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One of my 2011 financial goal is to acquire a 4-plex. It’s been two months and here is my progress report.

I met with my lender and was preapproved for a mortgage loan for an investment property. The local bank wanted me to put 25% down and the loan will also cost an extra point since this will be a non owner occupied investment property. I am OK with that and have started to liquidate some stocks to prepare for the down payment. The larger down payment will make it easier to generate positive cash flow. My credit union doesn’t even consider lending for an investment property at this time so that’s out.

Once credit is taken care of, the next step is to work with a real estate agent to find a suitable 4-plex.

Here are my criteria

  • Absolutely must have positive cash flow from day 1.
  • Must be in an area that I would live in. I don’t want a building in a high crime area or terrible schools.
  • Good school would be a positive, but not a must. As long as the school beat the state average, I’ll be happy.

In February, I have seen two 4-plexes that fit my criteria.

#1 cost 350k. Rent roll – $2,850/month. Schools are OK, not great. This 4 plex is in a good location near the highway, a large strip mall, and employment. There is a cluster of 4-plexes and apartments on this street, but everything turns into single family homes a few streets over.

#2 cost 269k. Rent roll – $2,600/month. Schools are good in this neighborhood. This location is close to a middle school, a mall, a park and a recreation center. This whole neighborhood consists of 4 plexes and apartments. This 4 plex looks like it need a fresh coat of paint. This one was a short sale.

Both of these 4-plexes were sold quickly while I was researching rent, operating cost, and school. I was really interested in the 2nd one and asked my agent to make an offer, but the seller already accepted an offer before I could make a bid. I think both of these were short sales.

So what I’ve learn so far is good investment properties are moving fast even in this environment. Next time something good come up, I will have to move quickly. My agent told me there will be many more properties coming on the market in Spring so I am sure there are a lot of opportunities left. The local market is still in a dive so I am not in a huge hurry.

4 plex new

#3 This 4 plex is brand new and is not even finish yet. The seller is asking 550k. I like this area a lot, but I think the most rent I can collect is 4k/month. I checked the rent in this area and they are all around $800 for a 2 bedroom unit. I think it’ll be tougher to find renters even if the place is brand new. If the price is around 450k, I might consider it.

What do you think about the stringent lending rule? Should I find a different lender? If you have any tips and hints on 4 plex, please share them.

Here is the latest on the 4 plex short sale!

 Read how the first 3 months of owning the 4 plex went.

Zillow Homes, Rentals, Foreclosures

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{ 33 comments… add one }

  • Moneycone March 2, 2011, 4:49 am

    I like your investment play on real estates! If you can buy (and buy for the long term) when others are selling, chances are you’ll get a great deal.

    Is the location worth the 100K extra the owner is asking for?

    • retirebyforty March 2, 2011, 8:02 am

      You mean #3? I think it cost a lot more because it’s new. The other 4 plex were built around 1980 and will need more maintenance. The location is better, but not that much better.

      • Dividend Growth Investor April 2, 2011, 2:28 pm

        Why do you need to sell your stocks? Some brokers could allow you to hold half of your stocks on margin. For example if you own $100 in stocks, you could easily withdraw $50 in cash. You will pay interest, and if your stocks decline in value you will have to put up some cash. But I guess that could be a financing option for you. In addition, any interest you pay would be deducted from any dividends you receive.

        • retirebyforty April 2, 2011, 8:31 pm

          I don’t invest with margin account. I’ve been burned once before during the dot com bubble so these day I only invest with money I have.

  • RT March 2, 2011, 5:45 am

    What area/state are you looking in? I live in MD, in the DC area, and those prices compared to here are so low. Those are the cost of the low level single families.

    • retirebyforty March 2, 2011, 8:01 am

      I’m in Portland, OR and I’m searching in the surrounding suburban area. The single family homes in good area here goes for about 300k. I think the 4 plexes are in a less competitive area in general and that’s why they are cheaper. The 550k one is in a nice area, but the rent doesn’t make sense.

  • Invest It Wisely March 2, 2011, 2:29 pm

    Have you looked for combo commercial/residential properties? This can be more lucrative especially if you get the commercial tenant to cover part of the insurance and taxes, but the downside is that there will be more wear and tear and this is more difficult to find.

    • retirebyforty March 2, 2011, 3:11 pm

      No, I haven’t looked at any commercial properties. I heard it is much more involved and it’ll be tough to do with a full time job. My friend said negotiation can be difficult and in this economy businesses are not doing well at all.

