Need advice on a deal

[Connor Deneen]

Happy Labor Day weekend everyone! I have a question regarding a fourplex property that was just put up for sale a few days ago. Before the numbers, here are the basics: I will be using a VA Loan (so zero money down), and will be living in one of the units, (And yes VA does up to 4 units). The property is in California, because that is where I am stationed currently. Long term I want to invest out of California, but I'm going to be here for a while so I'd like to get a property and take advantage of the zero down loan while I'm here, preferably multifamily, but I'm not opposed to Single Family. This property is in pretty good condition, which it would have to be for it to pass the VA inspection. Ok, now for the numbers:

Asking Price: $425,000

Taxes (CA): roughly 5,500/year, less if purchased for less. (458.33/mo)

Current Rents: $825/unit

Vacancy: Less than 5% for last two years, only one turnover

Nearby similar rents: $800-$950

Property Type: Garden Style, single story

Property Class: B

Property Location: B

Insurance: Roughly $150-$200/mo

Managing: I'd be managing myself for at least the first year

I've ran the numbers and including cost of property management(even though the first year or so I'll manage it), and accounting for capex, garbage, maintenance, and all other related costs I know that with the loan being zero down and me living there so as not bringing in one of the four rents I'll technically be negative cashflow, and I know Brandon Turner and David Green would say what the heck are you doing man!? I know.

That being said, I wanted to get all of your perspectives on this, is it worth making an offer to where I'd be living for free, the other tenants' rents would cover PITI as is, and even more so once I raise the rents. I know I'd be paying down the principle and over time I'd start to cashflow even after saving for capex, maintenance, etc.

So what do you think? Yay/nay? What do you think I should offer if at all? Their agent told me he already has a "good" offer on the table, and ever since moving to California all I've heard is that people buy here to break even on cashflow and wait for their return on investment way down the road. But again, this is California, so who knows where things will be down the road. Is it worth it since I'm using next to zero of my own money? Or do I wait and keep looking? Any and all advice is greatly appreciated, thanks!

[Eugene M.]

Shooting my shot at a few pieces of advice. I just purchased a quad with a VA loan myself. It was at a lower price point in NC, but with corresponding lower rents. My taxes are a bit lower than yours, but my insurance is a bit higher per month.

1) Realize that if this is your first deal, rarely does anyone hit a homerun on their first deal. Accept that it might be "decent", work your tail off to negotiate, raise rents, add value, and minimize your expenses. As long as the numbers aren't horrible, there is hidden value in just taking action and getting this under your belt. The people you network along the way and lessons you learn will allow you to get that homerun next.

2) Being slightly negative cash flow while house-hacking isn't terrible. In fact, you could even turn this into a system in which you force yourself to pay comparable rent each month even if you don't need to: throw this money at the loan to accelerate equity for future refi/selling, or throw that money into the CAPEX or working capital fund so when you move out you can reduce those allowances in your math.

3) Again - even at negative cash flow (as long as it's not bad) combined with your W-2 (military/BAH?) house-hacking is a great way to accelerate your savings so you can go out and get the next property even quicker. That's called scaling! 

4) Look at other strategies to increase cash flow. Are the units more than 1 bedroom? Can you advertise for a roommate for your own unit while still being comfortable living? A roommate sharing your unit even at $400 a month for just one room and shared kitchen/living area might help a ton. I'm sure you can find someone on post who might take you up on that. I know a ton of guys (Officers!) who live together to reduce rent. Also, you might want to explore AirBnB market rates (if legal in your area) for when you move out. If it's in a desirable area, you can double your rent by AirBnB'ing just one unit (yours when you move out) instead of long-term renting. I know a few people who do that on quads. It will definitely require some effort/money: furnishing the place, taking professional photos, taking time to learn the app and compare market rates, turnover/cleaning, etc.

Hope it works out!