Fourplex in San Jose, CA

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Fourplex in San Jose, CA

Account Closed
Investor · Los Gatos, CA · Member since 2015 · 32 posts · 5 votes

Hello everyone, 

I would love your opinion on what you would do if you were in my situation. So the quick breakdown is I live in the SF Bay Area, I have a lead on a fourplex, where the owner want 1.5mm (I'm set at 1.45mm and think that will work), in San Jose, CA. I have the ability to get a loan at 3% with 100k down, living in one unit. The unit sizes are (1) 3 bd 2 ba and (3) 2 bd 1.5 ba units. All units are on Section 8, with rents at (1) $2,800 and (3) $1,980 respectively. Market rents could fetch (1) $3,500 and (3) $2,250. Recent fourplex, same layout, went pending with a list price of $1,599,000, with the contingent/pending days its been on the market for a 3 months.

Here are the numbers with my family living in the 3bd unit, a 5% vacany rate and $10k in expenses. 

Cap rate - 4.03% (about average for the Bay Area maybe a little low)

DCR - .65

Cash Flow - ($31,000)

Here are the numbers fully rented with rents at 3bd $3,250 and 2bd's $2,150.

Cap rate - 6.94% (over 7% is tough to find in the Bay Area)

DCR - 1.12

Cash Flow - $10,500

Please let me know your thoughts or questions. Much appreciated.

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Account Closed
Rental Property Investor · Oakland, CA · Member since 2014 · 730 posts · 1k+ votes
9y
Do not battle Bob Bowling on cap rates. You will lose.
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  • Assaf Furman
    Wholesaler · Campbell, CA · Member since 2014 · 187 posts · 70 votes
    10y

    Even though the -$31000 annual cashflow it may be a good investment if it answers your risk tolerance and financial goals, as well as your alternative housing expenses. There's another parameter you should consider when house hacking and that is taxes, which can make or brake whatever it is you want to achieve. This is probably the best place to start understanding the issue.

    As for the fully rented option, there's the time factor and renovations needed to bring the property to its full market rent potential; how long would you estimate it would take to do it? How much money is needed to make the units worthy of this rent? These two can make a big difference to the profitability of the deal, especially when you have sec8 tenants.

    Hope it helps, good luck! 

    1Reply
  • Chad HalePro Member
    Property Manager / Investor · San Jose, CA · Member since 2013 · 779 posts · 301 votes
    9y

    depending on the exact location and condition of each unit and common areas of the property, your projected rents may be a little high?  Also, the rent market is softening a little bit.  The frenzy of the past 2-3 years is subsiding.  So you may want to consider that as a risk.  Also, check to see if San Jose rent control laws apply to you.  They just changed June of this year.  

    1Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    9y
    Originally posted by @Account Closed:

    Hello everyone, 

    I would love your opinion 

    Cap rate - 4.03% (about average for the Bay Area maybe a little low)

    Here are the numbers fully rented with rents at 3bd $3,250 and 2bd's $2,150.

    Cap rate - 6.94% (over 7% is tough to find in the Bay Area)

    Please let me know your thoughts or questions. Much appreciated.

     Ronald there are NO cap rates on 4plexes.  No one in the Bay Area can provide verifiable cap rate comps for a 4plex.

    Also Even if there was a source of verifiable cap rate comps for 4plexes you are using them incorrectly. CHANGES in NOI either increases or decreases the value. It does NOT change the cap rate.

    Also how do you explain the Section 8 rents being so much lower than market rents?

    0Reply
  • Account Closed
    OP
    Investor · Los Gatos, CA · Member since 2015 · 32 posts · 5 votes
    9y

    Hi Bob thanks for the reply. I think cap rates can be used on anything, all a cap rate does is provide a rate of return. 

    Maybe I am using the wrong formula to calculate the cap rate, what is the formula you would suggest I use? 

    The market rents are higher thats just what it is. Current rents are section 8, and those rental rates are what they are. If you go to the non section 8 market the market rates are higher. That's just what the numbers are for those unit types. 

    Would you buy it with those numbers?

