ED, CAN I BUY A 4-PLEX???????? - Posted by STEFFIE

Posted by Ed Garcia on March 04, 2002 at 09:04:43:


I’m not going to go into all of the different ways to structure a deal on this board. I’d be here forever.

What I’m going to do for you today is give you a cut and past copy of an article I wrote a while back titled “Making Money When You Buy”.

First, is to evaluate how much time you are going to be able to commit to Real-estate? If your approach is hit and miss, so will be your result.

Second: Go to the street. It is the best teacher. Rather than talk about doing deals, reading in the library, getting courses, JUST DO IT.

You’ll find in the long run, the street is the best teacher. Not only that by getting out an doing it, you’ll learn your MARKET, meet people to build a NETWORK, learn the demographics as well as the geographics of your area, and of course you would have over come the biggest obstacle in getting started, PROCRASTINATION.

We need to do what we call, penciling out a deal. When doing that, we ask ourselves a battery of questions necessary in structuring a deal.

I’m going to give you 5 steps to get you started.

(1) How much do we want to make?

So many times I hear someone act as if they are afraid of loosing a deal because of the profit they put into it. Forget about it. I’d rather be sorry about the deal I did not make, rather than the one I did. The profit is what protects you in a deal.
Don’t be afraid to make it.

When doing a deal I want to make at least 30% and believe me when I tell you, when I structure a deal with 30% in it, I never get it. Some how the profit always dissipates, even after I thought I figured it to the penny.

Would I do a deal with less profit? Yes but I would do it as a flip, lease option, or as a leveraged deal with positive cash flow.

(2) Determine the Value of the Property.

The next thing I must do is determine what the property is worth. The obvious thing to do, is comp it. Don’t let the seller or real-estate broker tell you what it is worth. Get it comped yourself.

(3) Deferred maintenance.

Usually I figure my profit after taking off the deferred maintenance otherwise it distorts my profit. So it must be figured in the beginning to determine your profit.

(4) Game plan.

What do I want to do with the property? Do I want to fix it and sell it? Do I want to keep it long term or short term? When I buy a property, I have a plan for it.
And usually I buy it with that plan in mind. This part is so important , I’m going to go into more detail by giving you an example.

Remember, you make your money on the buy.


Each deal speaks for it’s self. For example, if I bought a house for Lets say $50,000 and had to put $10,000 into it for fix up. I’m in this deal $60,000. Now what would that house have to be worth in order for me to feel comfortable to buy it, and debt service it on my line of credit.

$70,000 ? No I don’t think so. I have no room in this deal for error. What if after a month or two I don’t sell it ? Now remember, we can play the what if game all day. I can create a fast Sale for the purpose of this posting to make myself look good, but that’s Not the answer. So remember we have to always be careful with hypothetical questions and answers. The profit structure on this deal is not good enough for me to do the deal.

$80,000 ? Were getting better, but No. I have to keep in mind that things can go wrong with my deal. What if I sell it after 2 months, and then the sale falls through after being under contract for 45 days because of financing.

Now I have had the property for 31/2 months, and have to put it back on the market again. Also what if the market changes or slows down ? Even though I show on paper that I have a $20,000 profit, that’s not so. For the fun of it, lets take this so call $20,000 profit and structure a Game Plan around it.

(1.) I plug in 6 month worth of debt service on my deal. I’m in the deal $60,000. Interest, depending on the interest of your credit line, Let say for the benefit of our example is 9.5%. Our payments would Then be $475 per month. 475X 6 = $2850.

(2.) What ever the market value you come up with, always cut it 5%. Because
realistically, the potential buyer is going to want you to Discount your price. Now if you don’t have to, great. But lets face It. If you were trying to sell it for $80,000 and someone offered You $ 76,000, you know you wouldn’t want to wait for another Buyer. You would still be debt servicing the deal. With you luck, You wait another month or two and the next buyer would make The same offer. Terry Vaughan will tell you, that the first 10% of a deal is water. I agree with Terry, but for the purpose of this
deal we’ll just keep it at 5%. So lets take off another $4000.

(3.) I always plug in a realtor. Now I know that there are a lot of Geniuses out there that don’t need them. They are so great that they can sell the property themselves. Great, you plug in a Realtor. 76,000 X .06 = $4,560.

Lets recap. A sale of $80,000, gives us on paper a $20,000 profit.

-$ 2,850 Debt service
-$4,000 5% Discount
-$4,560 6% Sales commission.

Potential Profit $8,590.

As you can see the profit dissipates quickly. And personally I don’t think it’s enough to take the risk your taking with your line.

How about $90,000 ? Now all of a sudden the deal can make sense. We have between a $17,500 and $18,000 profit.

Lets look at our LTV (loan to value). 60,000 divided by 90,000 = 67% LTV.

