Assuming your four-plex is here in the San Diego area, i’ve been seeing four-plexes for around $700k to $900k. There are quite a few variables so I would suggest going to loopnet.com and take a look at properties similar to that four plex and see what their values are.

780 is a very good fico score, similar to mine. I’ve been getting around 6.875% to 7%. With that kind of score, you can probably get any kind of loan you want, from negative amortization to interest only to fixed rate.

If you were able to get an owner occupied loan, the rate would go down to around maybe 6.5%. As for the difference between owner occupying an office and owner occupying a home, I can’t help you there.

Hope that helps somewhat.

I always looked at prices based on gross rent multiplier.

So, I take $6500/mo income for 12 months => $78,000/year.

The last 4 plex I sold (2004) went for 18x rents which would give us $78,000 x 18 = $1.4 mil. Let’s say that the market has softened and the 4 plex were talking about doesn’t have the amenities or whatever, so it only warrants a GRM of 15. That’s $1.17 mil.

Let’s say we can buy it for $1.2 so we can do some back-of-the-envelope cashflow analysis.

You’re going to live in one of the units so income becomes 75% of $6500/mo or $4875. Let’s pay property taxes next – 1.1% yearly on $1.2 mil is $13,200/yr or $1100/mo so we have $3775 left.

Let’s say we put 5% down ($60K) and get owner-occ financing on the rest. 80% first mtg (30 yr fixed) for $912K at %6 means a monthly payment of about $4500. We will need a second to cover the other 15% – depending on your credit rating this 2nd mortgage is likely to be at 10% or more – let’s say the gods are smiling on us and we can get a 15 yr, interest only loan of $228K at 8% – that gives us a 2nd mortgage payment of $1520/mo.

We have now taken $2,245 out of our pockets for the right to ‘own’ this property for one month and we haven’t paid for any insurance, utilities or maintenance yet. We also haven’t accounted for vacancies or turnover costs.

Let’s be conservative and say it will cost $2750/mo to own this property and cover expenses. This assumes you will manage the property and do all the minor maintenance work yourself. When someone moves out it will be you doing the cleaning, painting, etc.

Can you afford that monthly nut? Will you have any reserves if something goes wrong?

Do you really want to have $1.1 mil in debt secured against rental income property? Real estate is very non-liquid in a soft market so this could be dead money for a long time.

Buying this 4plex might make sense for your personal situation but it doesn’t make sense to me as an investment.

As an owner-occupant you get better loans and you’ll have lots of write-offs for your taxes. Just don’t kid yourself about what it will cost to ‘own’ a property like this.

Well here goes. asssuming gross annual operating income is $78,000. Subtract 20% for expenses… normally I would take out 30% to be on the safe side but, since you will be your own property manager we will keep it at 20%($15,600 in expenses. This leaves you with $62,400 of annual rents, so based on a 30 yr loan @ 7% on a loan of $780,000 your annual debt service would be $62,272. So I would not want to take out a loan greater than $780,000 and this is not including the loss of rents for you taking up residence in one of the units. I hope this helps.

I am also looking to buy a multi family for some positive cash flow, they are just real hard to find…..

Does anyone know how multi-family and commercial RE performs during the type of housing downturn we all expect to see in the next few years? Do rents go higher on the multi’s? Do the buildings prices go down?

Thank you for all future responses

Thanks surveyor, for the insight. I am looking to find some multi-families with positive cash flow thinking along those lines that if rents go up maybe the value of the property would hold and even maybe appreciate. Was wondering if there any historical charts or data to show what has happened in previous cycles.

I learned a lot from looking at Rich’s charts, but I am also wanting to figure out how the multi-family building values fluctuated during up/down RE cycles. Basically, wanting to know if it is a good or bad time to purchase this type of investment right now.

Commercial RE does march to a different beat, but that difference is generally about timing, not direction. Commercial RE in this region didn’t enter bubble territory until a couple years after the residential markets were in full swing. So far, most of the commercial markets haven’t entered into decline.

But they will go into decline, sooner or later, because they’re still subejct to the same economic forces that residential properties adhere to.

During the last downturn the different commercial market segments took a beating, some being hit worse than others. I expect the same thing to happen this time, and to at least the same degree as what happens to the residential markets.

The biggest difference between the two markets is that a home really does provide shelter and a given populace does require a certain amoung of housing. Businesses can die off or go dormant, and nobody is going to subsidize their continued existence by way of social entitlements.

BTW, the reason a 4-plex can qualify for residential financing is because it’s classified as a residence. Unless that 4-plex is your domicile, you will not qualify for a residential loan at the optimum rates; at least, not without committing some mortgage fraud. You’ll be an offsite investor and will be subject to those underwriting criteria.