For the past two years I’ve increasingly been looking at ways to generate income outside of the stock market or my job. I also stumbled across a podcast called BiggerPockets, which aside from being genuinely entertaining is a great resource if you want to learn more about real estate. I currently own and rent out a former primary residence in Georgia, and clear about $200/month in cash flow after paying the mortgage, maintenance, and property management fees. The financial factors driving real estate are pretty attractive to me at this point in my life, and the more I learned about duplexes, triplexes, and quadplexes the more excited I became.
I have found that no matter what the market is, illiquid investments are where the most attractive mispricings occur. 2-4 unit apartment buildings occupy this weird mid-market niche that makes them unloved and illiquid relative to larger apartment units or single family homes.
- Too small to be gobbled up by commercial investors, and tend to have a stigma attached for first-time home buyers. It just isn’t what they picture as the American Dream. This increases the potential to find diamonds in the rough.
- Treated like a single family home for financing purposes, with the same government subsidy benefits attached. VA loans and FHA loans are both options. A typical apartment complex would cost an extra 1-3% in mortgage interest compared to the financing which I can get in a fourplex.
- Easily house-hacked.
- 4 doors instead of 1 door reduces occupancy and turnover risk compared to a single-family residence.
Do you see where I’m going with this? My family is currently in the process of building a house, but being fans of Maslow’s Heirarchy we could also use a place to stay while we sell our current home and build the new one. I also happen to love anything that yields a cash flow of >10% per annum.
Each unit is a 2 bedroom, 1 bath which rents for approximately $600/month. 3/4 occupied units will fund our mortgage, allowing us to live rent free while also putting equity into the building. When we (eventually) move out the building should conservatively cash flow $100/door after setting aside money for maintenance and property management. The downside is that we will have neighbors and live in a relatively small space.
It is important to note that I used VA loans on both my single-family residence in GA and my new multi-family property. These loans effectively guarantee 25% of my mortgage with government backing in case of default, meaning that I do not have to put much money down up to a certain level. In my case, I was covered for $417,000 initially, with ~$225,000 of coverage after my initial home purchase in GA for $190,000.
Readers who are not veterans could do something very similar using a FHA loan, which only requires 3.5% down. Mortgage coverage limits for these programs often vary by region, so readers on the coasts are hopefully not crying just yet…Going over the numbers using the remainder of my VA loan coverage after accounting for the $190k house which I bought with no money down in Georgia:
Remaining VA mortgage principal coverage: ~$225,000
Final Price of Multi-Family property: $262,000
Remainder after VA coverage: $262,000-225,000 = $37,000
Required initial equity from me: 25% * 37,000 = $9,250
After inspections and fees my all-in initial cash costs was $15,000. During the first year on that $15,000 I am budgeting a return of zero, because we plan to inhabit one unit for free. After that first year, with a minor rent increase our cash flow should be approximately $8,000. That’s roughly a 50% return within two years, with full payback by the end of year 3 assuming no major emergencies. This is not counting the associated tax benefits or potential for price appreciation for the structure.
“You make your money on the buy” is a phrase real estate investors like to say, and so when my agent told me this property was $20k cheaper than comps, and my home inspector put it in his top 10% for overall quality I got pretty excited. The Kansas City area is doing well. Over time, rents tend to rise along with housing prices, and so I expect that our cash flow from the property should increase in-time. I am also interested in buying trailer parks (easy financing, depreciation benefits, and low overhead), as well as practicing the BRRR strategy on more multi-family units. If anyone has experience doing either one please let me know!