The year is 2015… not 2011, or 2012, or 2013… Sadly. Although I’ve made quite a bit of progress on my journey to early financial independence so far, something I’ve realized through the years is that if I could do it all over again, the one thing I would have done differently (and made sure to do) is this:
I should have bought a fourplex!
The beauty behind 4 unit properties (fourplex or 4-flat) is that they qualify for conventional mortgages. Although a fourplex houses multiple tenants/families (collect up to FOUR rent checks!), you can still get a 30 year fixed mortgage on them. Fourplexes are classified as residential properties, not commercial, so they adhere to the typical Fannie/Freddie underwriting guidelines.
Not only that, you can even reduce the amount of downpayment required at closing if you qualify for a low downpayment FHA (as low as 3.5%) or VA (if you are military) loan, and are willing to live in one of the units (owner occupied/primary residence).
You can then rent out the other three units and have your tenants pay for your mortgage. This could help you live rent-free (or close to it)… and as everyone who’s been on the journey to early FI knows, housing is usually THE killer expense each and every month.
But even if you didn’t want to live in a fourplex, I still think they would have been the best play. Four units generating massive cash flow on just a SINGLE loan! As you get deeper into your real estate investing career, you start to realize the importance of maximizing each loan. After 4 loans, regardless of how small the loan amount is, the underwriting guidelines become much more strict… So use them up wisely!
Anyway, during the crash, 2009-2013, you could have EASILY picked up a fourplex and have it cash flow… For sure, it would have cash flowed with a conventional 30 year fixed mortgage with a typical 20% to 30% downpayment. Actually, prices were so cheap back then, people were even able to find cash flow while living in one unit on a FHA loan (which also requires an additional payment for PMI).
And that’s exactly what so many savvy people did to short-cut their journey to financial freedom.
Through the years (after appreciation takes effect, both market and forced), these brilliant, same investors then found ways to cash out refi or take on HELOCs to pull equity out and deploy elsewhere. Again, if you bought at the right time, even after a refi, you would still have the fourplex cash flowing…
Lather. Rinse. Repeat.
Before you knew it, you would have owned 3 fourplexes, or 12 units… Cash flow of $2,000+/month, easy. Early FI in 2-3 years.
The concept is incredibly simple. If we use the Bay Area as an example (a really expensive example), you could have picked up a prime fourplex during the downturn for around $600,000, maybe even $500,000 (if you digged hard enough to find one).
Just as an example, we will assume the following:
- 2/1 configuration for each unit
- $1,300/month rent for each unit ($5,200/month total)
- 10% PM fee
- 5% vacancy
- 10% maintenance
The actual numbers are not so important because the property would have cash flowed, regardless. Using a middle-of-the-road downpayment of 25%, a fourplex investment back then would have looked something like this:
That’s close to $700/month in positive cash flow! With reserves and a PM in place to boot, in one of the most expensive places to live in the country. So, you can use your imagination and easily imagine what the returns might have been like in a more affordable location.
And had you utilized a FHA loan, you would only have needed a 3.5% downpayment, or $21,000. So, there literally was no barrier to entry (provided you had a stable, good income job).
If you think the cash flow returns above are insignificant, you would only need to compare with today’s prices to realize what a once-in-a-lifetime opportunity we really had back then.
In today’s market, a similar fourplex might be worth around $1.23MM:
Talk about some AMAZING appreciation! Again, had you utilized a FHA loan, the downpayment would have only required $21,000. But your $600k property would have more than doubled in value! Where else but real estate can you turn something very little (~$20,000) into something very massive ($600,000) in only 3-4 years, relatively safely?
Today, with gross rents at ~$5,000 to $6,000/month… yeah, I’m not too sure how this thing could possibly generate anything but negative cash flow. Forget the 2% Rule or 1% Rule… This thing probably won’t get you even 0.5% Rule. The Cap Rate is a paltry 2.38% and the Gross Rent Multiplier (GRM) an outrageous 19.18.
So, this is one of the reasons why local investors such as myself have had to resort to out-of-state investing.
When it comes down to it, there are many paths that can take you to early FI. No one has a crystal ball, so we can never time the market… but you don’t really need to. Opportunities will always present themselves, and when they do, you must take action!
“Luck is when preparation meets opportunity.”
Whoever got in on those type of fourplex deals is sitting in a most enviable position today, because you are win-win, regardless:
- Hold on and collect cash flow. Utilize economy of scales. Say rent increases from $1,300/month to $1,500/month in the area… you get $200/month extra cash flow PER UNIT!!!
- Sell the property. If you lived in it for 2 out of the last 5 years, that’s upwards of $250k to $500k in profit, tax-free.
- 1031 exchange into a larger, commercial unit that cash flows even better and avoid capital gains taxes altogether.
- Take out a HELOC or cash out refi and pull equity out to access more investment capital.
Regardless of what you decide to do, you are coming out well, well ahead…
Surprisingly, or not, these type of fourplex deals can still be found across the country. Certainly not in the Bay Area, but they are out there, somewhere. Perhaps in your own backyard?
And that’s really the “big secret” on how you get to early FI in warp speed… I wish I would have taken this very approach because my biggest mistake was not acquiring enough units in the Bay Area. Yes, when rents go up locally, it helps me out… but I only own 2 units.
Imagine if I had 12… 😉