A fourplex with every unit rented looks like the easy version of a first small building. The income is already arriving and nobody has to go find tenants. The part that decides whether it pays is what those tenants are paying, because that is the rent you collect, and on a building held a long time it is often well under what the units would rent for today.
What do you buy when the tenants stay?
The building, and the rent that is already running through it. A listing that says four units at market rent is describing what the units could bring. The leases say what they do bring, and until a lease ends, that is the figure your mortgage gets paid from.
So ask for every lease before you write an offer, along with the start and end dates, the deposits held, and anything the old owner agreed to in writing. What those leases bind you to is a question for a real estate attorney in your state, and worth an hour of one’s time on a building this size. The arithmetic below assumes the plain case: each lease runs to its end date at the rent it names.
What does a below-market lease cost each month?
Take the fourplex the multifamily calculator opens with: $499,000, 20% down on a 30-year loan at 7%, which is a $399,200 loan and a $2,656 payment. Two of the four units are at $1,575. The other two were signed three years ago at $1,300 and have nine months left. The example assumes 6% vacancy, $6,400 a year of property tax, $3,600 of insurance, and $450 a month of water, sewer and trash on the owner, with maintenance and a repair reserve at 5% of the rent roll each and management at 8%.
| As you buy it | At market rent | |
|---|---|---|
| Rent collected after 6% vacancy | $5,405 | $5,922 |
| Property tax | −$533 | −$533 |
| Insurance | −$300 | −$300 |
| Water, sewer and trash | −$450 | −$450 |
| Maintenance and a reserve for big repairs | −$575 | −$630 |
| Management, 8% of the rent roll | −$460 | −$504 |
| Mortgage payment | −$2,656 | −$2,656 |
| Cash flow a month | $431 | $849 |
These are example figures, not a forecast for any market.
The two leases are $275 each under market, so $550 a month of rent goes missing. Cash flow falls by $418, not $550, because three of the running costs are percentages of the rent roll: collect less and you also set aside less for maintenance, repairs and management. Over a year that is $5,016 of cash flow on a building that still costs the same to own.
It moves the lender’s number too. Debt coverage, the ratio of net income to the loan payment, drops from 1.32 to 1.16. That ratio is built from the rent the building actually collects, so it moves with the leases in place rather than with the listing.
What do the old leases do to what the building is worth?
More than they do to the monthly cash. A small building is priced off its income, so rent that is $550 a month light is value that is missing by a multiple of that.
| As you buy it | At market rent | |
|---|---|---|
| Rent roll a month | $5,750 | $6,300 |
| Net operating income a year | $37,040 | $42,056 |
| Worth at a 7% return | $529,142 | $600,800 |
| Cap rate at the $499,000 asking price | 7.42% | 8.43% |
| Cash-on-cash return | 4.50% | 8.87% |
| Debt coverage (DSCR) | 1.16 | 1.32 |
Net operating income is the rent left after the running costs and before the mortgage. Divide it by the return you want and you get what the income supports: $529,142 on the leases in place, $600,800 at market. That $71,658 is the number to carry into the offer, and it is the honest answer to a seller who prices the building on what the units could rent for.
Note what the table does not say. Even on the old leases, $529,142 is more than the $499,000 asking price, so the building clears a 7% return as it stands. The gap is the case for paying less, not proof the deal is bad. The apartment valuation post works through where a cap rate comes from in the first place.
Can you raise the rent after you buy?
Not while a lease is running at a fixed rent, and the date it ends is the date to put in your plan. Nine months at $275 under market on two units is $4,950 of rent nobody is going to collect, whoever owns the building.
What happens at the end of a term, how much notice is owed, and whether a local rule caps the increase are all state and city questions. Get them answered by an attorney where the building is before you count on a raise, because a plan that needs the rent up in month one is a plan with a legal assumption inside it.
When the raise does land, it is worth what the value-add post shows: income, not just rent. Going from $1,300 to $1,575 on two units is the same arithmetic run backwards, and it buys back the $418 a month and the $71,658 of value with it.
What should you check before the offer?
Price the rent you can collect, then look for what the leases hide.
- Every lease, in full. Rent, end date, who pays which utility, and any promise the old owner made about repairs or parking.
- A rent roll against the bank statements. The rent roll post covers what the document should show. Rent on paper that never lands in an account is not income.
- Deposits. What is held for each unit, and how it reaches you at closing. You will owe it back to the tenant eventually, so it belongs in the closing numbers rather than in your pocket.
- Concessions. A unit at $1,575 with one month free is really paying less, and the lease is where that shows up.
- Who has been fixing things. Deferred repairs arrive in your first year, and they come out of the same cash flow the old rent already shrank.
How do you run it yourself?
Open the multifamily calculator, set the unit count to four, and type each unit’s rent into the rent roll separately rather than averaging them. The averaged version hides exactly the thing you are trying to price.
Then set Vacancy rate, Utilities, Property tax and Insurance, leave Maintenance, CapEx reserve and Property management as shares of the rent roll, and put the return you want in the box marked Return you want. Read Monthly cash flow, Debt coverage (DSCR) and the line that says Worth at your 7% target. Run it twice, once on the leases you inherit and once at market, and the difference between the two is the discount to argue for. The multifamily analysis post walks through the rest of the inputs.