negotiations on a 4 unit multifamily in Jacksonville, fl

Multi-Family and Apartment Investing
7yFollow

negotiations on a 4 unit multifamily in Jacksonville, fl

Aaron Thivierge
Investor · Jacksonville, FL · Member since 2014 · 172 posts · 73 votes

Good morning, BP. 
After closing last August on my 1st investment property, I have closed on another SFH rental. Both of these properties are doing great. I find myself now in discussion with an older owner of a 4 plex in a B+ area of Jacksonville, Florida. What is your take on these numbers?


Numbers: 

Purchase price $320,000
Closing costs ( buyer is paying all of closing costs w/ a $2500 credit from seller): $7500
Rents ( 2 are under market value, 2 are at market value): $750, $850, $1000, $1100: total: $3700/mo
Downpayment: (25%) $80,000
P/I: $1800/ month
Taxes: $550
Insurance:  $267/ mo
Garbage:  $140/ mo
Water:  $440/ mo
maintenance (5%): $185/mo
vacancy ( although none have been vacant in 10 years): 5%: $185/ month
Expenses total: $3567

**I know I can raise two rents from $750 to $850 and $850-$900 ( adding $150/month in revenue)
** My goal is to do SOMETHING w/ the water bill : $440/ month that the owner is paying seems ridiculously high to me.  I feel like I can cut that number in 1/2 to decrease expenses. 

Thoughts on this deal? 

2Reply
116 views

Most Popular Reply

Don KonipolBusiness Member
Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
7y

An investor who wants to maximize his or her potential net worth will pay a purchase price based on the current position of the property.  If he can increase revenues or decrease expenses, he should be the beneficiary of those changes, not the seller.  Almost every seller and buyer out there thinks that the subject property is not being run efficiently and money is being left on the table.  Some of this is that the energy level tends to decrease the longer you own a property, but some is also that additional costs are required to get the property up to potential.  Take for example the statement that “rents are below market and an easily be raised”.  In 95% of the cases, in order to substantiate aren’t increase the owner will have to (1) get rid of existing tenants, (2) invest in property rehab and repair (3) have higher maintenance costs to maintain the higher rent rates and (4) attract a financially better tenant.  These cost money in both direct costs and lost income.  Further, it is by no means a certainty that rents CAN be raised, let alone easily.  Even if other competing housing is rented for higher rates, the subject property may have some inherent deficiency that the market discounts.  For example it may be on the wrong side of the Freeway for access to major employment or shopping areas.  A discount of as much as 20% might be required to attract tenants if a similar property is available on the “right” side of the freeway.  Buy for what the income can be, but only pay for what the income is. 

Private Mortgage Financing Partners, LLC
WebsiteView Page
12Reply
See this reply in the discussion

37 Replies

Jump to latestLatest
  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    7y

    @Aaron Thivierge

    You’ll only get rich buying property at full market value if you buy in an area where property values undergo large and continuous increases. I don’t think Jacksonville will be one of those few areas. Either make an offer substantially below asking price or find a more motivated seller - or more mismanaged property. Everything seems to work until you need a new roof, or have a serious foundation problem occur. You need “cushion” for these unforeseen contingencies.

    Private Mortgage Financing Partners, LLC
    WebsiteView Page
    1Reply
  • Aaron Thivierge
    OP
    Investor · Jacksonville, FL · Member since 2014 · 172 posts · 73 votes
    7y


    @Don Konipol thank you for your reply. In summary, you are saying buying for the 'potential' in reducing expenses and raising rents is not a sustainable formula for cash flow but maybe acceptable for appreciation? 
    Noteworthy:  This quad will need a new roof in the next 18 months ( or sooner if the 4 point inspection for insurance reveals the age of the roof and insurance underwriter balks).  No leaks, just past her useable lifespan.  

    I learned through hours of BP reading and to satisfy my end goal of cash flow, not to purchase for appreciation or depreciation (these are bonus'), but rather buy for the cash flow/ revenue generating investment opportunity.  

    I should add that the selling price of $320,000 is for the 4 plex and 2 vacant maintained lots on the property that are zoned RLD so future building on the lot is an option.  Seller broke down the numbers as $300,000 for the 4 plex and $20,000 for the two empty lots w/ separate RE ID's. 
    To me there is no value in the lots.  They are liabilities ( insurance, taxes, maintenance).  

    2Reply
  • Aaron Thivierge
    OP
    Investor · Jacksonville, FL · Member since 2014 · 172 posts · 73 votes
    7y

    seller started negotiations at $440,000 for all three properties.  When we left our first face to face meeting, she agreed on $350,000. 
    The next day I offered $300,000 after reviewing the numbers. She came back with $320,000 or the deal is dead.  
    I need to separate the emotional aspect from the numbers and stick to my $300,000 offer.  Thoughts? 

