Author Topic: Case Study: 4-Plex Good Deal For First Time REI?  (Read 3904 times)

AK

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Case Study: 4-Plex Good Deal For First Time REI?
« on: November 15, 2015, 09:59:58 AM »
Hi all. I'm seriously looking at my first investment property. Over the past year or so, I've been researching and keeping an eye out for investment properties in my local area. Last week, a 4-plex really caught my attention.

Market Value: $150,000? It's assessed for $147,500
Original Purchase price: $150,000
Original Mortgage Amount: $112,500
Interest Rate: 4.5%
Mortgage Term: 30 Year Fixed
Term remaining: 30 Years
Amount remaining on mortgage: $112,500
Gross Rents: $30,600
Principal and Interest (the P&I of your PITI - should match with the above info): $570
Taxes and Insurance (the T&I of your PITI): $6,700 annually (~$559 monthly)
HOA costs: N/A
Deferred maintenance notes: Need more information. Based on pictures and a drive-by, the property looks well maintained. Scheduling a walk-through in the near future.

Anything else special or unique in regards to the numbers of the property (not the property itself; things such as city assessments, back taxes, special costs due to unique features of the property, etc. etc.):    The property has 2 houses on it. The main house has 3 units and is about 2,000 SF. The secondary house is a single unit with 700 SF. Using http://forum.mrmoneymustache.com/real-estate-and-landlording/evaluating-a-rental-property/ and other sites like Zillow, Rentometer, and biggerpockets, below are the projected numbers. These will be revised once the house is seen and hopefully actual numbers are known.

Based on iamlindoro's excellent financial spreadsheet,
                                         Annual              Monthly

Gross Rents                     $27,540             $2,295
Expenses                          $12,896             $1,075  (~52% of Gross Rents)
  Prop Mgr 10%
  Vacancy 10%
  Other Expenses...

Net Operating Income:     $14,644             $1,220
Mortgage                              6,840                $570
Total Cash Flow                  $7,804                $650

Cash ROI                              18.49%
% Profit                                  1.48%

Questions
  • What's the protocol to ask the agent / realtor for the current tenants' lease information / financials? Is this considered taboo?
  • I'm thinking about taking out a HELOC on my primary home to pay for the 25% down payment and closing costs. My risk tolerance is very high so this seemed like a good idea to leverage and have a better return on cash. Is this a very bad idea?
  • Would you do this deal? Can anything else be done to improve the financials?
  • Any other considerations to to think about?

Thanks in advance,
AK

arebelspy

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Re: Case Study: 4-Plex Good Deal For First Time REI?
« Reply #1 on: November 15, 2015, 11:37:33 AM »
    Questions
    • What's the protocol to ask the agent / realtor for the current tenants' lease information / financials? Is this considered taboo?

    Absolutely you should do this--it should be in your contract as something for you to review/approve during your due diligence period.

    • I'm thinking about taking out a HELOC on my primary home to pay for the 25% down payment and closing costs. My risk tolerance is very high so this seemed like a good idea to leverage and have a better return on cash. Is this a very bad idea?

    Depends on the rates/terms/your ability to repay.  Be careful with leverage on leverage, but if it's not outside your means, and the rate is below what you're getting on your money elsewhere, and it's on good terms, it can work out great.

    • Can anything else be done to improve the financials?

    Pay less?

    • Any other considerations to to think about?

    Run comps to find the market value, ignore the assessed price.  Make sure the rents are market rents.  Do a thourough inspection.  It'll be a weird property.  It's not a 4-plex, as you say in the title, but two separate units.  Is that main house 3 totally separate units?  Are the units all individually metered, or do you have to pay utilities?  What's the vacancy rate for the area?
    We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
    If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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    sunshine

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    Re: Case Study: 4-Plex Good Deal For First Time REI?
    « Reply #2 on: November 15, 2015, 11:53:00 AM »
    Ask too see proof the property was actually rented consistently for the rent numbers you see. We ran into one with rent numbers that seemed just a bit too good to be true. Did some digging and they were all brand new month to month leases with family members.

