From SFH to 4plex - analysis

[Thomas Handy]

I'm making the leap from SFH to fourplexes. I've plan to look at a fourplex this weekend and make an offer and put down 20%. The property is listed for $109,000. Taxes are $849/yr and insurance will be $1766. The vacancy factor would be 5% and it's currently renting for $1900 a month. I'll use a property manager for 10%.

Based on my estimates the mortgage would be around $442 a month. Am I missing anything?

Tom

[David Beard]

Thomas -- I hope you've done more due diligence that what you conveyed in your post there. At a minimum:

* Pull comps to make sure you're buying with at least 15% equity on the front end.
* Review existing tenants, verify if they received any lease incentive, and have them verify their mthly rent and security deposit.
* Do comps on the rental amounts with nearby properties.
* Get the utility bills for the prior year, from either the owner or the utility companies. These may be artificially low if the building had reduced occupancy during the prior year, so watch out for that.
* Validate what the prop taxes will reset to based on your sales price. LA does have the lowest prop taxes in the nation, or thereabouts, so that's a big plus in investing there.
* Call a few insurance agent for quotes. You shouldn't pay more than .75% to 1.00% of the property value.
* Document the age/condition of the roof and mechanicals, and factor into your price if these are in the last few years of their useful life.
* Determine any other deferred maint or issues with the property. Have a good contractor walk through if you're not experienced with this.
* Get the prior Sch E's from the owner if possible.
* Grade the neighborhood: crime statistics, school quality, bus line access, parks, shopping, amenities
* It's a negative if the bldg is in a large 4-plex clustered area; proximity to SFR's is a plus.
* 5% vacancy is too low for a "low end" 4-plex. Not being derogatory, but $475/mth is a pretty low price point, and turnover among this type of tenant will likely be high, so assume turnover every year. If each unit is vacant one month per year, this will translate to a vacancy rate of (8.33% + leasing fee of 4.15% = 12.45%)
* Annual turnover will also lead to high unit turn expenses of perhaps $700/yr/unit, plus or minus depending on need for flooring replacement, though you'll always have to paint and clean.
* There are a few economies with 4-plexes vs SFRs, but these get wiped out by having to pay utilities, lawn and common area maint, and higher turnover and more issues from people living in close proximity to one another.
* I'd run expenses/vacancy/capital at least 55% of gross potential rent. I'd even say 60%, but you have those low prop taxes helping you out. (Taxes in OH and TX are 3 to 5 time as much.)
* A big win with 4-plexes is that it's one financeable unit, so the $100K 4-plex is easier to finance than the $30K SFR.
* Based on your numbers, I'd pay no more than $85K for something like this in my market, minus any rehab expenses, in a C to C+ area, and honestly that would be stretching it.

Good luck with it.