Author Topic: Fourplex plus 2 bedroom 606 sq. ft house in oilfield market. Should I do it?  (Read 3065 times)

Frugal Firefighter

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First, a little background. My wife an I lived in this community for the last 4 years, moved for a different job six months ago, then realized how much we really loved the community we had left. This town has seen astronomically inflated house and rent prices within the last few years. For example, the rent house we were in prior to leave cost us $525/month. That house is now renting $950/month. Another example, an 1100 sq ft house was purchased in 2009 for $45,000. It is now on the market for $78,500 with little renovations that took place during that time. We've looked at a couple houses, but I can't bring myself to pay the current asking prices. We have luckily found a rent house for $600, which is an absolute steal at this time, and signed a 6 month lease on it buy us some time in looking for a house.

This is what I've found, it's the realtor's description:

$150,000.
The fourplex was built in 1925. The fourplex consists of 5 bedrooms and 2 baths, totaling 1,296 sqft. m/l. There are two apartments upstairs and two downstairs. The fourplex is currently occupied.

Apartment A: 425 sqft. m/l, 1 bedroom, 1 bath, central heat, window units, stove and refrigerator.
Apartment B: 2 bedroom, 1 bath, central heat, window units, stove, refrigerator.
Apartment C: 400 sqft. m/l, 1 bedroom, 1 bath, built in ac unit, forced vented heater, stove, refrigerator, microwave, king bed, and couch
Apartment D: 400 sqft. m/l, 1 bedroom, 1 bath, built in ac unit, appliances, forced vented heater
This property also includes an additional home. This home is 660 sqft. m/l. It is a 2 bedroom, 1 bath home, built in 1928. The home includes 2 window units, a floor furnace, gas water heater, NEW Pex plumbing, and a basement with outside access. To add to this deal, the shingles were replaced April 2013.

I am assuming several things at this point in time:
1) The use of a USDA Rural Development Loan. 30 year, requires 0% down (I'll explain why later), at roughly 4.75%, making a payment of around $782/month.
2) The current apartments are rented at ~$400/each, seemingly a conservative number.
3) My wife and I would live in the 606 sq ft house located on the property and continue to pay $600/month toward the total mortgage.

The property is located 1 block from the downtown area of this town, across from a grocery store, and across the street from the hardware store/lumber yard. All are pluses for biking and a decreased fuel bill.

Monthly Numbers
Fourplex income: $1600
Our house: $600
Total: $2200
Actual Mortgage payment: $782
Net: $1418
1/2 for repairs: $709
Profit: $709

It seems to meet the 1% rule. Since this would be my first home and rental property purchase, I would plan to use the first several months' profit to gain money for rental expenses. After that, the profit would be used to pay down the mortgage. This would bring the total we would pay on the mortgage to $1491/month. Based on some quick numbers that I cam up with, this could potentially mean the entire mortgage is paid off in around 12 years.

THE KICKER: At the present time we do not have enough for a 20% down payment. Our current savings amounts to about $9000, with a potential $10,000 falling into our lap within the next two months. Also, I plan to sell my 2004 Nissan Titan for $5000-6500 once we get moved and start driving a 1995 Ford Probe that my dad is giving me.

We are fairly new Mustachians, but most months we save between 30-40% of our net income. It's not where I would like it to be, but it's getting better.

First, should I do it? I wanted to pay cash for a house, and it grinds my gears to pay PMI. However, the overall deal seems logical at first glance.

Secondly, what other expense do fourplexes incur? I believe I have to pay for water, sewer, trash, insurance as well as cut the grass.


-It's also located in a college town.
« Last Edit: February 18, 2014, 06:33:44 PM by Frugal Firefighter »

KingCoin

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Numbers looks pretty good.

What's with the sqft estimates? If the total property is 1296sqft, how do apts A, C, and D add up to 1225sqft? Also, a true 1-bedroom with a kind bed that's only 400sqft? Sounds more like a studio, which probably limits the rent upside. An additional 2-bedroom home that's only 660sqft?

With a property built in 1925, you have to be very careful about potential deferred maintenance. This is especially true if you're light on cash savings. Have you gone over to kick the tires?

How does this compare to similar properties in the area?

Are all the tenants current on their lease? How long are the leases? Are there any restrictions with respect to who you can rent to and at what price?

Frugal Firefighter

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I'm not sure how they've messed up the sq ft numbers. We are going to try to look at it Sunday so hopefully that will iron out some of the questions.

It looks as though they've stuff a king size bed into a room, not leaving much room for anything else.

The fourplex is located on the front of the property with paved parking in front. The 606 sq ft house is set off the alley.

It says that the fourplex is occupied, but in the pictures it looks like the two basement apartments are unoccupied.

In comparing it to other properties it's tough because of the two residences on one property. There aren't any other duplexes, apartments, or similar properties for sale right now, but another listing in the area is for a 576 sq ft house with an asking price of $55,000, Zillow estimate of $50,000. This is how I have it broken down:

606 sq ft house:     $44,500
1/2 of lot:               $5,500
Fourplex:                $94,500
1/2 of lot:               $5,500

I also think there may be quite a bit of negotiating room in the asking price. Just from the pictures I can see a few maintenance issues; new windows on both residences, replacing the wood on the porch of the small house, and a shed needs built to house a mower, tools, etc. I'm fairly handy plus have resources, brother-in-law owns a construction company and handy friends, to offset costs too.

I'll ask about the leases, rent, and other issues when we look at it Sunday.


jbmatth

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First of all it is nice to see someone else so close to my area, we are just over in Ponca City from ya'll.  If it is titled as a 4 plex and there is a house would you even be able to get a conventional loan for the property?  I know they typically limit you to 4 units for a loan.  I would be worried about the foundation of the house because of the age, and what I've seen in many houses around our area.  Also consider what would happen when this oil boom is over, will you still be able to find renters, and how much would it normally be worth to rent, or sell for?  It sounds doable for the time being, but I'm already worried about what will happen when this boom slows down.

Frugal Firefighter

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"If it is titled as a 4 plex and there is a house would you even be able to get a conventional loan for the property?  I know they typically limit you to 4 units for a loan"

That's one issue I didn't consider. I just spoke with the bank that I was planning to go through, and I was informed that a property of that type would only qualify for an in house loan at a higher rate and for a max of 20 years. I'm off to check with a different bank now.

Foundation issues are one thing that I will be closely keeping an eye out for when we view it, especially since the 4-plex has two of the units in the basement. The small house also has an unfinished basement so that will allow me to get a close look at it.

Seeing as it is in a college town, I think that is a benefit to consistently finding renters. I think that $400-500/unit is fair for the current market, and $300-400 would be the long term rent goal. I also want to be selective with renters and offer a fair price. As far as selling it later, I think this is the peak buying time in the area. I don't know that I could ever sell it for that much again, but I am looking to keep it as a long term rental. I want my wife to be able to work part-time when we have kids, and this property may allow for that, especially if we can have it paid off in 9-13 years.

jbmatth

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One other thing to consider would be the basement units, depending on the windows and exits it could be considered a fire hazard if the windows are too high off the floor for children to get out of in the even of a fire.  That may limit you being able to even rent those, even though they are rented now it is something to be aware of that could bite you down the road.  You should be able to talk to your chief and he could tell you real quick.  Good luck with it.

Frugal Firefighter

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Well, we were able to take a look at them yesterday. It was in horrible condition. After leaving, my father's only comment was, "Well, the roofs look good." Too expensive for the amount of repairs that needed to be done. Thanks for the help. I learned quite a bit of new information through this process. The search continues.