  • krantcents March 2, 2011, 4:34 pm

    Regarding the lender, you can negotiate if you have any leverage. Good credit, larger than normal down payment or competition? You can always try a different lender, the RE broker should have suggestions. Negotiate on the price of the 4plex! What is the upside on the rents? This is the potential of the property. What is the turnover rate or do you have long term renters. Long term renters are good, but affects the potential. What is important to you? Potential or hassle free ownership?

    • retirebyforty March 2, 2011, 9:34 pm

      I checked out a couple of lenders and it seems the purse string is still pretty tight for an investment property. I’ll check with my property management company on the turnover rate in the area I’m looking at. I think the rent are pretty stable at the moment since the economy is still bad here. Personally, I’d rather have stable renter, it’s so much easier. Thanks for the tips Krantcents!

  • Money Reasons March 2, 2011, 5:38 pm

    I wish I could offer advice, but I’m planning on learning from you 🙂

    It’s interesting to hear that the market is turning so quickly! I would like to buy some apartments, duplex, triplex mainly… I don’t think I would have enough money for a 4-plex yet.

    • retirebyforty March 2, 2011, 9:35 pm

      Right, the good deals go pretty quick. Investors must be wanting to pull some money out of the stock market with the recent run up.

  • Aloysa March 2, 2011, 7:37 pm

    I am not an investor nor landlord so I just state my opinion. The price scares me. Even with 25% it is a lot of money and a lot of debt. Will you be able to ensure a postive cashflow from the very begining?

    • retirebyforty March 2, 2011, 9:37 pm

      The overriding goal is to ensure positive cash flow. If a property doesn’t have positive cash flow, I won’t invest in it. With all the foreclosures and low mortgage rate, I think I should be able to get positive cash flow. 25% is a lot of money….

  • retirebyforty March 2, 2011, 9:40 pm

    Wow, another 25%? Will it drop that much in your area? I think we are close to bottom here. Maybe you can find a foreclosure that has positive cash flow.

  • youngandthrifty March 2, 2011, 10:54 pm

    RB40, sounds like you’ve really done your research. The fourplex idea sounds great- so I understand you will be living in it while renting the other 3 units out?

    I hope you find something soon 🙂 Number 2 sounds really good to me too.

    Good luck!

    • retirebyforty March 3, 2011, 10:06 am

      Unfortunately, we won’t be moving into one of the units. That would be ideal, but the Mrs. hates moving and she swears she’ll never move again.
      The extra cost would be 1 point for not moving in and the Mrs. can handle that. I definitely recommend living in one unit and rent the others though. Maybe my brother can do that someday.

  • Everyday Tips March 3, 2011, 8:26 am

    I would probably not consider buying the new unit as there are so many great opportunities out there. (As you learned though, you have to act fast.)

    My brother buys rentals all over the country and has a management company take care of issues for him. It has worked out really well for him so far.

    • retirebyforty March 3, 2011, 10:03 am

      I agree with you on this. The new units are nice, but the older 4 plex makes a lot more financial sense.
      I’m planning on using my property manager as well.

  • Buck Inspire March 3, 2011, 11:53 am

    Interesting, properties are getting snapped up. Guess the worst is over? Good luck to ya, sounds like you are doing your due diligence. Curious, if you had two similar properties, would that fact that one was a short sale sway you in one direction or the other?

    • retirebyforty March 3, 2011, 12:22 pm

      Buck, I think investment properties are different than residential home in this market. I bet investors made some money over the last 2 years and want to cash out a bit to diversify. The housing market is still diving according to Zillow, but I think it’s pretty close to bottom. It’ll be much harder to buy once it’s on the way up, that’s for sure.
      If all things are equal, I would definitely avoid the short sale since the Bank with the mortgage has to approve the sale. This can drag out the transaction and there is no guarantee the bank will approve. That’s where the good deals are though.

  • retirebyforty March 3, 2011, 12:19 pm

    Thanks for your feedback. I haven’t dealt with lenders on investment property before so this is a new experience for me.
    I talked to my property manager and they charge 6% for a 4plex. That’s not bad at all.

  • Little House March 3, 2011, 3:36 pm

    I think buying a 4-plex can be a great investment opportunity. (I’d personally like to buy one and live in one of the units while paying down the mortgage.) Now that you have all your paperwork ready to go, you’ll probably have to move quick on the next 4-plex you find. They seem to be going quick in your neighborhood.

