Our 4-plex Investment

our 4 plex investment

My only financial goal in my list of 2011 New Year Resolutions  was to acquire a 4-plex rental property. I’m glad to report that we finally closed the deal on August 31st and are a proud owner of a 4-plex investment! This 4-plex was a short sale property and we’d been trying to work out a deal since April. It took almost 6 months to go through the whole process and I don’t know if I would buy another short sale property with this kind of wait time.

The 4-plex was listed for sale at $375,000 in Jan 2011 and was reduced to $350k by March.

In April, we made an offer of $325k (+5k closing cost) to the bank, contingent on inspection. The bank took about 2 months to make their decision and accepted our offer in late June. At this point we had a thorough inspection done and found many issues as detailed in this 4-plex short sale experience post. After seeing all the issues, I got a bit scared and asked for another price reduction. The last offer we made was $300k + 5k toward closing cost. The bank took another month to do the paper work and they accepted the offer in late July.

Here are the final numbers

chargescredit
4-plex price300,000
loan fee, title, escrow, etc…3,827
1st year insurance1,184
mortgage loan (75% sale price)225,000
out of pocket74,276
closing cost credit from seller5,000
tax prorate735
Sum305,011305,011

In addition to this, we paid for a few more things during the inspection period.

inspection1,000
sewer inspection125
sewer cap repair347
appraisal660
total2,132

Up to now, we’ve invested a total of $76,408 in this project.

The roof and crawlspace need some repair and maintenance before the rainy season and that will cost around $3,000. We probably can’t look at the last 4 months of this year due to the deferred maintenance, but I will report each month and show you the income and expenses. I think 2012 will give us a much better idea of how this 4-plex will do as a rental property.

Here are my monthly estimates.

Monthly calculation1st year
Rent with 5% vacancy$2,802.50
monthly payment 30 years @ 4.875%($1,190.00)
tax and insurance($465.33)
monthly operating cost (management, repairs, lawn, etc…)($946.18)
cash flow$200.99
depreciation$606.06
depreciation value @ 28% tax rate$169.70
money to principle$300.00
real positive net worth (cash flow + tax credit +
payment going to principle)
$670.69
yearly income$8,048.26
yearly ROI (8,048/76,408)10.53%

As you can see the cash flow is pretty small at $200/month in the first year. The monthly increase to the net worth looks much better though. Rental properties usually take a few years before they start making a good return. In 10 years, the rent will increase and the mortgage payment will stay the same with more payment going toward principle. At that point, we should be getting good monthly cash flow. Mrs.  RB40 is crossing her fingers.

We are taking a mostly hands off approach to the 4-plex and hired a property manager. I’m way too busy to manage a 4-plex by myself at this point. Maybe once I leave my full time job, I can take up the challenge.

Lesson Learned

– Don’t be afraid to ask for further price reduction. The agents may hesitate to do this because they want to close the deal, but use your own judgement. I suppose we could have asked for a lower price too…

– Ask for interest rate float down. We got .125% float down just by calling our finance guy.

– Short sales will drag on for 6 months and give you a lot of headaches.

Price History

dateprice
Aug-2011300,000
Feb-2005380,000
Jul-2003333,000
Jul-2002305,000

Any questions or comments?

 

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Joe started Retire by 40 in 2010 to figure out how to retire early. After 16 years of investing and saving, he achieved financial independence and retired at 38.

Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects across the USA so check them out!

Joe also highly recommends Personal Capital for DIY investors. They have many useful tools that will help you reach financial independence.
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50 thoughts on “Our 4-plex Investment”

  1. Joe, great job on the four family, I hope it is going well. I too have a four family and have since 2005. It has been a great investment though cash flow and tax benefits. Trying to get another but selling my wife on the topic is the struggle. Great job!

    Reply
    • It’s been tough because there were so many repairs. I think we’ve turned the corner though. We’ll see by the end of the year. Good luck with another 4 plex.

      Reply
  2. This is an excellent strategy – diversification with timing. Most people know that there are historic opportunities right now in investment real estate. Unfortunately, most people don’t have the cash it will take to get into the game.

    I regret that trying to invest retirement income in real estate is such a difficult (and expensive) proposition in pre-tax 401k plans. I have to agree with the earlier poster about bonds. Sure, everyone tells you that historically, the stock market returns more earnings. But take a look at the record and see how volatility today eats up your capital. Earning 5% a year in bond funds has enabled my 401k to grow almost 50% in the last 10 years. Check your stocks — you’re lucky if you’re even or up a fraction of that.

    IMHO, every investor serious about retiring should own some investment real estate. It’s logical diversification.