    0Reply
  • Radhika M.
    Investor · San Jose, CA · Member since 2014 · 167 posts · 146 votes
    9y

    @Account Closed Is teh fourplex in 95117 or 95128 zip code? if so the rent of 3500 for the 3bed seems high.  Right now units for rent are talking slightly longer to rent especially at the 3500 price range in San Jose.  I would be cautious when estimating higher rents.  

    1Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    9y
    Originally posted by @Account Closed:

    Hi Bob thanks for the reply. I think cap rates can be used on anything, all a cap rate does is provide a rate of return. 

    Maybe I am using the wrong formula to calculate the cap rate, what is the formula you would suggest I use? 

    Would you buy it with those numbers?

    A cap rate is not a rate of return on real estate. ALL it measures is the market value of a NOI.

    You need an actual NOI calculation on the property in question. Here you have non market rents to start with so that would understate PGI. Then you would divide that by what the cap rates that similar properties have ACTUALLY sold for but there is no reliable place to get that information since 4plexes are sold using the more accurate direct sales comparison.

    You NEED both the NOI calculation AND the sale analysis to get cap rate comps. No one can provide that. They can make wild *** guesses but is that how you want to invest your money?

    You gave a range of 4% and 7% cap rates. If a $1.5m property is selling at a 7% cap rate the NOI should be $105,000 but if the NOI is only $65,000 then the value should only be $928,600! See how not knowing the NOI or the market cap rate can be manipulated so that you are overpaying $600,000!

    1Reply
  • Ryan Landis
    Residential Real Estate Broker · San Mateo, CA · Member since 2013 · 585 posts · 264 votes
    9y

    @Account Closed brought up a great point. It really depends on where you are, but from my experience as you get to higher level rents in a 3/4 unit, potential renters will have SFH options available. Now if the location is stellar, that can make up for it. Just some food for thought.

    0Reply
  • Account Closed
    OP
    Investor · Los Gatos, CA · Member since 2015 · 32 posts · 5 votes
    9y

    @Radhika M.

    Thanks for the response Radhika, I didn't use $3,500. But I got that number from a 3bd in one of my other investments. It's a little different location, for the better, so I reduced it and my numbers use $3,250. I do agree even $3,250 may be a little high, especially since so many apartments are coming to market. The main idea I wanted to get input on was the financing, would it make sense with the terms and low down payment to purchase it. I am already leaning away from it as for the exact reason you mentioned of things slowing down. But will I get a chance at a 3% rate again?

    @Account Closed

    A cap rate is exactly that a rate of return on real estate, albeit you purchased the property cash. True its tough to find exact cap rates out but you can get a general idea. And to your first post NOI directly affects the cap rate. A cap rate = NOI/property value, thereby making the cap rate completely dependent on those two items. If you have a property that gives you NOI of $100,000 and you purchased it for $1M you have a 10% cap rate which is the rate of return. If there is a property listed for $1.5M with a NOI of $65k then the cap rate is 4.3% not 7%. Now if you want a cap rate of 7% then you should offer $928k. I feel like you're trying to argue rather than give helpful info. Please don't respond unless you have something constructive, it doesn't benefit anyone the way you have responded.

    0Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    9y
    Originally posted by @Account Closed:

    @Radhika M.

    @Account Closed

    A cap rate is exactly that a rate of return on real estate, albeit you purchased the property cash. True its tough to find exact cap rates out but you can get a general idea. And to your first post NOI directly affects the cap rate. A cap rate = NOI/property value, thereby making the cap rate completely dependent on those two items. If you have a property that gives you NOI of $100,000 and you purchased it for $1M you have a 10% cap rate which is the rate of return. If there is a property listed for $1.5M with a NOI of $65k then the cap rate is 4.3% not 7%. Now if you want a cap rate of 7% then you should offer $928k. I feel like you're trying to argue rather than give helpful info. Please don't respond unless you have something constructive, it doesn't benefit anyone the way you have responded. 

    I'm trying to give you factual information. If you have the market value of a property then why are you calculating a cap rate. Return? How is the cap rate accounting for rent increases, capEx or appreciation since it only looks at one years NOI?

    Now if you think a cap rate is a helpful number using it the way you do, ie. I buy $100,000 NOI for $1,000,000 then I have a 10% cap rate but I can show you that the market cap rate is 15% then you have over paid $334,000! on ONE property! How is that NOT constructive?

