1% on a 4-Plex in an appreciating area?

Question

Quick question - would you consider a 4-plex (owner occupancy - VA) in a highly appreciating area if it's towards the top of your budget and only rents out for about 1%? I can give more details if need be - but I do want to clarify that all new HVAC units were just put in, roof repaired and foundation leveled all within the past six months. Units are all currently renting out but I would plan to move into one of the units. Usually I wouldn't even consider looking at it since its only 1% but I'd love to know what people thought!

Dan Krupa · Answer

@Kenneth McKeown , that rule was great back in 2013/2014 but I wouldn't personally use it today.  What would you cash flow per door if you didn't live there? I like that your CAPEX would be minimal.

Kenneth McKeown · Answer

@Tyler Wehrung thanks for the reply! I'll be speaking with the listing agent here soon and I will figure out about the local comps and the market rents in the area. Being that the roof, HVAC's and foundation have all been replaced completely in the last six months, I believe those are your high ticket expenses.. but I'll also be asking if there has been an inspection/appraisal done. There are parking spots but no garages, washer/dryer hook ups, and I'm not thinking any storage room. I'll give feedback further when I speak to the listing agent here soon.

John Leavelle · Answer

Howdy @Kenneth McKeown

Have you tried establishing a Market Value using your own (or your realtor) comps?  At least to compare with any appraisal that may have been completed.

With the numbers you have presented it does not look like a good deal.  The $2,910 Income (1% Rule) is sufficient for a deal.  The problem is with the $1,600 mortgage payment.  If you use the 50% rule for expenses you get a NOI  of $1,455 ($2,910 Income - $1.455 Expenses = $1,455)

Cash Flow = $1,455 NOI - $1,600 Mortgage payment  = -$145

You have a negative cash flow with that amount of a payment.  Not to mention you plan on living in one unit.  Which decreases your income more.  Obviously the purchase price needs to be much lower for your financing plan.  Unless you provide a sufficient down payment to reduce the mortgage payment.

No matter what, the property must Cash Flow once you move out.

Good luck.

Tyler Wehrung · Answer

I'm also in the military and purchased a property that just met the 1% rule.  With a VA loan, you have to consider the fact that your getting into the deal for nothing... There aren't any other formal programs out there that I'm aware of to get into a deal for zero down.  Although you don't want to purchase with appreciation being the only basis, low cash-flow / high appreciation deals typically have their advantages such as the examples @Anthony Gayden mentioned.

Some other things I would consider: Are you accounting for expenses? Will you be managing the property? Are rents below market? they seem low to me, but I don't know the area. Are their any value add opportunities? garages, laundry, storage, etc?

Good luck with what ever you decide!

Kenneth McKeown · Answer

@Anthony Gayden sure! I figured it may be worth another look - but I'm a bit hesitant. It was bought by an investor six months ago for 180k and he did a lot of repairs (as mentioned above) and it has all resurfaced or new hardwood floors and upgraded kitchen and baths. He is now basically flipping it for 280k. Here are the numbers.. feel free to let me know what you think!280k List Price

3.75% VA loan

0% Down (disability waives origination fee)

Don't plan to put anything down - and may even roll in closing costs.

Haven't spoke with lender to see exactly what my mortgage would be.. but a previous interest at 200k was roughly about $1600 mortgage with the same VA loan. All units are rented out for 675(1/1), 675(2/1), 785(2/1), 775(2,1) for a total rent of $2,910 - so slightly above 1%. I'm going to ask the listing agent today whether or not an inspection or appraisal has been done... and I'm not wanting to offer list. Hopefully the seller is willing to go for less - who knows.

Anthony Gayden · Answer

@Kenneth McKeown

That is not necessarily a deal breaker. If the property is in very good condition in a nicer area, that may mean that you have a higher quality of renters and less wear and tear. It may also mean you have less vacancy loss.

Also consider the fact that you are going to be using it as your primary residence. The goal is of course to be living for free, or at an extremely reduced cost. If you are able to rent out the other three units and live for free, you are doing well.

Can you provide us with numbers so we can evaluate it?