    A 4-unit building is pretty ambitious and I understand why you got a manager. I’m finding that 2 different units managed by ourselves is a bit of a challenge. Ours are for our college student children plus a roommate.

    One of the condos was a short sale and I can fully appreciate the torturous journey you made. Ours took 5 1/2 months, but we managed to get the property at a rock bottom price in perfect condition. Like the man said, “It’s complicated!”

    Because we paid upfront for both units, we’re saving large amounts now and hope to turn it into a serious revenue stream in retirement.

    That’s not to say we’re not plowing the maximum into our 401k and other pre-tax accounts, but if you can diversify into real estate, now is the time to try to do it.

    Reply
    • Thanks for your comment. The 4 plex is doing pretty well this year. You are right about real estate investment. It does take a lot of money to get started. It’s great that your rentals are paid off so you don’t have to worry about the mortgage payment.

      Reply
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  4. I am looking into a 4-plex too, your post is very helpful.

    When you applied for the loan, does the bank treat it as one property or four? Thanks! 🙂

    Reply
    • The bank view it as one property, but they wanted more down payment because it was an investment property. I guess the exact amount of down payment depends on the bank. I’ll do an update soon to show how we are doing in 2012. Thanks for visiting!

      Reply
        • One of the renter is section 8 and it’s working out well so far. The property manager charges 8 or 9%. I’ll have to double check, but I think that’s the usual range.

          Reply
  5. I have yet to go into the realm of multi-unit properties. My reason is that they experience a lot more turn over and repairs than single family properties. I do recognize there is a huge upside in the rent received department. Also a vacancy in a single family is 100% where’s you have the ability to be 25-100%. But, I don’t want the headache. Nonetheless, great article I definitely will be following you on your real estate journey.

    Reply
    • Thank you! It looks like September will be a negative month due to repairs, but after that we should see some positive cash flow if all goes well.

      Reply
  6. Congrats on getting the 4 plex. That’s a pretty sweet deal! Once you get the repairs done, over the next few years your yearly income will increase. This is one of my goals to complete within the next 2 years, plus its a retirement goal

    Reply
  7. Congrats, that’s awesome! As you know, I’m excited to finally get into rental real estate as well. It’s such a learning experience, lots of work, but for the patient – it “usually” pays off quite handsomely!

    Reply
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  9. I’m a little late but a huge congratulations! I think you live in LA? My previous landlord had a 3plex that he turned into a 4plex, and I’ve loved living there. I think the rents he got was enough to cover the mortgage on the entire complex, or at least were very close to that. Getting a good property in a good part of town is invaluable.

    Reply
  10. Congrats, it looks like a solid investment. The issue of rental property just hits a brick wall with me when I consider how much work I would have to put into it. I am by no means a handyman, and I hate dealing with large-scale contractors. I have found that investing in Canadian REITs to be an acceptable exposure to real estate for my tastes. Much less responsibility and worry. My view my change one day as I develop more experience with real estate, and get a little more free time.

    Reply
    • Thanks! We rented out our old house when we moved and that started our adventure in rental. There are a few problems, but overall we haven’t had to repair too many things. We have a property manager at the 4 plex because I think we’ll see much more problems there. I have a little invested in REIT and will probably add more over the next year or so. Mortgage REIT are great investments while the interest rate is low.

      Reply
  11. Congratulations on closing the deal. In reference to an earlier comment, the cap rates in the midwest where I am are much better but the possibility of appreciation is less. It is a trade-off. It is good to find a cash flowing property on the coasts.

    Second, you should be able to take your depreciation. If you make less than a certain adjusted gross income (I believe $100,000) you can take the depreciation without being a real estate professional. Obviously if you could take it for one property, you could take it for this new one. Check with an accountant if there is a question but I can’t believe your situation would change that much.

    Reply
    • Thanks! I think we’ll have to think about an exit strategy if the property appreciate. I was thinking we’ll keep this place for cash flow, but if the price really goes up we’ll have to see if it makes sense to sell. Thanks for your encouragement.

      Reply
  12. Well done and congratulations on closing. I’m sure this was not an uncomplicated process. I hope that it gives you an awesome ROI for decades to come.

    Reply
    • I’m pretty sure this year is not going to be very good with all the deferred maintenance, but starting 2012 we should start to look pretty good.

      Reply
  13. It doesn’t seem like it was purchased on a whim by any means. Your detailed analysis shows a wise investment. I have zero experience with rental properties but hope to purchase a few in years to come.
    Is the property manager solely responsible for maintenance issues or are they more involved (collecting rent, find tenants, etc)?

