How I Find Unseen Value in 4-Plex Properties
For many years, I owned and managed 90 units of apartments across three buildings. One building was nicknamed “Jerry Springer” by my assistant…because the tenants were always finding drama, and somehow it always boiled up and became my problem. I tried for years to find ways to improve the properties. I tried to find unseen value. I tried to increase rent. I tried to stabilize occupancy. I tried to manage costs. In ten years, I was barely able to keep my head above water.
Something had to change.
Larger complexes were too much headache
My goals for real estate investing have always been part financial, part lifestyle. I wanted my lifestyle back! So I made some moves and sold out of the larger complexes . . . goodbye Jerry Springer!
Once I exited the larger complexes, I started researching smaller properties. Namely 2, 3 and 4-plex properties.
What I learned was that these properties can be financed with Fanny/Freddy conforming loans (either as owner occupied or as investment property). That made borrowing easier, and cheaper.
I also liked the economies of scale. I knew that trying to get economic savings from scale at 90 units never worked. But, at 4 units, I had many advantages. Going smaller turned out to be wiser. If I bought in my own town, I could self-manage (saving 6-8%). I could work with contractors that had to look me in the eye before they billed me. It turns out that contractors tend to be more fair with a small property than some rich landlord that owns a giant apartment complex. I learned that I could also do many small things myself. I’ll guesstimate that fixing small things myself saves me $150 per month, and that I probably save about that much on being able to better manage contractors.
Here are some other great benefits I like about 4-plexes:
- My insurance costs are lower on the 4-plexes than on a 33 or 48 unit multifamily property.
- Multifamily complexes often have large utility bills that are hard to manage (water for example), and often a power bill for the exterior lighting. 4-plexes often have small per-unit water costs, and in some cases ALL utilities can be shifted to the tenant. And, there’s no exterior lighting bill to pay.
- The long-term value of those savings should not be ignored. If you compare a 4-plex in San Diego that costs $1.4M to a 24-unit complex in Missouri that also costs $1.4M, you may find that the San Diego property comes out way ahead simply based on the factors I listed above. If you save $600/mo on management and maintenance costs, that has a 10 year value of well over $100,000.
- 4-plexes can be found in nice neighborhoods where people pay higher rent. With larger complexes, the rents are typically competing with other complexes. That keeps rent lower.
- If you buy a 4-plex in a neighborhood of houses and duplexes, then you can rent to people who want to live a more “neighborhood” lifestyle and often your rent is competing with single-family homes in the same area.
- There are better increases in rent over time…particularly if you buy in an area that is popular or gentrifying.
A little rehab goes a long way in a 4-plex
If you rehab an apartment in a large complex, you can’t add much to the rent. People would rather have old cabinets than pay higher rent. But, if you rehab a cute duplex in a nice neighborhood, the tenants (who are already paying more to be in a real neighborhood) will pay more to be a bit more upscale. They appreciate the little things.
We have a video for how I found value with a specific 4 unit project:
Here’s what the numbers looked like in detail…
Purchase: $1,150,000
Rehab: $85,000
Total: $1,235,000
Rent On Purchase:
2/2: $1,650
2/2: $1,150
1/1: $1,100
1/1: $1,300
Total Income: $5,200
After Rehab:
2/2: $2,600 (and tenant now pays water)
2/2: $1,850
1/1: $1,650
1/1: $1,850
Total Rent Income: $7,950
Added Income & Expence Reductions:
Garage Income $175
Water Expense Reduction $100
No lawn Expense Reduction $150
Self Manage Expense Reduction $550
Self Fix-its $150
Total Savings: $1,025
That’s $45,300 per year that I’m making over the previous owner.
Strategic rehab and expense reduction
The increase in rents was largely due to strategic rehab. The old owner had a horrible lawn with a chain link fence that made it look like a gang member might be cooking meth inside the house. The smaller units needed to have space created, and small appliances that created more space in the kitchen and dining. I just had to be smart about what I did and be sure that the work added the right kind of value. I didn’t overbuild. I didn’t do windows or even touch the exterior paint. Just a nice yard and a moderate interior rehab and the rents shot up.
On the expense side, no-maintenance lawn was key. But, so was dumping the management company and doing a few repairs myself when I can. And, that garage was being used by one of the tenants at no cost. I rented it to a local contractor who uses it to store tools.
Want to make it big in real estate?
Try going small. Keep it lean and local. Look for unseen value (like a garage that someone should pay to rent). What’s next for my little 4-unit? I’ll add value (and increase rent) by installing washer/dryer units in each unit. That is likely to cost $2,000 per unit, but will increase rent by $100/mo.
I’ll recover the cost in 20 months or less, and then keep charging higher rent until the day I die.
Do you think I got lucky on this property?
Two years later I did it again. I knew the next property was a good deal when the selling agent told me no one was paying to use the 2-car garage. That was $200-300/mo in unseen value right out of the gate. In the first 4 months, rents are up $800/mo (in addition to the garage income).
Now that’s real estate investing, the “Opt Out” way.
