Purchasing 2nd investment property - a Multi-Unit!

[Joseph Davis]

We purchased our first rental last year & am now looking at purchasing a multi-unit, preferably a 4-plex. Our bank will let us purchase 1 more investment property with 10% down and no PMI, thus the reason for the 4-plex. I want as much leverage as I can, while I can.

 We are going to have a property manager priced into the deal at 10%.  This way, if I choose to manage it myself  I can go back to a property manager at a later point and still have positive cash flow.  The current manager we have is working out really well so we are pretty happy.  We are looking at the following criteria:

1. 20% equity upon purchase

2. 15% cash on cash return

3. At least $150/door positive cash flow after all operating expenses.

Beyond our normal due diligence, what other things should I be watching out for when buying a multi-unit versus a single family home?

[William Hochstedler]

Hi Joe,

Just want to comment on your criteria.  If you're looking for $600/mo positive cash flow, that is your cash-on-cash return or $7200/yr.  $7200 is 15% of $48,000 which would equal your 10% down payment.

This means that you're looking for a $480K fourplex.  Actually, because of the first criterion, you're looking for a $600K fourplex for $480K. 

That's going to be really tough for a number of reasons.  First, those price points on existing construction are only available in the hottest, most expensive markets in Utah where cash-flow is extremely tight.  The other option on a $500K 4-plex is new construction which might hit your numbers but will never have that type of equity.  We are seeing spec 4-plexes where you can walk into a new construction without having to get the construction loan.  But these are selling faster than they're being built.

About the equity. why are you using a high LTV loan on a property with equity? Instead structure a deal to use the equity as a down payment to achieve the same thing. This is kind of the BRRR strategy that people talk about.

But, in general, equity on 4-plexes right now could be a non-starter for exactly the same reasons you're trying to get one. There are a lot of buyers including owner occupants with FHA's snatching these up at record prices, not at double digit discounts.

To answer your final question, pay particular attention to utilities and parking with multi's.

And congrats on your earlier deal.  What did you wind up with?

Cheers