    You sure can see the leases and rental apps. In our area it's in every contract. We wouldn't close on one property until a tenant was out.

    I personally wouldn't do leverage on leverage but I'm a security freak.

    Papa bear

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    Re: Case Study: 4-Plex Good Deal For First Time REI?
    « Reply #3 on: November 15, 2015, 12:34:29 PM »
    Check your municipality for what constitutes a commercial property.  3+ in Columbus Ohio gets you listed as commercial for permits and regs.  Not so much fun.

    Also, have you checked with a bank on getting a loan for the property?  I'm assuming you have, but I would double check someone will loan you the money for the unit and if you can truly get a 30 yr fixed. 

    For your first, I would recommend 1-2 unit property.  Though the numbers look good so far on that 4 plex.


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    AK

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    Re: Case Study: 4-Plex Good Deal For First Time REI?
    « Reply #4 on: November 22, 2015, 11:36:33 AM »
    This community is the best and you guys provide thorough, helpful replies.

    Quote
    Check your municipality for what constitutes a commercial property.  3+ in Columbus Ohio gets you listed as commercial for permits and regs.  Not so much fun.

    Also, have you checked with a bank on getting a loan for the property?  I'm assuming you have, but I would double check someone will loan you the money for the unit and if you can truly get a 30 yr fixed. 

    For your first, I would recommend 1-2 unit property.  Though the numbers look good so far on that 4 plex.

    I've reached out to a realtor and will be viewing the property this week. The listing says residential as well as the county government website for the property. Will ask the realtor if there are any commercial considerations with the property.

    A year or 2 ago, my mortgage lender at Wells Fargo was contacted about getting pre-approved for a loan. He mentioned what I'm pre-qualified for and that they require at least 25% down generally speaking for financing. Since then, I've been casually looking at properties and have been waiting for the right deal before re-approaching a lender to inquire further.

    Ask too see proof the property was actually rented consistently for the rent numbers you see. We ran into one with rent numbers that seemed just a bit too good to be true. Did some digging and they were all brand new month to month leases with family members.

    You sure can see the leases and rental apps. In our area it's in every contract. We wouldn't close on one property until a tenant was out.

    I personally wouldn't do leverage on leverage but I'm a security freak.

    The realtor said current rents are $2,700 monthly which is $200 higher than projected. She is getting the lease information for me to view. Will inquire about tenant history too. One thing the realtor mentioned that raised a flag is the back tenant will mention that there are rats in the apartment even though pest control hasn't been called to the property. If this the case, this is a possible opportunity to put in a lower bid if the house is in rehabable condition.

    Do you ever interview the tenants before closing to see what they're like? If so, what questions do you ask them? The tenants will probably be home during the viewing this week. This seems like a no-brainer but unsure if there are laws against it or other considerations.

      Questions
        Run comps to find the market value, ignore the assessed price.  Make sure the rents are market rents.  Do a thourough inspection.  It'll be a weird property.  It's not a 4-plex, as you say in the title, but two separate units.  Is that main house 3 totally separate units?  Are the units all individually metered, or do you have to pay utilities?  What's the vacancy rate for the area?
      The main house is 3 totally separate units based on what I know. Adding the other questions to the list of questions to ask the realtor. Can probably glean that information from the leases once they're sent over. Will be asking for the rental applications too.[/list][/list]

      EAL

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      Re: Case Study: 4-Plex Good Deal For First Time REI?
      « Reply #5 on: November 23, 2015, 09:11:08 AM »
      If you are planning on financing this property, I would recommend you speak to a mortgage broker.  A property with four units is most likely going to be considered a commercial property, especially if you aren't living in one of the units.  This may require more down and more in reserves than for a traditional home mortgage, again depending on your lender.  We are in the process of buying a 3 unit property and are right on the edge of being a commercial unit.  My inspector even told me that you have to have a special inspector if the unit is considered commercial because they have to carry a different type of insurance. 

