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.