    VALUE= SUBJECT PROPERTY NOI/MARKET CAP RATE FROM COMPARABLE SALES

    1Reply
  • Radhika M.
    Investor · San Jose, CA · Member since 2014 · 167 posts · 146 votes
    9y

    @Account Closed For the market rents I would research what the going rent is for a 3 bed room and 2 bed room in fourplexes. Like you said depending on location and condition even 3250 seems high. Don't compare one zip code to the other as rents vary quite a bit depending on location within San Jose.

    Other thing to keep in mind is the rent control. Most fourplexes in San Jose are rent controlled so you may not be able to increase the rent right away. 

    1Reply
  • Account Closed
    Rental Property Investor · Oakland, CA · Member since 2014 · 730 posts · 1k+ votes
    9y
    Do not battle Bob Bowling on cap rates. You will lose.
    2Reply
  • Account Closed
    OP
    Investor · Los Gatos, CA · Member since 2015 · 32 posts · 5 votes
    9y

    Saj, it's not battling it's just looking at it and knowing what he is saying isn't correct. He mentions the cap rate is not affected by NOI. Well we all know it is. If I buy a property and increase the NOI my cap rate has increased. Like Bob said that's just the facts. Yes that is a very simplistic approach but when you start arguing as he did its too subjective to say I'm right your wrong, he didn't even ask where I got the 5% vacancy and 10k in expenses from. So the actuals actually give a higher cap rate. Those two numbers combined are currently more than the last year's expenses, but I felt it wouldn't be doing myself the justice with using the actuals as what I've experienced with my other properties wasn't what the actual size were.

    0Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    9y
    Originally posted by @Account Closed:

    Do not battle Bob Bowling on cap rates. You will lose.

    Ha ha.  Some of these discussions do seem like battles but if he hangs in it will be a win-win when he figures out he has learned the correct information. 

    0Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    9y

    Let's think this through. 

    1.  Wouldn't you rather have a higher value property than a higher cap rate?

    2. Cap rate = NOI/value

    2a  10%= $100,000/$1,000,000

    2b  11%=$110,000/$1,000,000.

    3. You did all that work to get your NOI up but you think your value is the same? Stay in bed, it's not worth it.

    4. NOI's are selling for 10% cap rates. You increase the NOI that you bought for $1,000,000 up to $110,000. The formula is V=NOI/cap rate. Now your property is worth $1.100.000=$110,000/10%cap rate!!!! You can sell your property for $100,000 more!! That is worth getting out of bed.

    5.  Think of it like $per sf.  If properties are selling for $100 per sf then a 1000sf property is selling for $100.000.  If you add 100sf to the property you should be able to sell it for 1100sf X $100 per sf=$110,000.  Doing it backwards like you are doing cap rates would mean $100,000/1100sf =$90.91per sf!  See?

    1Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    9y

    Being $100k out of pocket up front, and a further $31k each year thereafter, is a good idea how?

    (Yes, I know, it's California, the land where everything only ever increases in value blah blah)...

    But, if your Lender will give you $1.35M at just 3% fixed - you should buy SOMETHING (better)!

    1Reply
  • Account Closed
    OP
    Investor · Los Gatos, CA · Member since 2015 · 32 posts · 5 votes
    9y

    Bob what you said doesn't change the fact that I bought the property for 1m, increased the NOI, and there by increased the cap rate.

    Brent what should I buy, or what would you recommend? That's very true, being out an extra 31k doesn't make sense unless it reduces my cost of living, which it doesnt. Thanks, for the input. 

    0Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    9y
    Originally posted by @Account Closed:

    Bob what you said doesn't change the fact that I bought the property for 1m, increased the NOI, and there by increased the cap rate.

    So you are saying that you bought a property, increased the NOI by 10% but can't sell it for anymore than what you paid for it? Think that through again. If a $110,000 NOI sells for $1,000,000 why on earth would you pay $1,000,000 for a $100,000 NOI ? SEE! That makes no sense. Please explain that to me. If you do I think you will have you aha moment.

