What's my next adventure? Buy some 4plexes?

Question

Hi All, I'm new to BP.  I've lived in SoCal my entire life, and don't plan on changing it.  My wife and I are aggressive investors by nature, and we want to take it to the next level.  We have some nice assets that I want to leverage OR sell, then upsize our investments, then turn them into my full-time job (and our new home).

This is what we have:

1) We own a SFR outright (sell around $430k OR borrow $300k against it)

2) Our primary residence (make $160k if we sell OR borrow $60k against it)

3) Own a small tree service business

4) Residential development site (that $ is tied up for a couple years)

After getting mortgage pre-approvals, running scenarios and numbers, I realize I have around $400,000 to play with.  I want to make that my full-time job.  I figured 3 possibilities:

First Thought: sell both SFR's and aim at purchasing 2-3 4plexes in our area in need for some beautification (preferrably north orange county (Brea, La Habra, Fullerton, Placentia, Yorba Linda, etc)).

Second Thought: borrow against both properties, and find 2 mirroring triplexes (or 4plexes) in need of some help.  I figured this would be a 6-plex and I can avoid a commercial loan (higher interest).  In addition, I'll have both SFR's to rent out, and cash-flow nicely.  I do realize that this plan may require me to sell SFR's, but if I can hold on to them, I'd be better off in the long run.

Third Thought: ask BP!!!!!!

If all goes well, my plan is to gift my tree business to my brother, then just pay attention to my REI.

Bill Larsen · Answer

@Clint Kreider  is a multifamily wizard...

But if it was me, i'd sell the rental (or refi it out), pay off principle residence, and then buy awesome rentals for the rest of my life

Clint Kreider · Answer

@William Larsen Well, that's between me and Dumbledore

Bill Larsen · Answer

@Clint Kreider She doesn't think you're a wizard

Clint Kreider · Answer

@Kimberly T. I am not sure what you are disagreeing with. The only claim I made was "For this type of investment (multifamily), in this area (north O.C.), these are "great" deals with solid long term potential". I am only comparing it to other deals of the same type and in the same location. Of course, we all have different objectives and ideas about what makes a good deal. Clearly these deals are not for you, but the best ones are pretty highly contested when they are listed.

I would be comfortable cutting your vacancy estimate in half. In this area vacancies are very rare, and if they do occur they are very easy to fill. I know this from speaking to many owners of property like this.

Joe Fairless · Answer

@daniel

@Daniel Siapin what are your goals and what aspect of real estate do you like most? That would drive my decision on what to do next if I were you.

Kimberly T. · Answer

I don't know that I agree with that.  His numbers don't account for vacancy, which is bound to happen.  If you assume 7% vacancy (totally reasonable), then his monthly profit drops to about $430/month, or $5,160/year.  With 25% down and assuming $5k for closing costs, that's $205k down, just to make $5k a year.  That's a 2.5% ROI, which isn't worth the risk in my book.

Oh, and he's also not setting aside any money for CapEx, which is bound to bite him in the butt since he plans to hold onto the properties long-term.

That low ROI, coupled with the tenant-friendly stance of CA, is why we no longer buy rentals in CA.

But if you're interested in those kinds of deals, it looks like they can still be had.  Just found this after a quick search online, pretty comparable to the deal mentioned above:

https://www.redfin.com/CA/Anaheim/310-E-Wakefield-Ave-92802/home/3689152

Brent Seehusen · Answer

I would agree if he is cash flowing then he got a great deal.  Rents are also increasing organically as the job market improves and entry level homes become less affordable, so he will benefit from that growth in terms of cash flow and appreciation over the long run.

Clint Kreider · Answer

Monthly averages: 800K Purchase price, 25% down

Monthly Expenses                            Monthly Revenue

Mortgage         2952                          Rent        5250

Tax                   815                            Laundry   75

Insurance         120                             Other

Gardening        60

Repairs             200

Trash                160

Water/Sewer    150

Electric              60

Gas

Total:              4517                              Total:    5325

These are monthly estimates on a 4plex in North Orange County. A client of mine bought a 3/2,2/2,2/2,2/2 in Orange and a 3/2,2/1,2/1,1/1 in Anaheim. They both were purchased in below average condition with solid upside in rent.

He put 25% down on each, and should cash flow $600-800/month initially with upside to cash flow $1600-1800/ month once units are updated and new tenants are found. Of course, this will require more cash.

For this type of investment in this area these are "great" deals with solid long term potential. My client plans to hold onto them for a long time.

David Friedman · Answer

Hello @Daniel Siapin My brokerage office is in downtown San Bernardino. If you are looking for properties online I doubt you will be able to find a 4plexes at 2%, even in San Bernardino. To find the 2% rule in the Inland Empire you'll have to do mailers and make the deal happen off-market. No agent is going to put a 2% deal on the MLS. Just a true fact. Even if they did you'll be bidding against 10+ other bidders. Right now 1% is common on the MLS. If you plan to invest in the I.E. let me know. If you have cash there are other ways to get to that 2% rule.

Daniel Siapin · Answer

@Andreas Mirza  (did I put your name right?)

Early on in our planning, my wife gave me the green light on "House Hacking" for 3 years.  I'm not too worried about cash-flowing on owner-occupy, since I'm definitely NOT cash-flowing on our current residence right now!!  In addition, I can rehab as much as we want and get the write-offs (not to mention depreciation/interest tax savings!).

Cash-on-cash is going to be dependent on several things, nothing I can pin down without an exact property I'm looking at.

I have been reluctantly entertaining the idea of investing in the IE, for exactly what you've been mentioning.  You might have a good idea in that.

@Nathan Emmert I wouldn't even dream of getting any 2% deals here!!

@Kimberly T. Things may be a little more difficult managing myself driving out to the IE every day.  Someone mentioned buying NOC and Inland Empire.  Maybe I ought to chew on that.

I'll investigate and report back if I find anything hitting 2% in the IE.

What's my next adventure? Buy some 4plexes?

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