Los Angeles, CA · Member since 2017 · 22 posts · 9 votes
I am considering a 4 plex house hack in Los Angeles where appreciation has been fairly high (though subject to change), and I'm considering living in one of the units and renting out the others. However, this property needs a MAJOR 150K rehab before it can be rented. The upside is that it's probably the worst property on an otherwise nice street with good rental demand. It's going to be a lot of work (and also my first real estate deal) so I'm wondering if I'm getting in over my head?
Los Angeles, CA · Member since 2018 · 326 posts · 279 votes
7y
@Josh W. if you are able to get $6,300 in rent and with the 50% rule I think the deal makes sense as long as the property is in a good location for appreciation. It sounds like the rental demand will be good.
Just a couple of things from the analysis; your closing costs will be closer to at least $12,000, do you already have a 4.5% interest loan and do you have a 30 year loan? If you do not have the 4.5% and 30 year loan secured your numbers will change a little.
Based on the limited information I think you purchase the property, get the rehab done asap, get renters in, hold the property for 6-8 years and then sell prior to the Olympics coming in 2028.
Los Angeles, CA · Member since 2018 · 326 posts · 279 votes
7y
@Josh W. if you are able to get $6,300 in rent and with the 50% rule I think the deal makes sense as long as the property is in a good location for appreciation. It sounds like the rental demand will be good.
Just a couple of things from the analysis; your closing costs will be closer to at least $12,000, do you already have a 4.5% interest loan and do you have a 30 year loan? If you do not have the 4.5% and 30 year loan secured your numbers will change a little.
Based on the limited information I think you purchase the property, get the rehab done asap, get renters in, hold the property for 6-8 years and then sell prior to the Olympics coming in 2028.
Los Angeles, CA · Member since 2017 · 22 posts · 9 votes
7y
@Michael T. I know some of those numbers will change, but based on my credit and pre-approval, that is what my mortgage broker is quoting me. FYI this scenario involves me living in one of the units in exchange for having an additional 90K in liquid cash. My perfect credit scores (all 800+) should allow this as owner occupier. However, if I were to put 20-30% down and rent all units (4 instead of 3) my numbers would look more like the analysis I have attached here (based on some of your corrections as well).
My biggest concern is that this would be my first real estate purchase, and the 150K rehab is a bit daunting, as I know sometimes that number inflates. Would love to hear more of your wisdom!
Rental Property Investor · Phoenix, AZ · Member since 2016 · 553 posts · 314 votes
7y
@Josh W. Michael made some good points about your assumptions.
In my limited experience the 50% rule doesn't apply to repositioned fourplexes in Los Angeles. Rents are so high that expenses are crowded out. Your own calculation reflects that. Also, you have expenses pro forma'd at a 3% increase YOY but your largest expense will be property taxes and they will go up at 2% each year. It's possible to "grow into" an investment.
The rents that you are talking about (I assume for three units) are stellar so the $1.2M assumption would seem to be low. The rehab amounts that you are posting are enough to gut rehab three units so you should be getting top dollar (whatever that means for the neighborhood).
The biggest problem I see is the low down payment.
To be clear, all four units are vacant? What neighborhood or cross streets?
I'd caution against it but then again people would probably caution me for the things I have done. I bought a "rehab" project (only because I paid so little that I could afford to screw up several times) and it is NOT fun. AT ALL. Very stressful (contractors, engineers, licenses, permits)....
Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
7y
@Josh Wade
Make sure all units will be delivered vacant! If not, you might have tenants that won’t move out so you can rehab. What’s the scope of work on the rehab? Do you have it all costed out? Are you sure the costs are correct? I rehabbed a 4plex for my first deal. I learned a ton, now I know what I’m getting into on rehabs, although I still make mistakes. I was majorly over what my projected costs on my first one. It all worked out because I bought right, but there were a few months where I was really hemorrhaging cash. Make sure you know what you’re getting into with the rehab but don’t let that dissuade you, you might be able to create some really good equity doing it.
