Trying to buy a 4plex...is it worth it?

Question

My husband and I just got an offer accepted for a 4 plex.  It was originally listed at $330K...dropped to $299K and is now selling to us for $285K.  I don't know the actual value of the 4plex as we have not had the appraisal yet.  There are 4-  2 bed/1 1/2bath units approx 1050sq.ft. each....with one renting for $850, two renting for $750 and we will live in the fourth.  The income is $3,100a month for the three.  So we will be living rent free.  Our loan will be for $285K with 3% down (approx. (9K), for a mortgage of about $2,200.   Is the net income worth it?  I don't know exactly how much the montly mainetenance expenses will be since we haven't officially purchased it yet.  Does this sound good??   thanks for any input :)

Michael Rossi · Answer

I agree with the numbers in Jon's analysis.  As a rental, this property will lose money.  Therefore, I would say that it's a very poor deal and I certainly wouldn't do it.  If you're going to be putting money into a property, why not just buy a Single Family House?  Then, you won't have to put up with 3 tenants and you'll be putting your money toward your own house.

If you do want to own a 4-plex and live in one unit, at least do the hard work and find one that will actually cash flow!

Good Luck,

Mike

Michael Rossi · Answer

If you look at the top of the Landlording forum, you'll see a sticky thread about the 50% Rule.  To answer your question, the reason that you haven't experienced all these expenses is that you only have one rental and you've been lucky so far.  Over time and/or over an increased number of rentals, your operating expenses WILL run in the range of 45% to 50% of the gross rents.  It's covered in the thread that I talked about.

Good Luck,

Mike

Jon Holdman · Answer

Hi Vanessa and welcome.  Please do post an intro in the new member intro forum.

Lets evaluate purely as a rental.  I'll assume $3200 for monthly rent if all four units were rented.

Rent: $3200
Expenses: $1600 (read in the Rental property forum on this topic)
NOI: $1600
Payment: $1709 (6%, 30 year, $285K)
Cash flow: -$109

So, not a great rental.  $266K would be about break even, and $200K would be the max price to make $100 a unit.

If this was in my area, though, I would probably buy it at $285K because I tend to be a little speculative.  Lots of fourplexes around here listed as high as $400K even though they only rent for $500-600 a unit.  Those are awful.

That analysis assumes the property needs no work at all.

Now, since you're living in one, your actual collected rent is less.   So, instead of having "expenses", which include a nominal allowance for vacancy, of $1600 a month, your's will be more like $2300 a month with the rent you're not paying. That leaves you about $900 in net operating income (i.e., $3200 scheduled rent - $2300 exenses).  With the $1709 payment, that means you need to kick in about $800 a month.

If I were you, I'd open a separate bank account for this property.  Pay "rent' of $800 a month into this bank account for your unit, and deposit all the other rent into it, too.  Over time, that bank account should stay right about zero.

But, you don't want a bank account of zero.  So, you should put aside at least $500 a month, in addition to the $800 "rent", for the next year.  This will give you a $6000 reserve fund.  You will have major expenses, like roofs, sewer lines, boilers,  a nasty eviction, a lengthy vacancy, a lawsuit, and any of a number of other things.  Over time, the rent going in will build up enough reserves, and you can pull this $6000 back out.  By doing this quickly, you guard against a big expense in the next few years.  My rough guideline would be to have a reserve of six months of scheduled rent, which would be about $19,000.  That's probably more than you need.

Vanessa Chelmis · Answer

thanks so much for responding.  I read about the 50% rule that's posted on the forum...i've never heard of this though.  We currently own a home already that is being rented out...and we collect the rent every month minus $100 for the property management company, so no way are we paying out half of the rental income to expenses.  it seems like if every investment had to pay out half of the rental income every month, no one would ever make a profit on anything therefore, no one would invest in real estate.  The roof is only 5 years old, and there are no renovations that need to be made.  Fresh paint inside and out, new and running appliances...pretty much everything is turn key ready, so we're expecting to make much more in profit every month.  Of course we will have money put aside for the unexpected, but half of our profits every month going to expenses seems like ALOT.  The taxes and insurance is figured into the $2,200 mortgage, and the tenants pay their own utilities, so i'm confused as to where half of our profits are going into maintenance every month?  Sorry, i'm just trying to understand this 50% rule.