YOU WALK IN AND CANNOT BELIEVE your eyes — this is the condominium of your dreams. You ask the real estate agent what the price is and she answers $400,000. The listing price is at the upper stratosphere of your budget, but you love the condo and want to put in an offer. She says that several offers have been submitted well above the asking price. Your heart drops. This is the reality of looking for a piece of real estate you can call home on the Westside of Los Angeles. However, you may have other options. Some first-time homebuyers look at purchasing multiple units on one parcel. One of the best number of units to purchase is a four-plex or four-unit since it generates income like an apartment building, but still qualifies for residential financing.
Shopping for a four-unit over a condo can make sense. Most lenders will finance 90 percent of the purchase price, meaning that you will only have to bring 10 percent of the purchase price to the closing table. However, what makes a four-unit purchase more desirable is that income from the other units is used to cover a portion of the mortgage payment. For example, if you were to purchase a four-unit property with a list price of $1,000,000 and three of the units grossed $2000, each totaling $6000, the lender would be able to use 75 percent of the three units income towards the loan. At $6000 the lender could use $4500 towards the payment. With an interest rate of 7 percent amortized over 30 years, that translates to roughly $675,000 in loan dollars. Your portion of the payment would be for the remaining $225,000 or a payment of about $1500, while $100,000 was used for the down payment. The nice part about this scenario is that you do not have to sell the property when you move out; you can refinance it and use the equity to purchase another property.
Now the above example works if the property is grossing enough money, but what if it is not bringing in a strong income? If the four-unit is not grossing the needed money, you could choose to increase the rents. The problem with increasing rents is that tenants may move out and it maybe difficult to find new tenants. Also, cities like Santa Monica have strict rent control laws, which must be observed. Cities such as Long Beach and Inglewood, however, do not have strict rent control laws. What if you cannot come up with the down payment?
Using the above example one would ask “where do I come up with $100,000 plus closing costs?” If you only have a portion of the down payment, you could get partners who would come up with the difference. For example, if you found three partners who wanted to live in the property, you would only need to come up with $25,000 for the down payment. In the above example, you are paying $250,000 a unit. In the Westside of Los Angeles it would be very difficult to locate a condo for that price, plus with the four unit you do not need to pay monthly condo fees. However, the property will need maintenance so calculate those costs. Also, remember that it maybe difficult buying your other partners out in the future. If you decide to have partners have an attorney put together a partnership agreement and make sure everyone is on the same page. With partners, it would be a good idea to set a sale date for the property with each partner receiving an equal share of the equity proportional to the down payment amount.
Purchasing a four-unit is a great way to start investing in real estate. Having tenants cover a portion of the mortgage and living in a four-unit is a great alternative to a condo. Just remember, if you get partners, agree on the same exit strategy beforehand to avoid problems in the future. On the Westside of Los Angeles a four-unit can be the first step to your real estate dreams.
MIKE HEAYN is a Washington Mutual multi-family loan consultant. He 310-428-1342, or e-mailed at
Originally published in the Santa Monica Daily Press print edition on August 1, 2007. Read the original PDF.