Los Angeles, CA · Member since 2017 · 22 posts · 9 votes
7y
@Seth Borman the property taxes are definitely high. The low down payment would only be to owner occupy one of the units. 3 units are identical, the "master" unit is actually a separate 2/1 house with a private yard, fireplace, and private swimming pool (which is empty and needs rehab).
The $1.2 assumption is based on comps sold recently in that area. Could potentially be worth more.
All the rents I quoted were for 3 units comped for the area assuming top dollar post rehab. To @Lee Ripma's point, this is a big rehab. Floors, bathrooms, interior paint, exterior paint, HVAC, pool rehab, most likely termites, and still need to check the structural work. The last contractor quoted 150K but I know things can balloon from there. This work needs to be done on the entire building. 4 units.
The building can be delivered empty which would allow me to rehab the entire property at once. My plan would be to hold this property for at least 10 years, most likely more. After one year living in the "master unit" I could then rent it out separately at a higher rent. Does that make sense?
Los Angeles, CA · Member since 2017 · 22 posts · 9 votes
7y
@Lee Ripma thank you for your experience. What mistakes did you make on the first deal which caused the cash hemorrhage? That is my biggest concern haha. What would you do differently?
Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
7y
@Josh Wade
Make sure you know everything that needs to be done! So do your due diligence on structural, roof, plumbing, electrical. Make sure you have accounted for everything you want to replace. On my first one I didn’t replace all the windows to save money, but once most of the windows were replaced the remaining ones looked so bad that I went ahead and replaced them, but everything was already painted and trimmed, so not the time to do it. I also thought I could save the doors, but ended up replacing those as well. So just make sure you know everything you need to do at the beginning of the project so it can be done at the right time. Also pick your trim carefully based on what renters want. Based on the rents you listed I would go with more premium finishes-adding dishwashers and laundry. You can save if you get into the design yourself and buy your own appliances, flooring, tile, and vanities. So I would just spend a lot of time really thinking about what you want and what you can cut. It’s good that you already have a bid. Where is the property in LA? Sounds like a good deal to me as long as you do your due diligence, check on your contractor all the time, and really spend a ton of time planning. One error that I’ve made a few times now is working with a cheap contractor who I end up having to fire!
Los Angeles, CA · Member since 2017 · 22 posts · 9 votes
7y
Thanks @Lee Ripma! The property is in Inglewood, just south of Ladera Heights. The rents are about 2K for a 2/1 unit, but with a rehab, I think $2100 is possible. This all hinges on me living in the building, as I do not have enough cash to put down 25% and cover the rehab (which I will most likely need to finance with a HELOC)
I will do my diligence, but I'm not sure how long the rehab process would take. There are two vacant units, and wit 60 days, the other units can be vacated with notice for a nominal fee.
As my first RE investment, do you think this is too big of a job? I liked what you said about being able to learn all of the ins and outs during the rehab. I'm on the fence!
The $150K rehab estimate sounds low for a 4plex in LA if it includes the exterior with a swimming pool. I am going through contractor quotes for a remodel of a SFR and seems like rehab costs have gone through the roof since my last one 5 years ago. Curious who quoted you. Do you mind private messaging? Low cost contractors are hard to find and who knows maybe he'll be appreciative of the referral.
Rental Property Investor · Fort Collins, CO · Member since 2015 · 273 posts · 127 votes
7y
@Josh Wade - you’ve asked twice in the thread if others think this is too big of a job. I would caution going into it if your gut and heart keep suggesting this may be too big of a job. You need to be committed emotionally and financially for this to be a success. Good luck with your decision.
Los Angeles, CA · Member since 2017 · 22 posts · 9 votes
7y
Thanks for your honesty @Patrick Soukup. It would definitely be a large project in my life at a time when I am busy with my career.
After digging into some other properties nearby, one has a more profitable unit mix with some 3BR units and is priced similarly, but it is already rehabbed. Only half the units vacant but It could rent right away. No pool or upkeep.