    0Reply
  • Account Closed
    OP
    Investor · Los Gatos, CA · Member since 2015 · 32 posts · 5 votes
    9y

    I never said that. I'm saying my cap rate increases as my NOI increases. Is that true or false?

    0Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    9y
    Originally posted by @Account Closed:

    I never said that. I'm saying my cap rate increases as my NOI increases. Is that true or false?

    FALSE!  Cap rates are set by the market.

    0Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    9y
    Originally posted by @Account Closed:

    I bought the property for 1m, increased the NOI, and there by increased the cap rate.

    $1,000,000=$100,000/10%

     $1,000,000=$110,000/11%

    This is exactly what you said. NOI increased by $10,000. Value stays the SAME. The cap rate changes NOT the VALUE.

    That is wrong.

    0Reply
  • Account Closed
    OP
    Investor · Los Gatos, CA · Member since 2015 · 32 posts · 5 votes
    9y

    Ok, so back to the original question, what would you do?

    0Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    9y
    Originally posted by @Account Closed:

    Ok, so back to the original question, what would you do?

    Are you asking me?  Do you understand the cap rates now?

    Anyway with the market rents you have gross rents of $116,400. If the comp property sold at $1,600,000 and had similar rents then it sold at a 13.75 GRM gross rent multiplier. Of course we don't know the actual sales price and since sales hundreds of thousands over list price are common in the Bay Area we have nothing to get to market value and one sale does not make a market.

    I would ask the agent and the owner how they arrived at their value. Then I'd calculate GRM on the sold properties and also compare $per sf, $ per unit, $per bedroom etc. and make adjustments for time, location, condition.

    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    9y
    Originally posted by @Account Closed:

    Bob what you said doesn't change the fact that I bought the property for 1m, increased the NOI, and there by increased the cap rate.

    Brent what should I buy, or what would you recommend? That's very true, being out an extra 31k doesn't make sense unless it reduces my cost of living, which it doesnt. Thanks, for the input. 

    I'd want to be borrowing in order to MAKE money. I just had a brief look at Zillow. How about your $100k earning you say $70k/y?:- http://www.zillow.com/homes/for_sale/house,condo,a...

    [Not a promotion. Do your own research. And yes, I'm aware you still want to buy somewhere to LIVE. I'm just recommending: buy with INVESTOR-eyes as priority]. My 2c. All the best...

    0Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    9y
    Originally posted by @Brent Coombs:
    Originally posted by @Account Closed:

    Bob what you said doesn't change the fact that I bought the property for 1m, increased the NOI, and there by increased the cap rate.

    Brent what should I buy, or what would you recommend? That's very true, being out an extra 31k doesn't make sense unless it reduces my cost of living, which it doesnt. Thanks, for the input. 

    I'd want to be borrowing in order to MAKE money. I just had a brief look at Zillow. How about your $100k earning you say $70k/y?:- http://www.zillow.com/homes/for_sale/house,condo,a...

    [Not a promotion. Do your own research. And yes, I'm aware you still want to buy somewhere to LIVE. I'm just recommending: buy with INVESTOR-eyes as priority]. My 2c. All the best...

    If someone asked me what I thought of that deal I'd have to say it DEPENDS.

    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    9y
    Originally posted by @Account Closed:
    Originally posted by @Brent Coombs:
    Originally posted by @Account Closed:

    Bob what you said doesn't change the fact that I bought the property for 1m, increased the NOI, and there by increased the cap rate.

    Brent what should I buy, or what would you recommend? That's very true, being out an extra 31k doesn't make sense unless it reduces my cost of living, which it doesnt. Thanks, for the input. 

    I'd want to be borrowing in order to MAKE money. I just had a brief look at Zillow. How about your $100k earning you say $70k/y?:- http://www.zillow.com/homes/for_sale/house,condo,a...

    [Not a promotion. Do your own research. And yes, I'm aware you still want to buy somewhere to LIVE. I'm just recommending: buy with INVESTOR-eyes as priority]. My 2c. All the best...

    If someone asked me what I thought of that deal I'd have to say it DEPENDS.

     Yep. We know. I also asked it as a question: "is a good idea how?"

    I did NOT suggest there might not be an appropriate answer.

    (But as you can see, the OP now seems to -agree- there may not be one - for THEIR situation)...

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