Quad-plex just hit the market for 500k, what should I expect?

Question

My area is somewhat expensive when it comes to real estate. A quad plex just hit the market in my area for 500k. The units are 2/1, and the rent comes out to about 875 a month per unit, which is pretty fair given the current market, but I guess it could be increased to something like 925-950 a month. I want to use the FHA loan with 3.5% down. This quad plex already has a cash offer though, because quadplexes are very rare in my area and there probably hasn't been one sold in the last couple years. However, there are plenty of similar quadplexes to this one, in fact, on the street that this one is on, there are a whole bunch of them that look pretty much identical. It's just very rare to have one up for sale in my town.

Since there is a cash offer already on it, I'm offering the full asking price, considering that I have an FHA loan.

Since I'll be living in one unit, there won't be any cash flow, in fact, I would pay about $500 a month on top to cover the mortgage for it. But $500 a month is cheaper than paying rent here, and this is a rare opportunity.

What should I expect in terms of repairs? How much do you generally spend on 4plexes if you manage them yourselves? I don't know much about repairing stuff, so for repairs I'd have to hire someone, but I'd like to manage the property myself.

Do you guys think this is too expensive of a property? I just read on these forums how people are buying quadplexes for 300k-400k, and some even for 200k, and it's like, how do you even find such properties? It's just very rare for quads to go up for sale here. There are some triplexes too, but the price-per-unit is about the same, they're listed for like 360-400k, and the rents are about the same.

Cory Carlson · Answer

Ellie,

I am very familiar with the house hack strategy in our market and it can be tough. One thing to point out with the strategy is where to draw the line for expenses. In the owner occupied situation it is different for everyone. How do you want to calculate your monthly out of pocket? I helped a client buy a 4-plex in Bend recently and we calculated his monthly out several ways ranging from the simplistic rents from 3 units minus mortgage to the annualized monthly out of pocket including taxes, insurance, repairs/maintenance, MI, reserves, property management (if applicable), etc. Is the broker you're working with versed in this property type and strategy?

Repair and maintenance really depends on the upside of the building and your connections or abilities. The client mentioned above, using the income approach we worked backwards. Similar buildings in Bend go for a 5 CAP, so we determined with the purchase price of $618,000, after the units are updated, achieving market rents, the new value would be $750,000 - $775,000 after about $12,000 per unit in updates. The thing is my client is the contractor type, gutting the units and doing all the work himself. We project rents to go up from an average of $850 per unit to $1300.

Perhaps these units just need "soft turns" on turnover - carpet, paint, fixtures. Or hard turns - appliances, counters, flooring, etc?

I guess my point here is that every property is different and based on your questions (which are all the right questions by the way) you should consult with your "team" comprised of broker, lender, CPA (the other three units are to be depreciated) and understand the strategy first before making any offers.

Do not be afraid to lose this one. A broker can find off market deals for you if they work with the property type.

Erik W. · Answer

@Ellie Narie, hi!

First off, the cash flow is going to probably be dismal regardless of you living in it or not.  I can't be sure, of course, since you didn't share your numbers, but this is how I'm seeing it using a BEST CASE scenario.

Assuming 4 units @$950 = $3,800.

OpEx (40%) = $1,520

Vacancy (5%) = $190

CapEx Reserves (5%) = $190

NOI = $1,900

Debt service (assuming 30 years note, 4% APR, $482,500 balance) = $2,222.

Cash flow: - $322

But the REALITY CASE scenario is you won't have all four rented.  Subtract another $800-$900 from cash flow.  Unless you have different numbers to share, my guess is this will likely cost you around $1,000 - $1,200 / month out of pocket to own.

A good rule of thumb is most properties that do not rent for at least 1% of the total "all in" costs (purchase + closing + rehab + holding) each month will not cash flow positive.  This property with three units rented at the top market dollar ($950 X 3) only generate 0.5%.  Even if all 4 were rented it's only at 0.76%.

My advice: find a better deal.  Getting into a bidding war with a cash buyer isn't going to be pretty, even if you "win."

Ellie Narie · Answer

I guess my goal isn't necessarily cash flow right off the bat-- that's pretty much impossible with the prices around here. I'm currently renting, so I think any sort of investment into my own place would be better than renting. However, after I satisfy the one year occupancy requirement, I might want to move to another place, so I want to make sure that the rents of this place pay for all the expenses (mortgage, taxes, repairs, etc).