    3Reply
  • James Bailey
    Flipper/Rehabber · Middleburg, FL · Member since 2017 · 57 posts · 34 votes
    7y

    Agreed. If the numbers are telling you that nothing over $300,000 will work, don't let ego change your mind.

    2Reply
  • Charles SoperPro Member
    Rental Property Investor · Merritt Island, FL · Member since 2015 · 253 posts · 178 votes
    7y

    So are the 4 units identical and rents just haven’t been raised equally or are the cheaper units smaller?  If the same size bringing all rents to market at $1100 give you an extra $700 a month.  Also, bill back the water AND install low flow toilets and faucets, ideally you could separate meters but that’s a capex expense that probably wouldn’t figure well into your numbers at purchase.

    0Reply
  • Aaron Thivierge
    OP
    Investor · Jacksonville, FL · Member since 2014 · 172 posts · 73 votes
    7y
    Originally posted by @Charles Soper:

    So are the 4 units identical and rents just haven’t been raised equally or are the cheaper units smaller?  If the same size bringing all rents to market at $1100 give you an extra $700 a month.  Also, bill back the water AND install low flow toilets and faucets, ideally you could separate meters but that’s a capex expense that probably wouldn’t figure well into your numbers at purchase.

     
    The units are not identical. The N and S units have a fireplace and an extra 1/2 bath downstairs. 
    These two units are 2 bedrooms upstairs, full bath upstairs and 1/2 bath downstairs. 

    The two middle units are 2 bedroom upstairs and 1 full bath upstairs. 

    Fair market rents for both "outside" units is $1100/ month.
    The middle units should rent for $950 to $1000/ month. Total rents SHOULD be $4100/ month. 

    One of the middle units has had the same tenant for 39 years, and she pays $750/ month. 

    The other units have had the same tenants for 7 years, 3 years, 2 years.  

    Needs a roof. But, no other repairs ( per the seller). again, the roof is not damaged or leaking, just beyond her useable lifespan. 

    Is $300,000 too high w/ the under market rents and the excessive water bill ? 

    I do my own property management and always will: it's just my nature. The lawn care I would also do myself ( this property is 0.5miles from my primary occupancy). 

    1Reply
  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    7y

    An investor who wants to maximize his or her potential net worth will pay a purchase price based on the current position of the property.  If he can increase revenues or decrease expenses, he should be the beneficiary of those changes, not the seller.  Almost every seller and buyer out there thinks that the subject property is not being run efficiently and money is being left on the table.  Some of this is that the energy level tends to decrease the longer you own a property, but some is also that additional costs are required to get the property up to potential.  Take for example the statement that “rents are below market and an easily be raised”.  In 95% of the cases, in order to substantiate aren’t increase the owner will have to (1) get rid of existing tenants, (2) invest in property rehab and repair (3) have higher maintenance costs to maintain the higher rent rates and (4) attract a financially better tenant.  These cost money in both direct costs and lost income.  Further, it is by no means a certainty that rents CAN be raised, let alone easily.  Even if other competing housing is rented for higher rates, the subject property may have some inherent deficiency that the market discounts.  For example it may be on the wrong side of the Freeway for access to major employment or shopping areas.  A discount of as much as 20% might be required to attract tenants if a similar property is available on the “right” side of the freeway.  Buy for what the income can be, but only pay for what the income is. 

    Private Mortgage Financing Partners, LLC
    WebsiteView Page
    12Reply
  • Chase Louderback
    Real Estate Agent · Luray, VA · Member since 2016 · 459 posts · 293 votes
    7y

    Hi @Aaron Thivierge

    Could you increase all units to the $1,100 or is size, layout or something else preventing you to doing so?  If you could raise all the rents to the $1,100 mark and then maybe the second year establish either a billback for water or charge a flat fee rate for water then how would the deal look?  

    Be sure to check out some comps on market rental rates and how water is currently being applied to rentals in the market.  Is water included and competitor's rent the same?  Are other rentals billing back?

    0Reply
  • Aaron Thivierge
    OP
    Investor · Jacksonville, FL · Member since 2014 · 172 posts · 73 votes
    7y
    Originally posted by @James Bailey:

    Agreed. If the numbers are telling you that nothing over $300,000 will work, don't let ego change your mind.

     Ego like emotion? I don't think you are using that term correctly.  This property acquisition has nothing to do with my self esteem or self importance.  But, I agree w/ sticking to the numbers. 

