Hi everyone,
I would love your feedback regarding purchasing a multi-family investment property.
The idea is to purchase a multi-unit (triplex or 4-plex... probably not a duplex), live in 1 unit and rent out the others. Obviously purchase price is a big factor, since it will determine whether or not my family could live "for free" with rent covering the expenses (or at least as much as possible).
My own details:
-I live in Seattle, WA
-Currently renting a 2-bedroom with my wife and new baby for $1100 + electric
-We plan on living here long term
What are your thoughts? Are you currently doing something similar? Did you decide against something similar?
Thanks!
Jeremy
RE Investments: Rental Income / Multi Family
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George the original one
- Posts: 5406
- Joined: Wed Jul 28, 2010 3:28 am
- Location: Wettest corner of Orygun
It's doable provided you can keep the units occupied and can find candidate properties.
The questions you should be asking yourself:
1) Do you have the money for a 30% down payment plus several months of living expenses?
2) Is your regular income sufficient to pay the entire mortgage and keep creditors away?
3) Do you like people, because if you live in the same property as your tenants, they'll be in your face?
Looks like 2-bdrm 4-plexes in the Seattle area start at over $400k?
If you're paying $1100/mo rent, I have to ask why you haven't already bought a small house. $1100/mo can buy a starter house for $220-250k, including property taxes. Realtor.com shows 315 properties in the Seattle area that meet the same minimum criteria.
The questions you should be asking yourself:
1) Do you have the money for a 30% down payment plus several months of living expenses?
2) Is your regular income sufficient to pay the entire mortgage and keep creditors away?
3) Do you like people, because if you live in the same property as your tenants, they'll be in your face?
Looks like 2-bdrm 4-plexes in the Seattle area start at over $400k?
If you're paying $1100/mo rent, I have to ask why you haven't already bought a small house. $1100/mo can buy a starter house for $220-250k, including property taxes. Realtor.com shows 315 properties in the Seattle area that meet the same minimum criteria.
You were right to put "for free" in quotes.
You're basically buying yourself a job. A pretty good job by many measures, but still a job.
I think it's hard to make money this way unless you can or are willing to learn to be your own handyman. And George is right. It'll never work if you pay too much for the property. So many landlords over-leverage themselves on properties where the rent barely covers expenses and hope they'll make money on appreciation. I know this because I buy up their properties from the banks after the foreclosure. When I see the prices they paid for these buildings I don't know how they ever thought they were gonna make money.
Then when I bump into these old guys who over-bought they tell me, "You can't make money land-lording." And I think to myself, "No, YOU can't make money land-lording. I'M doing just fine."
You're basically buying yourself a job. A pretty good job by many measures, but still a job.
I think it's hard to make money this way unless you can or are willing to learn to be your own handyman. And George is right. It'll never work if you pay too much for the property. So many landlords over-leverage themselves on properties where the rent barely covers expenses and hope they'll make money on appreciation. I know this because I buy up their properties from the banks after the foreclosure. When I see the prices they paid for these buildings I don't know how they ever thought they were gonna make money.
Then when I bump into these old guys who over-bought they tell me, "You can't make money land-lording." And I think to myself, "No, YOU can't make money land-lording. I'M doing just fine."
The great thing about living in your multi-family is you get great mortgage terms as an owner-occupant that an investor does not have access to (lower rate and down payment). If possible, do it.
The down side I see is you have to find a place you want to live and that will cash flow. Since cash flow is best in the not so good neighborhoods, this will be a problem.
The down side I see is you have to find a place you want to live and that will cash flow. Since cash flow is best in the not so good neighborhoods, this will be a problem.
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JerseyGirl
- Posts: 21
- Joined: Mon Jun 06, 2011 3:00 am
This is my plan for ERE as well. The more units there are in the property, the better. Tenants skip out, pay late, and just generally have a long list of BS they create for the landlord. I don't know of many ways around that, apart from renting to an agency (like an agency that helps developmentally disabled people live somewhat independently).
The more tenants you have, the better you can diffuse the cash-flow disruption that results. For example, when you have a duplex, and you live in one side, then your rental cash flow is entirely dependent upon that one tenant. If you have 4 tenants, then the delays, repairs, or vacancy of any one unit is offset by the rent coming in from the other rental units. I hope that made sense :p
I think it's a great idea, as long as you don't pay too much for the building, and you strive mightily to pay the property off asap. You don't want to pay all that interest if you can help it. If you still have a day job, you can sink all the rental income into paying the mortgage off very early. Once you pay it off, you'll only have property taxes to worry about if you make the tenants pay their own utilities.
The more tenants you have, the better you can diffuse the cash-flow disruption that results. For example, when you have a duplex, and you live in one side, then your rental cash flow is entirely dependent upon that one tenant. If you have 4 tenants, then the delays, repairs, or vacancy of any one unit is offset by the rent coming in from the other rental units. I hope that made sense :p
I think it's a great idea, as long as you don't pay too much for the building, and you strive mightily to pay the property off asap. You don't want to pay all that interest if you can help it. If you still have a day job, you can sink all the rental income into paying the mortgage off very early. Once you pay it off, you'll only have property taxes to worry about if you make the tenants pay their own utilities.
What would be the "correct" or best way to determine the rate of return on a rental unit? The only thing that makes sense to me would be to guess how many years I wanted to own the unit and then amortize the cost over that period (I would buy a cheap place with cash). Then figure out the expected rental rate minus expenses over the amortized amount. Does that sound right?
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JerseyGirl
- Posts: 21
- Joined: Mon Jun 06, 2011 3:00 am
@JasonR, Thanks very much for the information and book reference. I expected there might be a few different ways to calculate return.
@JerseyGirl, I don't know. I don't have the timeline all planned out, but I doubt I would keep a place forever. I also couldn't figure out the rate of return without estimating a sell date. Plus selling up like JasonR mentioned sounds like a good idea.
@JerseyGirl, I don't know. I don't have the timeline all planned out, but I doubt I would keep a place forever. I also couldn't figure out the rate of return without estimating a sell date. Plus selling up like JasonR mentioned sounds like a good idea.