If this one is too expensive and "not worth it", then I'm not sure what is around here. The triplexes are going for 400k, with the same rents. SFHs are going for 200k as the cheapest SFH (and it would be outdated), but most SFHs (3/2 homes) are going for 250k-350k around here. Duplexes are usually going for about 300k-350k here, but there aren't any right now on the market. I'm just trying to find the best option for me in terms of investment. I need at least something so that I actually own something instead of renting. What's the best option?

Bjorn Ahlblad · Answer

If your goal is cash flow there isn't any here at that price point and those rents. That is true for most markets here on the West Coast. Unless you can find a neglected MF property in a great neighborhood run by a tired old LL it is tough to make a buck, especially on the MLS. All the best!

Erik W. · Answer

@Ellie Narie,  how many properties have you looked at so far?  Not to be discouraging, but the average newbie investor looks at between 80-100 properties before making the first purchase.  If you haven't done at least that much digging, keep looking.  Don't let buying fever drive you to make a decision you'll regret a few years down the road.  I'm seeing phrases in your writing that hint of desperation/exasperation.  Things like: "any investment is better than renting..."  "I need to own something instead of renting".  Dangerous words many have regretted later.

Let's step back and look at your goal.  I may have missed it, but in passing it sounds like your goal is: "I'm going to buy something because that's better than renting."  Not only is that not a goal, it's also a false premise.  Renting absolutely makes sense in some scenarios, typically in higher cost of living markets.  You can rent and get more amenities than you can with ownership, often.  And you also get....flexibility.  That has value.

Instead, let's think in terms of what do you want: home-ownership?  Increased income?  Higher Net worth?  More free time?  Then find the property that works toward your goal.  I'm pushing you to find your WHY, a step many investors neglect when starting out.  Very important, though!  Do this first, and the deals will follow.

Hope that helps!

Caleb Brown · Answer

@Ellie Narie

Are you waiting for MLS? If it was me I’d pursue off market ones. See if you can contact the owners of 2-4 unit properties. Sooner or later you’ll find the perfect fit

Evan Polaski · Answer

@Ellie Narie I think @Erik Whiting does a great job spelling out typical numbers.  But as mentioned, it really depends on the current condition of everything.

If appliances, furnaces, A/C, roof, have all been taken care of, that can be a big source of repair dollars.  If you have strong tenants that are not destroying the units, your turn over costs will be lower.  If you are good with collecting rents, doing bookkeeping, and making calls to repair people, you can save on management fees.

But the biggest question for your situation is: how much do you pay for rent now.  If your net outflow is lower with this property than you are spending on rent, it may be worth it.

One downside of 4 families, a lot of people read Rich Dad, Poor Dad (or the like) and jump in without knowing what they are getting, so you are competing against people who are willing to overpay.

Joe P. · Answer

One thing people need to remember is that CF on a $500,000 4-plex varies significantly based on location.

I wouldn't find one, but if I COULD find a 4plex to hit the market in Philadelphia (especially in close proximity to Center City) and have four 2/1 units, even in horrible condition, for $500,000, I'd probably tap into my own 401k for that deal, because it would cash flow so ridiculously well and probably be a great appreciation asset as well. Nicely redone 2 bedrooms in our area can rent anywhere from 1300-1700 depending on amenities. That's pretty decent cash flow.

But if you buy a 500k 4-plex in the Northeast area, a 2 bedroom may only return $1000 per month. It's not enough yet all your costs are the same.

The 1% rule is annoyingly basic at times, but it is a good rule of thumb. I personally like the 50% rule because I think that's more realistic, but both just represent rules of thumb only.

Robert Lei · Answer

Personally, I would find something that cash flowed positive, after all said and done (capex, maintanence, vacancy, PITI). But realize that every market is different, and if this is what it takes to get a foot in the door, then do it. Maintanence and capex would depend on what's in the property. Is it central air? Each unit has its own air? Whats going on with the water heater(s)? How old is everything? What shape is the roof in? Can you renovate the units to increase the rents?

My own technique is to do about 5 - 8% of rent goes towards maintanence cost per month. Whatever doesn't get used is saved into my reserves. My goal with the reserves is to have enough cash to survive 2 major capex replacement. That is going to be at least 10k for me. Are you a handy person? If not, you would have to hire out all the repairs. That would force you to spend a little more on monthly maintanence. But honestly, besides the occasional light bulb replacment, smoke detector battery replacement, HVAC filter replacement, your monthly repairs isn't all that much.

Whether this property is too expensive depends on the market you are in. I can get a 4plex in my area for about 350-400k, and still cash flow $500+ after all said and done.

Quad-plex just hit the market for 500k, what should I expect?

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