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We wants to buy $800k 4-plex and live in one of unit. We are not sure if it makes sense. Any advice?

My wife and I wants to buy $800k 4-plex and live in one unit with 25 % downpayment. However, the cash flow negative for at least 10 years. Does it makes sense to buy? The price went down to 2003 year level but not sure if we should wait for something reasonable coming up. We appreciate your advice. 
  • May 30 2011 - San Jose
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Answers (10)

It When you are looking at negative cash flow for at least 10 years, I think there are probably better options available for you and your wife.  I'm confident that there are better options out there for you.
  • June 05 2011
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The multip-family unit prices has not dropped as much as condos, SFH due to that fact tenants are helping paying the mortgage.

The better deals are condos, or sfh in distressed areas. Some are at late 90 prices (45-55% vs peak price).  With condos it is easy to liquidate. You purchase several in the same area. Needless to say you don't have to mow 
grass and worry about exterior.

Do you really want let your tenants know the landlord is next door 24/7?
Most actually hire a property manager while staying there quiet.

Good luck,
[hotlink removed by Zillow moderator]
  • June 05 2011
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I guess it depends on what your investment strategy is. Look at it this way. If you had $800k in cash would you buy it today? If not, then it may not be the best investment decision for you.
  • June 01 2011
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I don't like negative cashflow. In todays market, if you are putting down 25%, you should be able to get some kind of return.

On the upside, rental rates are up and vacancy rates are down. Plus, if this is a property that you can make more desirable with some upgrades, you have that as an option to boost your desirability and with it your rent. 

Your case is a bit different since you plan on living in one of the units. In your case, you should do the math based on what you would make if you rented the unit you live in. If under those circumstances you see positive cashflow, that is easier to swallow. Plus, it leaves you open to potentially buy a detached home later and then rent out all the units and enjoy that income.


R

  • May 31 2011
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Let's work backwards here to figure out a fair deal. Negative cash flow is NOT good, but is that penciling it out on all 4 units (because you get the use of one but you should analyze it as if all 4 rented). A 5.0% Cap Rate (NOI/Price and really unleveraged return)) would give you about $40,000 in NOI on that $800,000 price. 5.0% cap would pretty good for a lower risk unit in a moderately priced area.

OK, so expenses on apartments are usually 35-40% of revenue. So let's assume 40% to be conservative. So that means you should be getting rental revenue of $66,000 per year on the 4 units. Let's bump it a little for vacancy to $70,000. So that is gross rental income of $17,500 per year per unit or about $1,500 per month per unit. Are the rents close to that?

If you are going to invest your hard earned dollars into real estate you should get a positive return for taking the substantial risk that comes along with real estate ownership.

I have purchased almost ten properties in the past 2 years in nice moderately priced areas and mostly 1970's townhomes. I get a Cap Rate of about 7.5% on average in a very low vacancy area with decent credit quality and decent units...but I'm really good at sniffing out a good deal. A 5.0% Cap would be a really good deal too, so put pencil to paper and see what you come up with.

The above numbers would be a fair deal. Good luck.
  • May 30 2011
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Hello Tim,

I would suggest you look for something with positive cash flow rather then take a risk of their being positive cash flow in the future.  I think its an good idea if you were to live in one of the units, I think you may be able to get a better loan program as well if that is the case. If you like, I can send you a list of properties bringing in positive cash flow in the san jose and surrounding areas.
  • May 30 2011
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Real properties usually are positive cash flow after owning it for several years... Real property investment is not like stock market; it is a long term investment and NOW is a great time to get into the game.  Good luck, go for it.
Manzar D.Azari, MBA, Realtor
The Azari Group Real Estate, Inc.
  • May 30 2011
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I like the fact that you will be living in one unit. You have to live somewhere and either pay a mortgage or rent. Check sold properties in the area and see if the one you are interested in is reasonably priced. Then verify rented similar units and come up with "reasonable" expected rent for the other units. No all of the units will be rented all of the time, or at least assume they will not to be on the safe side [hotlink removed by Zillow moderator]
  • May 30 2011
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The best bet for profiting on multi-family properties is usually through postive cash flow, not appreciation.  You can't predict what the value of the property will be when you eventually unload it, but you can predict the next year's rent with an acceptable level of accuracy.  Are you sure the cash flow will be negative?  Are you basing that assumption on current rents, or have you forecast periodic increases?  San Jose is currently one of the best rental markets in the country, with vacancy rates city-wide under 3%.  I'm even able to rent our haunted house on Fox Avenue downtown...  If you have the income to cover the loss from your day job, and since you intend to occupy one of the units, this investment might be able to work for you regardless of current cash flow.  But you should see if you can improve the cash flow as soon as possible.

  • May 30 2011
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How is the cash-flow if you rent out all 4 units?  It's an investment so it might be better to look at it in those terms.  If you consider the all tax benefits including the mortgage and depreciation, then the property might pencil. Have you spoken to your tax advisor?  

Oggi Kashi
Paragon Real Estate Group
CA DRE 01844627
  • May 30 2011
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