    1Reply
  • Aaron Thivierge
    OP
    Investor · Jacksonville, FL · Member since 2014 · 172 posts · 73 votes
    7y
    Originally posted by @Don Konipol:

    An investor who wants to maximize his or her potential net worth will pay a purchase price based on the current position of the property.  If he can increase revenues or decrease expenses, he should be the beneficiary of those changes, not the seller.  Almost every seller and buyer out there thinks that the subject property is not being run efficiently and money is being left on the table.  Some of this is that the energy level tends to decrease the longer you own a property, but some is also that additional costs are required to get the property up to potential.  Take for example the statement that “rents are below market and an easily be raised”.  In 95% of the cases, in order to substantiate aren’t increase the owner will have to (1) get rid of existing tenants, (2) invest in property rehab and repair (3) have higher maintenance costs to maintain the higher rent rates and (4) attract a financially better tenant.  These cost money in both direct costs and lost income.  Further, it is by no means a certainty that rents CAN be raised, let alone easily.  Even if other competing housing is rented for higher rates, the subject property may have some inherent deficiency that the market discounts.  For example it may be on the wrong side of the Freeway for access to major employment or shopping areas.  A discount of as much as 20% might be required to attract tenants if a similar property is available on the “right” side of the freeway.  Buy for what the income can be, but only pay for what the income is. 

     Brilliant! words to live by in an investors world. Very articulate. Thank you for this reply. It is invaluable. 

    1Reply
  • Carolyn Morales
    Investor · Jacksonville, FL · Member since 2015 · 504 posts · 217 votes
    7y

    I think it depends on the location of the B quad in Jacksonville. It is not accurate to generalize Jacksonville as an unappreciating market as there are 30 zip codes here. What zip code are you talking about? Could it be Riverside? Avondale? Murray Hill? 32205? 32210? What is the zip code? 

    Also ,I know plenty of builders who would build on the 2 lots depending on the zip code and area. 

    1Reply
  • Mike Wood
    Developer · New Orleans, LA · Member since 2015 · 1k+ posts · 898 votes
    7y

    @Aaron Thivierge I think that fact that you are not accounting for any maintenance, lawncare, capex or management cost is making the deal look much better than it is. If you factor in these costs, the Cap Rate (not exactly a perfect fit as a 4 plex would be valued based on sales comps, not Cap Rate) would be very low, like 6.1. Additionally, even assuming rents go up to $4100/month, your expenses are likely to be over 50% when you include maintenance (5%), Capex (5%), lawncare (2%) and management (8%). Adding these costs in, and you are negative on cashflow.

    The empty lots would be very intriguing to me if the area can support new construction.  But if your buy a 2/1 & 2/1.5 fourplex for $300,000, the value is likely in the $80-90/ft2, so it likely will not support new construction, if this is the case, the lots are more of a liability, although there may be other uses (putting storage sheds on them and renting storage space for your tenants, parking etc.)

    0Reply
  • James Bailey
    Flipper/Rehabber · Middleburg, FL · Member since 2017 · 57 posts · 34 votes
    7y

    Sorry @Aaron Thivierge, it was a reference to Bigger Pockets podcast 303. I should have mentioned that. Lol

    0Reply
  • Aaron Thivierge
    OP
    Investor · Jacksonville, FL · Member since 2014 · 172 posts · 73 votes
    7y
    Originally posted by @Carolyn Morales:

    I think it depends on the location of the B quad in Jacksonville. It is not accurate to generalize Jacksonville as an unappreciating market as there are 30 zip codes here. What zip code are you talking about? Could it be Riverside? Avondale? Murray Hill? 32205? 32210? What is the zip code? 

    Also ,I know plenty of builders who would build on the 2 lots depending on the zip code and area. 

     32210 Ortega. I agree with you, Carolyn. Rents will continue to rise in this area for so many reasons. 

    At current rents and assuming $100/ ft to build a new 4plex comparable to the current units,  it isn't  profitable to build on these two lots in the current market, in my opinion. 

    0Reply
  • Aaron Thivierge
    OP
    Investor · Jacksonville, FL · Member since 2014 · 172 posts · 73 votes
    7y
    Originally posted by @Mike Wood:

    @Aaron Thivierge I think that fact that you are not accounting for any maintenance, lawncare, capex or management cost is making the deal look much better than it is. If you factor in these costs, the Cap Rate (not exactly a perfect fit as a 4 plex would be valued based on sales comps, not Cap Rate) would be very low, like 6.1. Additionally, even assuming rents go up to $4100/month, your expenses are likely to be over 50% when you include maintenance (5%), Capex (5%), lawncare (2%) and management (8%). Adding these costs in, and you are negative on cashflow.

    The empty lots would be very intriguing to me if the area can support new construction.  But if your buy a 2/1 & 2/1.5 fourplex for $300,000, the value is likely in the $80-90/ft2, so it likely will not support new construction, if this is the case, the lots are more of a liability, although there may be other uses (putting storage sheds on them and renting storage space for your tenants, parking etc.)

