Fourplex in Bay Area - is it worth it?

Question

Hello,

I am hoping to get some investment advice on a fourplex in San Jose, CA.

List price: 1.9M

Rental income: 114k/annual

Taxes: 25k/annual

Expenses: 37k/annual

Mortgage with 1.5 borrowed (3.75% APR): 84k/annual

Cap: 3.75%

NOI: $70,500

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

Account Closed · Answer

@Amit M., thanks for the shout out.

@Suthy M., for comparison purposes, a friend of mine is currently in contract on a 6-unit bldg in SF for $1.6M. The current gross rent is $116k with 60 to 70% upside potential in rent. This is the kind of purchase you want to make... with upside potential in rent. You make money when you buy. On this 4plex, the value has already been sucked out already by the seller. That makes you a buy-and-hope or buy-and-pray investor.

I plugged this 4plex deal in my spreadsheet and got a 3.3 cap. Once the $1,500 unit is up to market rent at $2,300/mo, it's a 3.7 cap. No bueno. You want to be in the position of the seller. There's a sucker born every minute, and you don't want to be one of them.

It's apparent you haven't stress-tested this deal. What if rent were to drop 20% from today in the coming years, could you absorb the negative cash flow? Buying with low in-place rents, you could still raise rent during the recession. Again, you make money when you buy.

To answer your question, it's NOT worth it unless you have so much money you don't know what to do with it and need a place to park it.

Slow down. Spend some time to learn about this biz and you will get rewarded. Good deals tend to be reserved for the players who know the market and in the circle. Have a great weekend.

Account Closed · Answer

Suthy,

His deal is actually on the MLS. Address is 994 Capp Street in SF. It’s in the Mission District. It’s scheduled to close on 8/2. He knows his SF market well. Within the next few months, there’s a high chance he can up the gross rent to $130k. Don’t ask me how b/c I can’t share this kind of info in the public. A lot of haters out there.

There are different nuisances in each market. If you KNOW YOUR MARKET, you can spot a deal from miles away and capitalize on it.

Account Closed is killing it in his Oakland market while I’m dabbling into his market now. 😱😱😱 In fact, I’m in contract to buy a 4-plex there, which will hit the 1% rule when I’m done with it in the next few months. Then I will see if I can find a sucker and sell it for double the price. 🤗🤗🤗

With respect to price per square foot. My biz partner and I paid $376/sf for 544 S 7th St bldg in downtown San Jose late last year. Would you call it a good deal based on the price per square foot? How about $15k/mo gross rent for $3.175M? 😜😜😜

It’s not a good deal by any means, but we’ve WANTED to own this building forever. When it came up for sale last year, my partner said we’ll buy it at any cost. 😂😂😂

We got $2,695/mo for a 2/1 on this bldg a couple months ago. You can check Zillow for the rental price history. Who would have thought we could command this kind of rental price for this “not so fancy” market? We could b/c WE KNOW OUR MARKET. We’ll do okay with it in the long run.

Just some food for thought.

Account Closed · Answer

@Suthy Maxwell that is absolutely insane to only get $2300 for a 2bed in San Jose. That's the same rent in deep East Oakland, where there aren't any Google engineers :)

my man @Amit M. said it right...for $1.9M you should be buying in SF.

Amit M. · Answer

@Suthy Maxwell have you looked at comps? What prices have similar bldgs sold for nearby?

I agree with you that 1% is not realistic in Bay Area, unless you’re doing massive value add or in class D neighborhoods and getting section 8 rents. (The latter not a bad strategy, but requires a different skill set, and perhaps temperament, than renting out to google engineers ;)

Account Closed let me tag the minghster, who knows SJ we’ll for his POV. But my guess is that for $1.9 Minh is buying 6 plexes, so his cashflow would be a lot stronger...

Brian Sparr · Answer

Hi @Suthy Maxwell -

Just looking through your numbers:  $114k income - $25k taxes - $37k expenses - $84k mortgage = -$32k loss

Even if I'm misunderstanding your numbers and your $37k expenses already includes the tax amount, you'd still be negative by $7k/yr.

In either case, that's a painful hit to take.  Plus, are you sure you can get 3.75% on a jumbo investment loan like this?

Before I drop $400k into a negative cash flow property, I'd look around at some other markets to see what that same money could generate for me...

Amit M. · Answer

@Suthy Maxwell

You say nothing about the location, unit size/types, condition, etc., so how can we advise? (All I know is that for $1.9 mil...it better be a pretty prime bldg and location...cause 1.9 is San Francisco prices ;)

Albert Ng · Answer

@Suthy M.

You said “The price per square foot is comparable with many single-family units in the same neighborhood.”

I’ll looking to purchase my first 4plex, so not really qualify to give any advice. However, if the $/sf is the same as the single family, isn’t it cheaper to just buy 3 single family houses?

Suthy M. · Answer

@Amit M. There are not a lot of comps actually. I noticed that almost all of the properties sold are hovering around $1.7M, but most of these units have low rental rates, and many of these units do not have the 3bed units. Does higher rental income justify a 200k higher price tag?

Suthy M. · Answer

Account Closed Hi Minh, thanks for your input. It's been very helpful.

How common are deals like the one you've described in SF? I'm curious how long ago that 1.6 deal occurred.

Frank Wong · Answer

Been saying it for a long time 2-4 units are way overpriced in the Bay Area.   Now, of course, overpriced is subjective to me it makes zero sense.  If I am buying a property which should be based on P&L it should yield a positive monthly return. Spend $1.9m and struggle that is not an investment.  Buyers really have FOMO.

Fourplex in Bay Area - is it worth it?

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