3 Unit Property, ? worth buying

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3 Unit Property, ? worth buying

Scott Malkin
San Diego, CA · Member since 2012 · 19 posts · 3 votes

Hello, new to this, first time posting, curious what everybody thinks about this investment:
- 3 unit property in San Diego
- current rents are 2400 +2400+1200 = 6000, sought after location, easy to rent
- purchase price $800k
- 1920's property, well-maintained/upgraded, no obvious initial work/repairs needed, has potential for historic designation/ Mills Act thereby reducing taxes
- while financials may not be ideal as solely an investment property, also considering possibility of living in one of the units for a while
- if owner-occupied I can purchase with 5% down, ~ 4.5% rate with no pmi...

Thanks, looking forward to everybody's comments!

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Ned CareyPro Member
Moderator
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
14y

$6,000 mo = $72,000 /yr
X50% expenses
$36,000 NOI (net operating income)

That means you have $36,000 in net income if you pay all cash for the property. With an $800,000 price tag that makes your cap rate 4.5% Not a particularly good deal.

With a 30 year $600,000 mortgage your payments would be about $3,400 or about $40,800 a year. You would have negative cash flow.

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  • Will Browm
    Investor · Buford, GA · Member since 2012 · 120 posts · 31 votes
    14y

    With a P&I payment of $3860 you would be over 70% of the rental income (when fully rented) once you added taxes and insurance. That assumes you would be paying rent too...

    Assuming the 50% rule you would be in the negative with costs and maintenance.

    0Reply
  • Nathan Emmert
    Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes
    14y

    Without understanding your goals in the property it's impossible to answer.

    I wouldn't buy... but then I already have a place to live and believe in investing for cash flow to allow me to accumulate additional properties. I also don't believe in appreciation as paper money makes me nervous. Beyond that, in my area there are better buys so the opportunity cost on that is just too great.

    But that's me, my goals, my situation.... your mileage will most certainly vary.

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  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    14y

    As an investment this is pretty poor. I you are thinking of living in it, to make it a better investment forget it.

    If you truly want to live there, figure what it would cost to live in a similar property. Take that cost out of the equation and figure whether it is a good investment as a two unit. I suspect it is not.

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  • Scott Malkin
    OP
    San Diego, CA · Member since 2012 · 19 posts · 3 votes
    14y

    Thanks for all your replies. What about if one bought this property for $800k at 4.5% rate, 25% down, collecting $6000/mo rent. Using these numbers it seems to pass the '50% rule' screen. Any seasoned investors interested now?

    By the way, on this particular property which has been on the market 1 week, there are currently multiple offers including at least one full price, all-cash offer.

    0Reply
  • Ryan M.
    West, MI · Member since 2012 · 674 posts · 182 votes
    14y

    Man those are ugly numbers essentially you are subsidizing people to live there.

    0Reply
  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    14y

    $6,000 mo = $72,000 /yr
    X50% expenses
    $36,000 NOI (net operating income)

    That means you have $36,000 in net income if you pay all cash for the property. With an $800,000 price tag that makes your cap rate 4.5% Not a particularly good deal.

    With a 30 year $600,000 mortgage your payments would be about $3,400 or about $40,800 a year. You would have negative cash flow.

    1Reply
  • Scott Malkin
    OP
    San Diego, CA · Member since 2012 · 19 posts · 3 votes
    14y

    Thanks for the replies, I guess i shouldn't buy it then, lol. I think I'll have to stay away from markets like San Diego with high purchase prices relative to collected rents.

    So what do you guys think about a Texas duplex? Brand new duplex, $250k purchase, rents are $1275/side. Of course property taxes are much, much higher in Texas...

