Should I buy an Austin 4-plex?
I often get calls from investors excited enter the Austin real estate market. Without fail, the first thing they want our team to show them is a fourplex (4-plex).
Why?
<place photo of typical fourplex here>
Their reasons are:
- To benefit from Economy of Scale ( 1 roof, yet 4 streams of income)
- To minimize the financial impact of vacancies, which would be defrayed by having other occupied units.
- To save on the front end of the transaction—By purchasing 4 units at one time, they avoid paying the fees associated with several loans and several closings.
- Buyers can feel like they’re moving up in the investment world. (Bigger is better, right?) They get the sense that they’re just a step away from owning a small apartment complex while still obtaining a standard 1-4 family residential loan. (True apartment loans require large down payments and are often more difficult to obtain.)
- The own a fourplex someplace else in the country which has performed well for them.
I am absolutely aware of the appeal of these properties, particularly to outsiders unfamiliar with the Austin market. The above points appear to make a well-reasoned argument—certainly it is one that might apply in other parts of the country. But, as a seasoned investor and an advisor to my own clients, I AM ABSOLUTELY NOT a fan of Austin 4-plexes.
There are many reasons for this.
A 4-plex is like an apartment complex with no amenities. It is at the bottom of the rental food-chain for tenants. In a house, tenants have the benefits of homeownership without the maintenance and insurance expenses. In an apartment, they have the security of a community and amenities like pools and gyms. Duplexes represent a step up from apartments for many tenants, providing a yard and fewer noisy neighbors.
But who wants to live in a fourplex? And why?
They are generally arranged in a 2 unit over 2 unit arrangement, like two shoeboxes on top of two other, identical shoeboxes. The bottom 2 units typically lease up fairly easily, but the top units can be difficult to move.
The first warning sign for buyers should be rents: The rents in fourplexes are lower than standard Austin rents for units of the same size. Fourplex rents average between 500.00 and 600.00 per month whereas the average rent in Austin for 1st Quarter 2008 was $907 a month. The tenants in a 500.00 to 600.00 range are very, very low income. They struggle financially and when the going gets tough the rent won’t be paid. Or the property might be abandoned altogether. I’ve seen this countless times.
A prominent local property manger gave a presentation at our office last week, reviewing statistics of different classes of property. He analyzed them by property type, area of town, and rent range. The statistic that knocked me off my chair was that the properties with rents of less than 600.00 a month had a 21% rate of uncollectable rent—meaning the rent is due and it cannot be collected. Yes, that is not a misprint: 21% uncollectable. This is due to evictions and “skip outs.”
This second graph compares this year’s prices with last year’s prices. As you can see, values have dropped in this area of the market. As the buyers become more educated about the Austin market, this trend, in my opinion, is not likely to improve.
Sounds expensive, right? But, wait, it gets even more expensive. That 21% loss does not account for court costs, vacancy, damages, and re-leasing expenses.
As a former owner of a property management company which managed 300 small residential units, I always recognized those units as problematic, but I never crunched the numbers like my associate. Seeing them in that format confirmed all of our worst suspicions about these properties.
FOUR REASONS NOT TO BUY AN AUSTIN FOURPLEX:
1. Purchasing an Austin fourplex means investing in a property which appeals only to tenants living very close to the poverty line. This tenant base has almost no financial security, a factor which (in our small sample, anyway) results in a 21% rate of uncollectable rent.
2. The upstairs units will be difficult to rent and will likely have extended rates of vacancy. Vacancy rates of 20% are not uncommon.
3. Many property managers refuse to manage fourplexes, so by purchasing one, you limit your options for finding a property manager you like.
4. Streets with multiple 4-plex units (and they are typically grouped) tend to look trashy and neglected. It’s not unusual to see garbage cans left out on the street all week, litter-covered lawns, and parking lots and yards filled with junk cars. These factors also work as deterrent to better-quality tenants, making it very difficult to ever elevate the status of a fourplex.
5. Constant turnover makes it difficult to keep units in top shape, which means added expenses for fix-up between occupants and increased maintenance calls from tenants during their occupancy.
Of course, there are a few Exceptions to the rule:
1. Fourplexes located in high-demand areas like in the immediate vicinity of the University of Texas or in established downtown neighborhoods can often be easily leased.
2. It can be much easier to lease fourplexes built townhouse-style—in a row with all front doors on the same level, as opposed to being stacked one on top of the other. Again, even fourplexes of this type should be located in a higher-demand area to attract quality tenants
3. Fourplexes which, for whatever reason, have established track records of attracting (and keeping) higher-quality, long term tenants while bringing in higher-than-standard rental income should be given a second look.
<Insert photo of a better fourplex>
What do you do if you currently own a problem 4-plex?
As with any bad investment, you have to cut your losses. My advice is to sell it. In my experience, that’s the only way to reduce your exposure and avoid throwing good money after bad. The investors in this market are not paying retail for this product. The entire market is only moving three 4-plex units a month. Currently there are 30 4-plex properties for sale in the Austin Metro Area. It would take the Austin Market 10 months to absorb the current inventory.
That is good news for investors worried about the potential of declining values but bad news for taxpayers. 
denadavis