INTRODUCTION: FOURPLEX INVESTING
Every now and then, a book comes along that changes the course of your life. Before graduating college in 2008, I read and became enamored by multifamily investing. I went on amazon and purchased two books:
- “Investing in Duplexes, Triplexes, and Quads: The Fastest and Safest Way to Real Estate Wealth” – Larry Loftis
- “2 Years to a Million in Real Estate” – Matthew Martinez
The ideas presented in this book were simple enough and made perfect sense in terms of safely investing in real estate. In 2011, at the age of 26 I purchased my first fourplex for $240,000 as my primary residence. At the time, it was generating $3,000 a month in gross revenue. Each unit was rented for $750. I moved one of the tenants out and lived on site (as a condition of my primary residency). Overtime, I worked to fix up the exterior and interior of the entire building. As of January 1st, 2015, the unit now produces a gross rent of $3375 a month. This represents a 12.5% increase in rent over a 4 year period, or approximately 3.13% a year. Oh and by the way the last 4plex that sold on my street went for $295,000! This also represents a roughly 16% increase in the value of my 4plex based on what I paid for it ($240,000 plus $15,000 in capital repairs/improvements).
But here’s the real kicker, my cash-on-cash return is now at 60%. That’s right, 60% is not a typo! And it will rise eventually to produce a 100% cash on cash return on my original investment. See below for this amazing stat.
WHY INVEST IN MULTIFAMILY BUILDINGS?
That’s right, who knew that investing in Real Estate COULD be a SAFE endeavor? Can you really invest your hard earned money, make a 60% return with little RISK? The answer is yes absolutely! I am doing it!
Vacancy is the number 1 risk to a Landlord. Operating a multiunit building will inherently lower your risk because you offer lower rents and appeal to a larger pool of potential tenants. Consider the Landlord who has a single family home that is vacant. He is losing 100% of his income every month he is vacant. You on the other hand, as a 4plex investor, are still making 75% of your income every month with a vacant unit. In all likelihood (as in my case), you can have 2 vacant units, and the other 2 units will come pretty close to covering the mortgage payment and other expenses!
LOW INITIAL INVESTMENT!
But Brad, I don’t have $240,000! We aren’t all rich like you! Well here is another secret. If you live in the your fourplex as your primary residence, you can buy it with the best terms. And what terms are those? How about a 30 year residential loan with a down payment as low as 5%. On $240,000 that means only $12,000 is needed to get approved for the loan! Incredible isn’t it?
WEALTH BUILDING ACCELERATOR!
In my case, I put down 10%, or $24,000. After servicing my debt and all expenses, I now net $14,400 a year. $14,400 / $24,000 = 60% CASH ON CASH RETURN!
In addition, my debt has been serviced for 4 years, creating another $10,000 in equity. While debt has been being paid off, both the rents and the value of the building has increased.
Unlike single family homes, a multifamily buildings’ value is determined by the income it produces. Whereas a single family home’s determination of value can be highly subjective to the individual buying the home. Perhaps the single family home has a “nice” kitchen, or a great backyard etc. The only thing “nice” about a fourplex is income. Or put another way, the kitchen and yard is nice, but show me the money!
Where am I going with this? It simply means your wealth is protected by the rents your property receives. It is not subject to real estate market crashes as much as single family homes are because your rents will remain steady. And as stated, these rents are directly correlated to the value of your multiunit building.
Investors use what is called a Capitalization Rate, or a CAP Rate for short. This is simply the net income of the property divided by the value of the property. So, for instance I purchased my property with a roughly 11.9% CAP Rate. Over time, my rents have increased by $375 a month or $4500 annually. This means that I have increased the value of my building, and my wealth, by an additional $37,000 in a 4 year period (To calculate this, simply take 4,500/.119). Put another way, a new investor would be willing to buy my $4500 in yearly income for $37,000 (11.9%).
Multifamily investing, specifically a four unit building, offers the safest and fastest way to build wealth in real estate! I have been a proud owner for 4 years now and I will be buying another one between 2015 and 2016. I plan to blog about the entire process. Also, I am developing an extensive home study course, offering a hands-on, over the shoulder look of my 4plex. Stay tuned! Please feel free to comment or ask questions!