Buying a Plex: Rental Income, Expenses and Financing

Rebuild the income from the leases

A plex's income is proven, not announced. Request each unit's signed lease and compare them with the sales sheet. Gaps of several thousand dollars a year are common: hoped-for rents instead of actual ones, vacant units counted as rented, imminent renewals with contested increases. Note each lease's end date and exact rent, then subtract a realistic vacancy allowance, for example one month per unit every two years. Also check who pays heat and electricity. In a building with utilities included, the gross income hides expenses. The resulting figure, lease income minus vacancy, becomes the only basis for every calculation that follows, from cash flow to the offer price. Any analysis built on the advertised number inherits its optimism.

Price the expenses the sheet leaves out

Sales sheets display the taxes and often stop there. The complete picture includes rental-building insurance, noticeably costlier than a residential policy; routine maintenance estimated at about 1% of value per year; snow removal and lawn care; and a repair reserve for the roof, balconies or furnace that will eventually give out. Add a management provision even if you self-manage. Your time collecting rent, showing units and answering emergency calls has value, and the day you delegate, the expense becomes real. Line these figures up beneath the cautious income. Many buildings with advertised positive cash flow turn red at this step, before financing even enters the picture. Only a building that stays positive here is worth financing.

Understand the lender's rules

Financing a plex follows rules of its own that depend mainly on occupancy. A building where you will live in one unit finances with a smaller down payment than a fully rented one, but the lender will count only a fraction of the rents toward your qualification, using its own calculation method. Ask precisely: what percentage of rental income enters the calculation, and how is the owner-occupied unit treated? The answer determines the amount you can actually borrow, often far from what the gross income suggested. Get a preapproval based on the target building rather than your salary alone, and keep the purchase offer conditional on financing as well as on lease verification. The ceiling comes from the lender's arithmetic, not the seller's.

Test the worst quarter before signing

A plex that is profitable on paper must survive its worst quarter: one unit empty for three months, a tax increase, a water heater and a balcony in the same year. Simulate that scenario with your cautious numbers. If the mortgage payment then requires your credit card, the price is too high or the reserve too thin. Set the maximum price that keeps the bad scenario absorbable, and fund the repair reserve before taking possession rather than after the first emergency. Also anticipate rent variation across renewals and the work that increases depend on. A building that passes this test at your price is an asset. One that passes only at the seller's price is a bet. The test costs nothing but an evening.

Checklist

• ✓Obtain the signed leases and compare them with advertised rents
• ✓Subtract a vacancy allowance from the income
• ✓Price taxes, insurance, maintenance and a repair reserve
• ✓Verify the down payment required by occupancy
• ✓Ask what fraction of rents counts toward qualification
• ✓Test the cash flow with one unit empty for three months
• ✓Set the maximum price from the math, not the listing
• ✓Keep the offer conditional on lease verification
• ✓Fund the reserve before taking possession