue with the property such as a structural and/or foundation issue. 

Do you have an accurate P & L statement for the property? Most investors in our market don't keep good records so getting all the income and expense info on multi-family properties is difficult and usually just an approximation at best.

Is your agent experienced enough with investment properties to guide you and get you this info? 

Are they speaking directly with the seller or with the listing agent? 

If the property is listed they are speaking with the listing agent as they are not allowed to speak with the seller.

If I read your posts correctly, you mentioned you have not even seen the properties yet? 

Without seeing the properties in person how do you know what condition they are in and how much money needs to be put into them?

@Braden Smith

My agent is working with the agent.

The property has been off and on the market as the seller keeps pulling it off when someone puts in an offer that she doesn't like. The last time she turned down an offer for 290 for the 4 plex, then regretted it. Another offer came in for 250 (from another investor my agent works with) and she declined and decided to pull it off the market. She then put it back on the market and threw in the duplex. Honestly,  from what I know this far I kind of feel like this lady is not sure what she really wants. 

As far as if my agent is familiar with investments properties I cannot say for sure. I just recently started working with her so I have no history to go by. I will say she is very responsive and seems to have a decent understanding of working with investors. I'm not sure if she would be the person to help guide me through this.  She is only a buying agent and does not list properties. 

P&L is highly unlikely as the seller is an elderly lady. My only hope would be if she uses a property management company. This is one of the many questions I have asked my agent to ask. 

Correct, I have not seen the properties. I will on Friday and if nothing jumps out as a red flag after viewing the property I am hoping to be able to get some sort of conversation going directly with the seller. 

My current plan of action: 

  • Inspect the properties 
  • If all look fine,  try to get a meeting setup with the seller via the agents. 
  • Depending on how the conversation goes will determine my next steps. 

This conversation started with looking for financing options and I am currently working off the mindset  of if the deal is good enough the financing will be easy to find. 

Originally posted by @Kimberly Jones :

Truth? She really can't control what you show up at the closing table with as long as it closes, it really isn't any of her concern UNLESS she is looking for a 15 day contract. Is she willing to give you a normal 30 day contract? If so, technically speaking, the contract doesn't specify it be YOUR cash, as long as she walks with hers. Are you able to speak directly with her or are you working through an Agent? If you can speak direct, I suggest you be really nice and work your way into asking her why she is making that request. I am going to call in @Braden Smith to back me up on this. If a property has been on the market for 16 months, there is definitely a reason. If it isn't about the value, then she has most likely just had the painful experience of dealing with too many people that wanted to, but just couldn't pull it off. She is most likely asking for a cash contract because too many people have used the financing contingency as an out clause and she is tired of it.

I definitely agree-probably too many financing deals falling through.  Financing multi-family properties has been a challenge in the last few years due to the mortgage crises.

One thing to look at is that if you do HML, there are a ton of points and interest to pay. Then when you refinance, you will get hit with another round of closing costs.

It appears that the owner pays the water bill on the 4-plex, so you need to include that in your P & L projections.

It seems that you are less interested in the double.  Perhaps, after securing it under contract or actually purchasing, you could sell to an investor to help you pay for the 4-plex?

Another option: if you have a 401k/IRA, you may be able to use that. However, most financial pros may tell you not to touch it.

@David S.

From the sound of it, the duplex may need 'some' work so the possibility of selling it to another investor to help offset costs on the 4 plex is one of the ideas

To provide an update to anyone who may have been following this thread.

I viewed the properties last Friday.  4-Plex need a little updating (carpet, paint, etc..) I had a few concerns with a couple of soft spots in the floor on the second level and all 4 A/C units were of different sizes and ages even though the 4 units were identical.   It went under contract by another investor for 295k but his intention is to reduce the offer significantly after he gets the inspection completed.  He opted out of taking the duplex with the 4 plex.  Not sure why.

As far as the duplex.  It was in pretty good condition in a great neighborhood but the asking price of that one is way to high and the lady had turned down every offer she has received on that unit, even one that was only 5%less than asking.

At this point, I waiting to see what happens with the offer in place and how the inspection comes back.  That will determine my next steps.

Thanks to everyone who has chimed in and offered up their help.   Another great example of how BP is like no other forum and a great tool for any investor.