Real Estate Newbie Four Plex

[Trent Wale]

I am missing somthing here or is there more to this? I have an area that is filled with 1 bed 1 bath four plexes. All filled with tenants, interiors remodeled, listed around 200,000-250,000 with rents running from 600-700 a unit, most pay gas and electric. 

I am extremely new to this and just looking at different markets doing quick number crunches. This may not sound like alot but I feel if I purchased a few of these over the next few years I would have a decent cash flow that my day job would no longer be needed.

What other factors do I need to be on the look out for and are these fairly easy to manage? All inputs and stories are appreciated.

[Erik W.]

A few things for a person starting out:

#1 - It is not clear who pays gas and electric. Is it the landlord or the tenants? If the landlord pays, those rent numbers are terrible, as even small units can end up costing $200 - $400 per month depending on how the tenant sets the thermostat and if they decide to open the window to cool the place off in the winter rather than just turning down the heat. If the tenants pay, then the rents sound decent.

#2 - Deferred maintenance. How old are these units? When was the last time they saw more than just a cosmetic renovation? How old are the roofs? HVAC systems? Pluming? Flooring?

#3 - The 1% Rule. This is a "quick 'n dirty" method of checking many different properties at a very high level. The rule states that the property monthly rent must be at least 1% of the total purchase price. Example, a $250,000 4-plex should bring in gross rent of at least $2,500 per month. That's usually a base level for finding a property that may cash flow positively, but there's more analysis to do.

Here's what I suggest: do a full Net Operating Income analysis on it. Fair Market Value gross rent less vacancy less bad debt less all operating expenses (taxes, insurance, utilities, lawn care, management, maintenance, supplies, permits, etc). Then once you have that, subtract out debt service. If the number left isn't at LEAST $100 per door, it's probably not a good deal.

Be sure to include a management fee of 10%, even if you plan to self-manage. As a property self-manager, you're buying yourself a job: better get paid for it. $400/month of investment income  for a 4-plex you manage yourself isn't enough. You should be getting a 10% "management fee" ($250 on the example above that has gross rents of $2,500) PLUS the investment income of $400, or it's not a true reflection of this property as an investment. Also, if you plan to do any of your own maintenance, lawn care, etc, you need to see if the property rents can "pay" you to do those jobs as well.

Bottom line: don't buy yourself a series of jobs and claim to be a real estate investor. A true investor's job it to make deals and allocate capital efficiently. If they choose to plunge toilets and cut the grass, that's not investing activity, and only people who buy sub-par properties are content with that set up. It gets old after awhile. Ask me how I know!