     You are correct in all these thoughts. I did however account for expenses as maintenance (5%)
    1.) the numbers:  P/I, T, I, maint, water, garbage: These are my absolute expenses every month: These are what I need to work on to get lowered for overall profitability.  If I add in property management, lawn maintenance, capX, then I'm at another $296, $100, $185: $581. Total expenses $2073/ mo.
    PITI: $2331 TOTAL: $4404/ month ( -$700/ mo). The numbers make this deal dead for me. If I remove PM and LM, vacancy it's move favorable. Even more so when I get the water bill down and rents up. This is speculation.

    2.) Building is not an option at this time because of your calculations. I got even higher numbers as I used $100/ sq ft for building new.  

    3.) The sheds: this is what I thought of too.  I could consider building a 4 car garage and lease spaces out to tenants. They could be individualized as either vehicle or possessions storage: $100/ month each. Then have a split finished studios up top: 1/1 or a longer/ larger single 2/1. These are thoughts I have considered. 

    But, if the numbers don't make sense, then everything else is mute: appreciation, future best use, etc.  
    Thank you for your thoughts on this property. 

    0Reply
  • Aaron Thivierge
    OP
    Investor · Jacksonville, FL · Member since 2014 · 172 posts · 73 votes
    7y
    Originally posted by @James Bailey:

    Sorry @Aaron Thivierge, it was a reference to Bigger Pockets podcast 303. I should have mentioned that. Lol

     10/4 I need to start listening to them again. I think I left off in the early 100's.. it's been a while since I heard a BP podcast.  

    0Reply
  • Michael Ealy
    Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes
    7y

    I acquired over 1,000 apartment units so based on my experience, this does not seem like a good deal. You got to buy it at a lower price than $320,000 - maybe $280,000.

    Also, can you find out IF you can submeter the water and have the tenants pay for it? Is that common practice in that market? If the answer is NO, your water bill might stay at $440/month while allowing you to increase the rents. 

    It will be very difficult to pass on the water to the tenants AND at the same time increase the rent.

    1Reply
  • Carolyn Morales
    Investor · Jacksonville, FL · Member since 2015 · 504 posts · 217 votes
    7y

    @Aaron Thivierge,

     I sold an rld lot for 65k east of 17.. I know who would buy and build on those lots if they are Rld or RmdA east of US 17  in 32210

    0Reply
  • Carolyn Morales
    Investor · Jacksonville, FL · Member since 2015 · 504 posts · 217 votes
    7y

    @Aaron Thivierge

    What is the zoning on the lots Rld, Rmda, Rmdb, etc?

    0Reply
  • James Bailey
    Flipper/Rehabber · Middleburg, FL · Member since 2017 · 57 posts · 34 votes
    7y

    Also, this may be a viable option for you. To help with the water issue.

    https://truesubmeter.com/biggerpockets/

    0Reply
  • Oleg Shalumov
    Rental Property Investor · Teaneck, NJ · Member since 2016 · 567 posts · 291 votes
    7y

    @Aaron Thivierge I would also add CapEx to the expenses as you way need to change a boiler/heater/roof at some point.

    0Reply
  • Patti Rosepiler
    Realtor · Jacksonville, FL · Member since 2017 · 71 posts · 26 votes
    7y

    @Aaron Thivierge, if the numbers on that one don't work, I think I saw a quad in Orange Park for $220,000.   

    0Reply
  • Ryan D.
    Rental Property Investor · San Jose, CA · Member since 2013 · 188 posts · 228 votes
    7y

    @Don Konipol

    “Buy for what the income can be, but only pay for what the income is”.

    Great statement Don - there’s a wealth of wisdom condensed into a single sentence!

    I’m gonna have to steal that one.

    2Reply
  • Patrick Soukup
    Rental Property Investor · Fort Collins, CO · Member since 2015 · 273 posts · 127 votes
    7y

    @Aaron Thivierge this deal is very slim. It sounds like you’ve got a couple rentals and are getting experience operating properties. That said, do you have all the systems in place a PM would have? Credit checks, background checks, online bill pay, maintenance request portals? It would only take one bad tenant, one eviction or missed “leaky” shower faucet for you to start spending thousands in attorney fees/lost rent/maintenance. There is something to be said trial by fire, and I can attest I was very lucky for the first couple of years, but I had training as a PM and learned how to operate properties properly.

    You will have all the energy in the world at the beginning and will be willing to pick up rent checks, unlock tenants when they lock themselves out etc etc, but that too will drain you.

    Good luck on your decision! I think you can find better though.

    0Reply
  • Joel F.
    Developer · Santo Domingo, Distrito Nacional · Member since 2016 · 121 posts · 53 votes
    7y

    @Aaron Thivierge Good Deal! Like you said in that water bill is something to investigate it will eat up all your profits.

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free