How do I search for deals on a Duplex, Triplex, or 4-plex?

Question

Hi, I've decided that investing in a multi-family plex of some sort at the right price would be a wise decision to live cheaply and get started in real estate with little risk.

The area that I'm eventually looking to purchase in is orange county, and I plan on living in one of the units and acting as the landlord.  But, before I do so, I've got to find some for sale.  I would greatly appreciate any advice on the best way to search for multi family homes.

Thanks in advance,

Akash

Carlos Altamirano · Answer

@Akash Sky

Hello Akash, I believe their will always be competition for properties. Their are a lot of cash buyers out there. Having said that, build rapport with your broker or wholesaler to have dibs on a property first.

Matt H. · Answer

Everyone is both right and wrong here. SoCal is tough, true. It's different, also true. But you can cash flow. Sure it's not going to hit any 1 or 2% rule and it definitely won't be sexy with an FHA purchase. But I manage 229 units here and every single one cash flows, right out of the gate. And while it's tough and getting tougher, and expensive, let's not forget the positives: Basically zero vacancy with a little hustle, consistently strong price and rental appreciation in the good years, great weather, plus we have Disneyland. Can't forget that.

Matt

Akash Sky · Answer

Hey Carlos!  I think that investing over at the east coast is a wise idea, as the market over there seems to cash flow easier than South CA.  In terms of competition, was there ever a time where you had to compete against a cash offer?

@Ray Johnson I agree that if I want cash flow I will have to sacrifice a little in the area department.  Ideally, I would like get into a class C area.  In your opinion, what separates the classes B/C/D properties/areas from each other?

@ Matt Hoyt   California definitely has its upsides, and I think the largest hurdle to overcome is simply getting started.  How have you used California's positives, (low vacancy, strong price and rental appreciation) to your advantage?

Ray Johnson · Answer

@Akash Sky I'm originally from SoCal and still have a couple of properties in the area (Santa Ana). What everyone is saying is true, The only properties I've found that cash flow are in areas like Santa Ana (in Orange County), Compton, Southgate, and Watts, etc..In LA County. I recently looked at small Multi Family deals in Inglewood and Hawthorne that were barely cashflowing, and I mean barely. I can afford to look in Class C- and D areas because I don't live in the properties, since you'll be living in one of the units only you know if living in a Class C- or D property/area

Carlos Altamirano · Answer

hello @Akash Sky. Multi-Family is great! Unfortunately, it has gotten very difficult to find cashflowing buildings in South CA. I am sure they are out there, but competition is very tough and many investors are paying cash for these things. I help and show people how to use some of their savings to create streams of income by purchasing cashflowing assets. All of my units are in the east coast. Would be happy to chat some more! Talk soon

Akash Sky · Answer

Thanks for sharing your experience Kelly!   I too think that our best bet would be to wait for prices to fall (as I predict happening if the FED raises rates) or to find a killer off-market deal.  As far as finding deals like these, I think that networking is probably the best thing we can do to increase our chances of finding such an opportunity.

Have you done any calculations with a 20% down payment to see if a loss of PMI would result in cash flow?  (Although I do understand that 20% down can be unreasonable given our CA prices :x).

Kelly O'Quinn · Answer

Hi @Akash Sky. Congratulations on getting started on your investing journey! I've been trying to do the same as you - purchase a 3-4 unit property in the North OC or Inland Empire area. What I'm finding in the OC market is there is a lot of competition among investors here who are willing to purchase at a high price that doesn't cash flow by BP standards, either because they are betting on appreciation, tax benefits, or are able to afford to pay cash (among other reasons, these are just my guesses). 3-4 unit properties in the area are routinely selling for $700k-$1 million+, with multiple competing offers after only sitting on the market for a few weeks to a month. When running my analysis of these properties, which assumes purchasing with an FHA loan, 5% down, 3.25% interest, and maintenance/repair expenses (including CapEx, property tax, vacancy, insurance, and management) of approximately 40% of rental income, they simply don't cash flow at that price.

What makes California different from most of the country is that our market is very cyclical. We're at or nearing the top of our market right now (in my opinion), so prices will hopefully come back down in the next few years. Once prices recover again, they'll likely rise above the price they're at now, so although we go through cycles, we almost always cycle upward in the end. Therefore, people feel more comfortable buying for appreciation here than in other parts of the country. I still don't recommend it, though, because appreciation is never a guarantee, even in Southern California.

All this said, I haven't expanded my search past the MLS yet (that is my next step). You may be able to find a good deal on the MLS here or there, but they have been few and far between in my experience. The real deals will be off-market, so you'll need to get creative in how you find them.

Best of luck to you! You're on the right path. Don't let our challenging market discourage you =] There are deals to be had every where, at every point in the market cycle. You just gotta look in the right place.

Akash Sky · Answer

@Joe Horns , I appreciate your candid reply about how cash flow property's probably won't exist in orange county.  The main reason I picked multi-family was to increase leverage power in financing deals, as well as obtain housing that is a half liability, half asset.

If I choose multi-family, I would "ideally" only be paying for my portion of the mortgage and other expenses out of pocket if I was living there.  After I move, I could rent out my part and have an asset, generating cash flow each month.  The second reason is that I would be able to qualify for a larger loan, since banks would allow a conservative prediction of cash flow from rents to be added to my income.  Of course, in doing so I incur much more risk.  What if a tenant stops paying rent?  What if there are unexpected expenses?  I plan on going through each of these risks and developing a risk register to deal with everything.

Assuming Orange County is as you say, (as you would know real estate in the area much better than me) could you enlighten me onto some of the negatives associated with multi-family and what about california's pricing makes it very different from the rest of the country?

Also, I would love to recieve properties in Orange County in order to learn more about the market!

-Akash

Joe Homs · Answer

@Akash Sky  I can set you up to receive properties in Orange County, but unfortunately reality is that you may NOT find anything that will cash flow unless its in a D area.  Is there a reason that you picked multi-family?  California is very different from the rest of the country when it comes to investing due to pricing.

Good investing...

How do I search for deals on a Duplex, Triplex, or 4-plex?

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