So you see the deal speaks for it’s self, but the structuring of a deal with a Game Plan is what will let you know if you should do the deal.

(5) Financing.

How am I going to take my deal down? Am I going to create a seller carry back, and use a lender to give some money to the seller? Will the seller carry back the whole deal? Will I have to buy it with a combination of down payment and financing? Or will I pay cash and then refinance it later, getting all of my money back.

These are just a few basic fundamentals of doing a deal. I hope this is some help to you. One more thing, I would like to suggest for you to visit the How-to Articles on the Creonline site.

Ed Garcia

ED, CAN I BUY A 4-PLEX??? - Posted by STEFFIE

Posted by STEFFIE on February 27, 2002 at 19:10:01:

I wrote earlier but my question was not completely answered. I would like to know if I can purchase a 4-plex in the $130,000 range with a credit score of 630. I have a credit history of 5 years, never been late.

I am in the military, I thought about using va, but the property is located in Texas. I recently moved to Tennessee, but plan to go back to Texas in a couple of years, so I would not actually be occupying the property. My gross income is 2900 a month.

If I were to get a investor loan with 10% down, I would only be able to supply half of the down payment. This is assuming that the property has no equity and I would not be able to do a seller carryback. Would I be able to take out a second loan with the lender for the remainder of the down payment? If yes, what lenders would you suggest? My debt to income ratio is not that great. Wouldn’t the cash flow on this property play into me getting the financing and if so, should I write a business for this one 4-plex. I will add that I want to buy several more in this area. There are quite a few on the market ranging from $118-130,000 with a monthy income between $1800-2000 a month, not including PITI,maintenace,vacancy, etc.

I really want to do this,please help.

Re: ED, CAN I BUY A 4-PLEX??? - Posted by Ed Garcia

Posted by Ed Garcia on February 28, 2002 at 10:24:26:


It’s difficult for me to answer your post when starring me right in the face is a statement made by you saying, (This is assuming that the property has no equity and I would not be able to do a seller carry back. Would I be able to take out a second loan with the lender for the remainder of the down payment?)

Steffie, why would you even consider purchasing a property if you weren’t going to make any money going in? As far as the seller carry-back is concerned, the only way you would consider paying more is if the seller carried paper for you, leveraging the deal and allowing you to get into the deal with NO money out of pocket.

As far as would you be able to take on a second loan, why would you want to if there is NO equity? Steffie, you need to learn more about Profit structure as well as Deal structuring or you’re going to get yourself into trouble.

YES, the lender will definitely consider the new income you’ll get form the purchase of the units. They will hit the gross income with 25% to cover vacancy and expenses on a 1 to 4-unit acquisition allowing you credit for 75% of the income to go towards your debt to income ratio. On 1 to 4-units they do not look at a debt coverage ratio as they would on multiple units, which is 5 units and more.

As far as your income of $2900 a month, it has no significance with out knowing your debt service to calculate your debt to income ratio. This is an area that can be played with do to the fact that different loans or lenders may vary from 36 to 50% debt to income ratio. Obviously the difference in this percentage can affect the cost. The higher risk, the higher cost.

NO, you wouldn’t need a Business Plan on a 1 to 4 unit complex.

YES, you should be able to finance a 1 to 4-unit property with your credit score.

Steffie, again, I would like to encourage you to learn more about profit in a deal and deal structuring. We’re not doing this for the PRATICE, we’re doing this to MAKE MONEY.

Good luck,

Ed Garcia

Re: ED, CAN I BUY A 4-PLEX??? - Posted by Dusty

Posted by Dusty on March 04, 2002 at 02:29:03:

A followup to your comments to Steffie: I have a 4 plex now, but I am still a novice, and a bit afraid of doing something wrong if I jump in on another deal. The problem is knowing what a deal looks like, what a good deal looks like, and what you can play with in a deal. In other words, I have not seen where that kind of information can be viewed for study, so that a novice like me (or Steffie) can become comfortable with the numbers. When you are starring the prospective seller in the face on his/her property, after you have inspected the property, you would like to have an arsenal of what to offer.

Re: ED, CAN I BUY A 4-PLEX??? - Posted by STEFFIE

Posted by STEFFIE on March 01, 2002 at 01:11:31:

Thanks Ed, I am new at this, I will take you advice. Looking back at my post, it does sound a little stupid, by all means I plan to negotiate in any deal that I can come accross, it’s just I have been wanting to invest in property for sometime, but didnt have the nerve. I wanted to know if I would be able to get some type of financing.

What books do you recommend for a newbie like myself that would help me in setting up deals. Thanks again.

Re: ED, CAN I BUY A 4-PLEX??? - Posted by RICHARD

Posted by RICHARD on March 07, 2002 at 11:41:38:

Ed, I just found your site and I’m very excited about what you offer and the direct, concise answers you give. I look forward to working with you.

Richard Chew