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What kind of numbers do i need to buy a 4 plex?
I am new to this rental game. I built a duplex and have been renting it out for 6 months and am now looking at buying a 4 plex to live in 1 and rent the other 3 apartments. What do i need to ask for from owner and what kind of return do i need to be successful in this venture? I'm looking at a property that is listed at $300k and is fully occupied at $650 a month rent. It is 10 yrs old as well. I know there are a 1000 other things I need to find out but honestly don't know where to start to make sure this is right deal for me. Any advice?
I would make sure that at the end of the day you get net cash flow of $150 per unit minimum!
Is the $650 market rent for the area for those units? Are the units individually metered for utilities? I would determine what type of financing I would utilize for the purchase and compare the PITI to the net rent the three other units would bring in to determine if the rents could even cashflow the monthly payment. I would try to determine every additional expense that the property will have so you can include that in your analysis as well.
This all depends on your area and what your goal is. Is your goal to live for free or cashflow? Using the 1%-2% rule it doesn't work out at the purchase price you listed. It's also a newer property so I'm not sure how much renovating can be done to increase rent. If you offered less than the listing price it could very well work for you. I'd use bigger pockets rental calculator to see what makes sense.
It is market rate for the area altho I will be exploring moving it to $695 shortly. The trash removal is the only utility that is owner paid. Since i recently built the duplex that I'm renting out I'm kind of cash poor but I am financing it for 30 yrs and using equity on another property as the down payment if that makes sense. I'm basically getting in no money down. In my very basic math on this I should make around 300 to 400 a month on this since I will be living in one. Obviously if i moved out the cash flow would be much greater.
Ok I see. If I was to offer $262500 for property it would probably anger the owner (lol) but that's what it would take to make it a 1% deal happen. Like I said I am very new and had to look up the 1 to 2% rule. So it looks like it's not the best deal but since I want to move to area for personal reasons if I can get it to 1% for all 4 then I may pull trigger on it.
What are your goals @Charles Kiser? Happy to help analyze the deal with you to make sure it fits your criteria and goals. I have a due diligence checklist on my site - a few things we'll need to get started.
Hi @Charles Kiser, since you'll be living in one of the units (at least at first) the numbers can get a little screwy, so what you probably want to do is analyze it as though you don't live there. So at 650/unit = 2600/month rent. Now we have to make sure we account for all expenses not related to the mortgage payment. 1st the variable (expressed as a % of the gross rent usually) vacancy (i use 9%), Repairs (being a new property this will probably be low, so lets say 5%), CapEx (also low due to age so 5% again), then I always add 10% property Management because I don't plan on PMing forever and want to make sure it'll cashflow after I turn it over to PM, but that's up to you.
Then you need to determine fixed costs, Taxes, Insurance, Utilites (if it's just trash that should be cheap), lawncare (?), Snow removal (?), HOA (?). After we get all that see what's left from the gross rent, does it cover the P&I of the mortgage? If so that's your Free cash flow, or just cash flow. At that point you need to determine if you weren't going to be living there would you invest in the property? If so great!
Now we can take your rent out of the equation and see how much it'll cost you to live there, likely it'll be better than buying a similar size SFH to live in. On top of that even if taking your rent out since you'll be living there, your tenants will be paying down the note, and you can depreciate 75% of the building (for specifics talk with your CPA) for taxes.
That's how I'd do it if my wife allowed us to house hack. But I don't go for appreciation, strictly cash flow. So it depends on your goals, area, and outlook.
Good luck, let us know what you decide!
Cheers!
I decided to just buy a single family home. After researching on this site i don't think the numbers could have gotten where i needed them to be. Thanks for everyones input tho.
Originally posted by @Charles Kiser:
It is market rate for the area altho I will be exploring moving it to $695 shortly. The trash removal is the only utility that is owner paid. Since i recently built the duplex that I'm renting out I'm kind of cash poor but I am financing it for 30 yrs and using equity on another property as the down payment if that makes sense. I'm basically getting in no money down. In my very basic math on this I should make around 300 to 400 a month on this since I will be living in one. Obviously if i moved out the cash flow would be much greater.
I would be skeptical of this number and if you can, have someone else more experienced look at your assumptions. You could even post it here for some feedback. I can almost guarantee that there is no way you are truly cash flowing 300-400 per month while living on one of the units. A 30 year mortgage on 240k (assuming 20% down with your other equity) with an interest rate of 5% come out to a monthly payment of $1288. This is not considering any property taxes or insurance. Then on top of that you calculate potential vacancies, maintenance, and capital expenditures, I doubt you would be cash flowing at all.
This does not mean this is a bad investment as you have to consider the 4th unit's potential for rent income (and potential for appreciation) but I would just make sure you are calculating your expenses correctly. You might not actually have to spend anything on vacancies or maintenance for a while but then you have an eviction and a heater breaks and suddenly the profit you thought you had is gone and you are paying out of pocket.
At $650/unit/month for rent, this property does not meet the 1% "rule" (gross monthly rents should be at least 1% of the purchase price), and is not a good cash-flow investment.
That being said, numbers you need to acquire to analyse your deal BEFORE you purchase:
- rents
- taxes
- leases, & if the tenants are current & meet YOUR criteria for tenants.
- cost of insurance
- cost of lawn/grounds care
- utilities (for what is the owner responsible)
- cost of management (or will you self manage, in which case factor in the value of your own time)
- rent-control or not?
- any other cities fees/taxes/etc for which the property owner is responsible to pay
@Charles Kiser while I'm not where you are, I have to believe there's a few places in your area that would be great for house hacking. I wish I could have convinced my wife to let us do it when we bought our place. Even if you find a place that doesn't cash flow while you're living there, but would after you move, it's a great place to start. If it costs a little to live there well I can almost guarantee it'd be less than the cost of owning a SFH and having to cover the mortgage and all repairs out of your own pocket.
But of course it's up to you, good luck!