    0Reply
  • Harry M.
    Real Estate Investor · Dallas, TX · Member since 2010 · 449 posts · 173 votes
    14y

    Hey Scott,
    I think you can do much better than that in TX, or at least Dallas county, which is the area I am familiar with. Also, that rent range is out of the sweet spot for duplexes in much of Dallas county. Duplexes fill a niche - that is a place to live for people who can afford and want more space and privacy than an apartment offers, but for whom renting a SFH is too much of a stretch. At 1275 rent, there are many options for renting a SFH, so why rent a duplex?! The sweet spot seems to be more in 900-950 range for many areas. And those you can pick up for anything between 120-150,000.

    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    14y

    Scott,

    There are a lot of buyers that do stupid things and overpay for properties.

    At 800,000 sales price you are paying 266,667 a door for 2,000 in rent.

    That is a horrible cash flow property.In other states you can hit 1,000 in rent per 70,000 so you can about double that 2,000 to 4,000 rent for the same purchase price.

    That is for performing stuff.

    For value add you can do even better with the cash flow but the risk is higher.Many in California buy an appreciation plays.I have clients from California that invest in my state and others for better returns.

    The real question is how much money do you have to invest in a deal. That will dictate the size and asset class you would be purchasing without bringing a partner in.

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    0Reply
  • Scott Malkin
    OP
    San Diego, CA · Member since 2012 · 19 posts · 3 votes
    16h

    Found this old post of mine 14 yrs ago. Fun to compare.... San Diego triplex ended up selling for $662k in 2012 (I did not purchase it). Today is worth ~ $1.6M (2.4x the price). Combined rent for the 3 units went from $6k to ~$8k per month (33% increase).

    Compared with purchasing the brand new Texas duplex for $250k at that time, now worth ~$475k (1.9x the price). Combined rent for duplex went from $2500 to $3400 today (36% increase).

    Somewhat similar numbers for appreciation and rent over this period. However, property taxes in Texas went up dramatically while property taxes in CA are capped at 2% increase per year. More significantly, the San Diego will literally rent in days while it can sometimes take several months to fill a vacancy in the Texas property. However, god help you if you get stuck with a bad/ professional tenant in California. An eviction can take months to years as compared with weeks in Texas.

    1Reply
    • Dan H.Pro Member
      Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
      1h

      Your comment on property taxes is missed by many people that are not real familiar with CA RE.

      Some comments:

      • - I do not consider the appreciation close. The appreciation rate

      • is 31.6% higher on the San Diego property.

      • - the vacancy rate in San Diego has nearly tripled over the last few years. It went from crazy low to just slightly low. My first hand experience was that in rental season (March to Sept) I filled my unit on the initial open house ~90% of the time. Those days are over. My last rental that had lease signed yesterday took a handful of open houses in spite of a crazy number of inquiries (I suspect ~100). I set rent price using same process as those in the past that rented in their initial open houses. I have another unit entering the market this week. We will see how it rents but I will be pleasantly surprised if it rents in the initial open houses.

      • - on the eviction front, there can be nightmare evictions but San Diego has one of the lowest delinquency rate and eviction rates in the country. I suspect this was due to the crazy low vacancy rate. Seeing the vacancy rate has tripled, I question if the delinquency rate (and eviction rates) will increase. For decades the LLs in San Diego had a big advantage. Tenants with an eviction would have difficulty renting a quality unit at market price. For example, we do not accept tenants with a bankruptcy or eviction, ever.

      Per Google

      • - San Diego County's formal eviction filing rate averages 1.3 to 1.8 filings per 1,000 renter households countywide, with post-pandemic filings surpassing 2019 levels.

      • - Texas eviction rate: Texas has a high annual eviction filing rate, with major urban counties seeing filing rates between 5% and 12.1% of renter households

      To put the number into the same format, the San Diego eviction filing rate is between 0.13% and 0.18%.. Using the high number of each range places Texas’ eviction for filing rate 67 times as high as San Diego. Using these numbers means for every eviction filing in San Diego, there are 67 eviction filings in Texas. Also note the rate for San Diego has increased over the last few years (likely as the vacancy rate has increased). Just a few years ago, the entire eviction filing range was below 0.1% so the eviction filing rate has nearly doubled (but still very low) over the last few years.

      Best wishes

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