    • retirebyforty March 3, 2011, 5:38 pm

      I’m going to encourage my brother to do something like that. It’s more difficult for us because we are so settled now. There are a lot of 4plexes that are languishing on the market, but the one with good price get snapped up quick.

  • Barb Friedberg March 3, 2011, 6:44 pm

    I’ve owned lots of real estate over the years. You are very wise to insist on positive CF. 6% for mgt is awesome. Apparently, there are lots of rentals available in AZ and a good supply of tenants. If my life settles down, I might check them out! You are definitely on the right track!

  • First Gen American March 4, 2011, 12:41 am

    I like your requirement of the property being somewhere that you’d want to live. Trust me, from experience, it’s a whole lot of trouble trying to rent in bad neighborhoods and dealing with all the theft/damage that occurs if you’re in a shady part of town. I’ve had people smash down front doors and steal my snowblower and bring roaches into the house. It was just not worth it after a while.

    Good Luck. I think it’ll be a great investment if you have the right location.

    • retirebyforty March 4, 2011, 4:42 pm

      I definitely don’t want to deal with those kind of damages. The regular maintenance is expensive enough already.

  • Will @ HackingTheBank.com March 6, 2011, 7:55 am

    I think you’d be wise to go for one of the properties that needs a fresh coat of paint and some other small repairs, as opposed to that new complex you’re looking at. In general, I think a bad coat of paint can knock $10k off of a selling price and an unkept yard can knock another few thousand off of a price. Then once you’ve bought, both of these can be fixed fairly cheaply.

    • retirebyforty March 6, 2011, 11:12 am

      I think the older properties are the way to go too. The brand new places are just too expensive. There are short sale and foreclosure opportunities right now which won’t be available forever.

  • Grammar Cat March 6, 2011, 9:31 pm

    Wow, this is so interesting, I have so many thoughts. (found this blog after going to Michelle’s FB page) Firstly, I don’t think finding a different lender will change the 1% for non-owner occupied, or the newer 25% down rule. That is pretty universal, the second caused by the market. We also couldn’t use several lenders with good rates b/c we were buying an investment property. Secondly, if you are not in a rush, the best deal is a short sale. We bought one 2 years ago and we had an awesome real estate agent that kept on the bank all the time and we got the place after about 3 months. I highly recommend this real estate agent. Third, very universal rule – if you can buy a fixer-upper – WAY better deal. We really really wanted to do this and saw good deals, great locations, but we are overseas, so couldn’t stay and fix up a place during our summer visit to PDX. But is is clearly one of the best ways to make money. Our first home has an IKEA kitchen we put in for about $3000 (kitchen was completely empty, no cabinets, nothing.) Completely did it by ourselves (before a child) Whole kitchen – sink, dishwasher, counters, all was about $5000

    I have another thought on the cash flow. I agree, even breaking even is a deal – someone is paying the bills. However, on one house we have a 15 yr. mortgage, the one we plan to live in, in future, and so the rent doesn’t cover the mortgage entirely, but most of it. For me, maybe emotionally, it was well worth it b/c of the 100s of thousands of dollars we save in interest. 2/3 of every payment go to principle.

    Finally, I am astonished at the costs of those 4-plexes you are looking at. Wow. Dirt cheap – as another poster said, that is generally the price of a single family home…For me, location is key. And in PDX, for me that means an older building, close in – then it will always be rented. We could only afford 2 houses, to date, but I dream about a 4-plex.

    • retirebyforty March 6, 2011, 9:50 pm

      My credit union doesn’t even want to discuss investment property. I think you’re right about the new more stringent rules.
      #1 and #2 in the post were short sales. My RE agent told me most of the properties on the market are now short sales.
      It’s easier to have positive cash flow with a 4 plex since you have more renters. We definitely want positive cash flow or else there is no way I can retire by 40.

      I also looked at 4-plex close in, but I think Washington county has better deals. Close in locations are a lot more expensive and Multnomah county property tax won’t help positive cash flow either. Those price surprised me as well, but I like it!

  • bazzynyc May 7, 2013, 7:44 am

    Great Thread! I have found a 4-unit investment property and upon calling my credit union which already pre-approved me last year for a single unit was told they can’t lend if the property consists of more than two units. Does anyone know if this is true. Also, I’m interested in the financial pros/cons of living in one of the units myself. Any help is greatly appreciated!

    • retirebyforty May 7, 2013, 9:48 pm

      It’s more difficult to get financing for anything bigger than 2 units. Try talking to a bigger bank. They might want you to put down more, perhaps 25%.

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