    Reply
    • The property manager will collect rent, find tenant, handle eviction and all the difficult tasks. They charge 7% or the rent and we pay for any maintenance and repair. There are advertising fee, lease up fee, and other fee. We’ll see if it works over the next year or so.

      Reply
  14. Wohoo.. congrats. I’ve looked into multi unit properties in the past but never pulled the trigger. We have one single family rental. Now we live in an area that doesn’t have much in the way of mulitfamilies.

    I’m curious to see how it compares to “landlord wise” to a single family property.

    Reply
    • Thanks! We also have a single family rental that has been very trouble free. I expect the 4 plex to have more issues, that’s why I hired a property manager. We’ll see how it goes.

      Reply
  15. That sounds like a great investment. I know you said that there is work that needs to be done, but are there any renters in there now? Or will you have to find renters? Good luck with the investment. I am looking forward to hearing how it goes.

    Reply
    • I hope it works out too. Currently, 3 out of 4 units are rented out and there have been a few showings on the last unit. It’s a bit scary to invest that much money, but now is a great time because of the low interest rate.

      Reply
  16. Congrats! Glad to hear that you finally closed on your first 4-plex, hopefully more to come. Short sales are not fun to deal with, I like how you stuck with it and even got a lower price due to all of the deferred maintenance items called out in your inspection. We are closing on a home next week and the seller is paying about $5K in repairs.

    Reply
    • Thanks! Congratulation on your new home. Haven’t heard from you in a while, hope things are going well.
      The housing market in our area still trying to find bottom, but I think now is a great time to buy with the low interest rate.
      I feel like it might be better to invest in the mid west or the south to get better cash flow. What do you think?

      Reply
  17. Not sure your numbers suggest this as the greatest deal in the world. Couple of thoughts:

    Most real estate professionals seem to use the concept of a cap rate as a short hand measure of an investment. Typically you will see a 7-8% cap rate, usually Net Income/Purchase Price, as a fair barometer with a wide range fluctuation based on risk, etc. Note that this would not include debt service. However, you still want to be in the 6-9% range. Based on your numbers, looks like you are at $16.7k annual NI over a purchase price of $300k or 5.5% which is a little low.

    Your assumptions seem to assume you can take full advantage of your depreciation to get the $169/m tax credit. My understanding is that unless you are an ‘active real estate professional’ there are severe limitations on the use of losses in one real estate investment against other income. While you can use these losses to offset income from the property, given the numbers, you have more depreciation than you would have actual income left over.

    Your actual cash return without including principle repayment is lower than a tax free muni which I typically use as a baseline. $2.4k/76.4k invested is a 3.1% return effectively tax free (actually deferred) as you can definitely use your depreciation to offset this. However you can probably get that or close to it on a A or AA triple tax free 10 year muni bond with significantly lower risk, no management or maintenance headache. Granted you have the real estate upside plus the principle repayment long term which is the advantage of real estate investment.

    Not trying at all to be critical or disparage your investment. Just trying to probe a little and get a deeper insight.

    Reply
    • Thank you for your comment. It’s quite difficult to get a positive cash flow rental property in my area (west coast.) I think the mid west or the south will have a much better cap rate in general. We’ll probably have to look out of state for a better cash flow properties.
      We have another rental home that is cash flow positive so I’m pretty sure we can use the depreciation in full. We’ll see in April.
      This rental property is only part of our total portfolio. It is a diversification from stocks and bonds to take advantage of the down real estate market.
      Sure we could buy more bonds, but I would like to try my hand at a 4 plex and see if it works out.
      I really appreciate your input. They are very valuable. I’m not a real estate professional and this is our first multiple unit investment so I’m learning as I go.

      Reply
  18. That’s awesome! I really like the idea of owning a 4-plex someday. My step dad did for a while and it gave my grandparents and one of his aunts a place to live in their elder years. I’d even be fine with living in one unit and renting out the other 3. Congrats on the purchase!

    Reply
    • Thanks! I wouldn’t mind that arrangement someday. If I can find a 4 plex in Hawaii, we can live in one unit and rent out the rest. 🙂

      Reply
  19. Nice work getting yourself a cash positive asset. After you get through those bumps, it should run a lot more smoothly. There are generally always issues, even when I bought a brand new investment property there were a number of small things that needed tending to over the first 6-12 months. Now things are pretty steady.

    I also found a property manager to be useful, while you often need to manage them to some extent it does make life easier and it is a tax deductible expense.

    Look forward to updates!

    Reply
    • Thanks for the encouraging words. I found that it’s quite difficult to get positive cash flow in my area. I think the west coast in general is a lot harder than mid west or the south. Next year we’ll need an exterior paint job, but I think that’s the last of the big repair.

      Reply

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