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      arebelspy

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      Re: Case Study: 4-Plex Good Deal For First Time REI?
      « Reply #6 on: November 23, 2015, 12:13:52 PM »
      4 units and down is residential. Doesn't matter if you live there or not. 5 units and up is commercial.  This is standard across the U.S.  I can't speak for outside the U.S.
      We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
      If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
      We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

      AK

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      Re: Case Study: 4-Plex Good Deal For First Time REI?
      « Reply #7 on: November 24, 2015, 03:48:09 AM »
      Do you guys ever calculate what contribution percentage towards being FI the net income will be? For example, let's say this property nets 10,000 per year after all expenses and my current expenses are 50,000 so this covers 20% of my expenses. 4 more deals like this and FI achieved, right?

      arebelspy

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      Re: Case Study: 4-Plex Good Deal For First Time REI?
      « Reply #8 on: November 24, 2015, 04:20:35 AM »
      Sure.
      We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
      If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
      We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

      iamlindoro

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      Re: Case Study: 4-Plex Good Deal For First Time REI?
      « Reply #9 on: November 24, 2015, 06:38:18 AM »
      Do you guys ever calculate what contribution percentage towards being FI the net income will be? For example, let's say this property nets 10,000 per year after all expenses and my current expenses are 50,000 so this covers 20% of my expenses. 4 more deals like this and FI achieved, right?

      Definitely!  Keeping up w/ cash flow + SWR my current portfolio would produce is one of my favorite tools to stay motivated.  I update it once a month.  Granted, it usually only moves up ~$20-30 per month if I don't acquire new property in a given month (which is most months), but it's still fun and exciting.

      Papa bear

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      Re: Case Study: 4-Plex Good Deal For First Time REI?
      « Reply #10 on: November 24, 2015, 06:54:22 AM »

      4 units and down is residential. Doesn't matter if you live there or not. 5 units and up is commercial.  This is standard across the U.S.  I can't speak for outside the U.S.

      Maybe for a mortgage, but not on a municipality by municipality basis.  Local regulations I've seen dictate 3+ units as commercial.  That means you have higher prices for permits, different building codes, and different inspectors. 


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      arebelspy

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      Re: Case Study: 4-Plex Good Deal For First Time REI?
      « Reply #11 on: November 24, 2015, 09:59:13 AM »


      4 units and down is residential. Doesn't matter if you live there or not. 5 units and up is commercial.  This is standard across the U.S.  I can't speak for outside the U.S.

      Maybe for a mortgage, but not on a municipality by municipality basis.  Local regulations I've seen dictate 3+ units as commercial.  That means you have higher prices for permits, different building codes, and different inspectors. 


      Sent from my iPhone using Tapatalk

      Fair enough. The person I was responding to was talking about financing, and I believe 4 units or less is considered residential by every financing company I've heard of.
      We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
      If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
      We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

      savingstldad

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      Re: Case Study: 4-Plex Good Deal For First Time REI?
      « Reply #12 on: November 24, 2015, 01:53:07 PM »
      I saw this in your OP:

      Principal and Interest (the P&I of your PITI - should match with the above info): $570
      Taxes and Insurance (the T&I of your PITI): $6,700 annually (~$559 monthly)

      Doesn't this mean that your monthly expense for taxes, insurance, mortgage+interest is $1129?  If so I don't think it's reflected in your numbers.  After that, you add 10% for property management, 10% vacancy, etc, so you are looking at at least $400 in those expenses, upping the total to $1529 or more per month.

      I might be reading it wrong, so feel free to correct me.

      Bobberth

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      Re: Case Study: 4-Plex Good Deal For First Time REI?
      « Reply #13 on: November 24, 2015, 09:03:51 PM »
      I had an inspector look at a 2 houses on one property nearly 10 years ago. He told me that financing would be difficult because the second house wouldn't qualify in the valuation so the main house would have to appraise for the entire amount of the loan all by itself. I didn't go through with the purchase so I'm not sure how accurate that was then and if it is anywhere close to how things are now but it's something a quick phone call to your lender could answer.