Doing a costly and long term rehab would be worth it for me if I could get it at a steal. And who knows, maybe they will get desperate at some point. But all things being "sort of equal," I would prefer to avoid the hassle. I'm glad I posted this! What a great community.
Sounds like you and I are in the same boat. I just closed on a four unit with a hefty 150K rehab budget. My advive is to mirror a few others here. Do as much of the shopping as you can, appliances, tile, flooring, paint, etc. Things that are inconvenient but saves you the 40% or so upcharge contractors add.
My two cents are to make sure the bones of the property are in good shape. Do a CCTV sewer inspection to make sure you dont have pipe separation or deterioration. Go over the scope of work at least 5 times to fully grasp what needs to be done and then be ready for plenty of sleepless nights! (itll be worth it when its over)
I would have the units delivered vacant before COE. I can't stress this point enough! You think it's a nominal fee now but those tenants might take you for a sucker and try to get huge relocation fees out of you. This could be a bigger cost and headache then the rehab. Get them delivered vacant before you close!
Can you do it? I don't know, can you? It sounds like a deal to me. However, like others have said just make sure you REALLY know your scope of work and do your due diligence. It gets easier with time. You might be able to sub out project management to someone else, PM me if you want a friend of mine who does this for people.
The cosmetic renovations are the easy part, the part you really need to understand during due diligence is what systems you need to modify and update-pluming, electrical, structural, roof.
It is going to be a lot of work, prepare yourself to put in the hard work, but remember that it's not for nothing, it's for a huge gain in equity.
Only you truly know if it's the right move for you right now.
Los Angeles, CA · Member since 2017 · 22 posts · 9 votes
7y
Thank you for the input! I really have to determine the overall scope of the project and whether or not I am willing to take it on at the moment. Appreciate all the wisdom!
Los Angeles, CA · Member since 2018 · 326 posts · 279 votes
7y
@Josh W. you've gotten a lot of good recommendations from others here and while Los Angeles and Southern California is a daunting market it's well worth the appreciation!
The exciting part about this is as you've mentioned the units will be delivered vacant! Based on the information if they are delivered vacant then you have a lot of upside.
But even if the units are not delivered vacant it's not the end of the world as another great thing about this deal is it is in Inglewood and there is no rent control so you have a lot more opportunity to increase rents versus Los Angeles!
@Lee Ripma mentioned to ensure you do your due diligence and you'll be fine.
Also, I recommend to hold no more than 6-8 years. The appreciation that will come to Inglewood due to World Cup and the Olympics will easily justify selling the property by 2026 - 2027.
Real Estate Broker · Bend, OR · Member since 2017 · 46 posts · 20 votes
7y
@Josh Wade
And the rehab costs can go way up, especially as a newbie.
It looks like there is negative cash flow each month, are you only betting on appreciation?
I’d love to get a multi family under contract at like 75% of after rehab value, should cash flow at least $100 door after all expenses and Mgmt fees. Does this deal do that?
How many offers have you written? How many deal do you get from Realtors &/or leads?
Los Angeles, CA · Member since 2017 · 22 posts · 9 votes
7y
@Carey Greiner you nailed it. This would be all about appreciation in an up and coming neighborhood in Los Angeles. After living in the unit for one year, I could rent out all 4 units and cash flow a nominal amount. I haven’t found many $100 door cash flow deals in the LA market, but if my “rent” costs me $500 a month and offers me the ability to build equity, it’s not a bad deal IMO.
You are correct. The rehab costs are the big X factor for a newbie like me.
Some say play it safe, others say go big and learn along the way. I will have to figure that one out on my own!
Real Estate Agent · Renton, WA · Member since 2017 · 204 posts · 151 votes
7y
@Josh W. base on the comments, looks like there is plenty of upside if you're mentally prepared. Buying the Ugliest property in the neighborhood can create many upsides. Happy Investing!