4plex vs Duplex for your first deal?

Question

Hey guys,

Im currently renting half a duplex in Albany NY and I am considering buying a multifamily house myself. The plan is get into a multifamily house using an FHA loan, doing any renovations possible myself to create as much value in the property as possible and getting into a single family house with another FHA loan 1 year later. My goal is getting into that one rental property before moving into a single family home with my Wife and Daughter and then using a credit line on my single family to get more rental properties. I just would like any advice anyone might have for me as I am completely new to the investing world. I am a 27 year old electrician and love my career just would love to do it as a hobby and not work the amount I have to as of now. When I say new to investing I mean I have a checking and savings account and that is my portfolio. My work ethic is incredible and my focus is the same i know i can do this, anything you guys can tell me to help me in this first one is greatly appreciated.

Thanks,

Angelo Caruso

Amanda G. · Answer

People make estimates for cap ex, operating, taxes, insurance, utilities, etc. Often they assume that will take up at least 50% of rent. That's an ok place to start, depending on your area. However, when you have a specific place, you should analyze the deal with the actual expenses for tax and insurance. Capital expenses are rare but expensive, and you seldom know when they will arise. That's why having some financial padding is important. You want to have quick access to cash if you have to replace pipes or HVAC or a roof.

Steve DellaPelle · Answer

Hey @Angelo Caruso, I house hacked a 4-family outside of the Boston area using FHA and would love to share any info or answer any questions you might have. Send me a PM!

Angelo Caruso · Answer

@Amanda G. great point, my landlords are a really nice older couple but i doubt the numbers would work, i want to buy something for a really good price that needs some love being that i can turn it around myself

Amanda G. · Answer

Also, if you like where you are living currently, maybe just ask your landlord if he/she is interested in selling. Doesn't hurt, and landlords know each other. Maybe he/she will have a friend with your deal.

Amanda G. · Answer

Hi Angelo,Sounds like you have a plan. The main advice I'd offer is whether quad or duplex, just find a deal where you are happy with the numbers and willing for your family to live for a year (or more). You don't need a perfect deal, just a good one to get started. Good luck!

Dave G. · Answer

@Angelo Caruso I would determine your reserve based on the age of the property, the age of it's most expensive limited-life components (roof, HVAC, oil heater? etc), general property condition at contract inspection and how many doors you have.

My condos roofs' are already covered by the HOA fee. So my property reserves are primarily for an AC failure that would require full unit replacement since I'm in Phoenix and a property is pretty much uninhabitable with non-functioning AC for about 5-6 months of the year.

So if I were buying a duplex here with the intent to live in one side, I'd probably keep in reserve the cost of an AC unit ($5000) as a starting point. If the roof was pushing 20 years old, I'd keep more for that. If I was instead buying a 4-plex also intending to house-hack, I would look at maybe something less than just 3x the $5000 since it would be unlikely that everything would fail at once. Maybe I'd go to $10k. Maybe more with an old roof and deteriorating parking lot.

And of course you live in one of the units so you need to be able to maintain your unit as well. In some ways not as critical from a business perspective, but you need to be able to keep your home livable and functional as well as your renters' units.

If you estimate the remaining life of components, the cost of replacing them and then do the math amortizing the costs you can come up with a capex number and expenditure timeline. I'm sure some other BPers can chime in on their methodology.

Angelo Caruso · Answer

@Dave G. I completely agree i really didn't want to spend every last dollar I had to get this deal done just for that reason. How much would you recommend I have aside for each deal? That will definitely help me when trying to figure out if there is money to be made or the deal is not a good one.

Angelo Caruso · Answer

@Eric Jacobs Its a great feeling to see a professional like yourself tell me i have a great chance at success! Thank you for that, and neighborhood is very important to me for this first one especially because my family will be living in this house for atleast a year. when you say do your math what do you include when doing your math?

Dave G. · Answer

@Angelo Caruso make sure you have some cash reserves or access to emergency funds as @Amanda G. indicated. I did not do this early in my investment career and it almost wiped me out. It will give you peace of mind as well, because sh*t will happen guaranteed. And putting on your credit card sucks.

I also plan for net income before taxes to be about 50% of gross rents. That's what my actuals show although I'm probably an outlier on BP will almost all condo rentals. Your mileage may vary.

Best of luck to you.Dave

Eric Jacobs · Answer

Great intro of yourself. It is rare that someone does that and it is helpful to have some context.  I also think the fact that you have clarity on what you are after here increases the likelihood of success by a substantial margin.  Having said all of that, I would focus on value and worry less about whether it is one door or four.  It doesn't matter.  The fact that you can do work yourself and this is the course you want to take means you have a lot of advantages of those of us that hire out absolutely everything.  If I can suggest one thing, prioritize neighborhood over anything else. If you are in a good neighborhood you are likely to make money.  Secondly, do your math just like you would if you were investing.  Don't squeeze the numbers to make them work.  If they work, buy it.  Good luck !

4plex vs Duplex for your first deal?

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