By Kent Mitchell
SAGE PROPERTY SOLUTIONS
Four-Plex Home Strategy
The Best Way to Get Through Any Recession or Tough Job
Market? Get Rid of Your Rent or Mortgage Payment!
It Worked For Me
This is our first Strategy Tip because it was the first real estate strategy that I myself
used. And if it were the only one, ten years later I would now be a millionaire, owning my home free and clear, with my only financial responsibilities paying for groceries and daily expenses. Instead, I have pursued the other Strategy Tips as well, in order to get those groceries paid for too! But that is a story for later.
Our First Home Was a Four-Plex
When my wife and I decided to purchase our first home, in Berkeley, California, we
looked at the mortgage rates and noticed that some homes had “in-law” units that brought in rent to offset the mortgage expense. In other words, you could live in your home and rent out a little basement unit or cottage unit to someone else and thereby have a smaller mortgage payment. We thought this was a great idea. Then I had an idea. I asked our real estate agent, “What if there were multiple in-law units on the property, enough that the whole mortgage payment would be covered by the renters? Do you think we could find that?” He laughed and said he didn’t think so.
A week later, our agent called me back.
He said, “You know, there is a four-plex available on Carleton Street that might do
what you are talking about: you could live in your own separate unit and have three renters in the main building. That should pay your entire mortgage.” We went to see
this property and found that it was a classic 1920s building and large cottage with street front access on a corner lot. We moved in a month later and the income from th renters paid our mortgage and our insurance and our taxes and our maintenance. This house paid for itself from day one!
You Don’t Have to Bank on Appreciation
The market appreciated after we purchased our first home, it’s true. Most of the time, that happens, over time, the recent real estate downturn notwithstanding. But here is the important point. We didn’t need a penny of appreciation. It wouldn’t have mattered that much, really, if home prices went down after we purchased. We had all our expenses paid by the renters. So if we had to wait out a downturn, we would be doing it rent free, mortgage free. That is the power of real estate with positive cash flow: it takes care of its own expenses. And if one of the expenses it takes care of is your own living expense, that’s a good thing. Who needs appreciation on top of that?
Appreciation would merely be icing on the cake.
How You Can Do It Too
In Berkeley, CA, we have some of the most expensive real estate in the world. Even after the recent market correction, you’d have a hard time getting a single family home for less than $500,000 to $600,000. I don’t know if that sounds like a lot to you, but, if your mortgage on the home is, say $500,000 and you are paying 5% interest, you are paying over $2,000 per month interest plus principal repayment, taxes, insurance and maintenance. Let’s say $3,000 per month in round numbers. It could easily be $4,000.
So how much do you think you would have to pay to purchase a four-plex instead of a single family home? Four times as much? Say $2 million? Actually, no, you can
obtain a four-plex in Berkeley today at between $500,000 and $1,000,000. In a
$500,000 four-plex you would not be living in as nice a neighborhood as a $500,000 single family home (but the neighborhood would not be that different), and you would be living in a smaller space (say a 2bd/2ba apartment instead of a 3bd/2ba home). The thing is, although you would be living in an apartment, it would be yours, and the yard would be yours, and the entire cost of loan, taxes, insurance, maintenance would be paid for plus extra cash to boot. That’s pretty amazing considering you are only sacrificing one bedroom and a little bit of elbow room.
If you want to live pretty much the same lifestyle as in a single family residence, then buy a four-plex that has a full-sized owner’s unit with a separate yard and just happens to have three tenant units next to it. This is what we did. You’d find the price tag in Berkeley to be something like $900,000 for a home comparable to a $500,000 single family home…with three tenant units tacked on. That’s right, you live in a comparable home, but for less than double the price you get three extra units that produce lots of income from day one. In fact, in this scenario you would expect your principal and interest payments on your mortgage to be paid for from day one. Your property pays for you to live in it.
If you’re interested in this strategy, we have a team of expert local real estate brokers who can help you understand it better, and can help you obtain that new home at the best possible market price. I am available to discuss this key strategy and can help you as you prepare to take the next step to owning a home that pays for itself today, making your life more secure by removing rent and mortgage payments from your personal account permanently.
Kent Mitchell, Principal Broker
Sage Property Solutions
1442A Walnut St., #431
Berkeley, CA 94709
Restorer of Classic Berkeley Apartments
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