negotiations on a 4 unit multifamily in Jacksonville, fl

Multi-Family and Apartment Investing
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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? 

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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. 

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  • Ahmad H.
    Rental Property Investor · New York, NY · Member since 2013 · 136 posts · 101 votes
    7y

    @Aaron Thivierge Your P&I seems too high at $1800 for 240k (320-80) loan. Is this a 30 yr fixed? What's the interest rate? At 5.5 or even 6% your P&I should be ~1400.

    Also water $440/mo is absurd, unless water in Jacksonville FL is very expensive. Do you know how many gallons are they using? How many people are living there? I would call the water company and find out average usage for the area or at least usage history to see if this is a recent increase.

    I would also look into how much rehab is needed to get market rents for the other 2 units and add that cost along with lost income during rehab to purchase price and figure out your CoC, ROI, ROE, and MIRR if you have an idea of when you'd refi or sell.

    0Reply
  • Simon Collins
    Rental Property Investor · Saint Augustine, FL · Member since 2018 · 102 posts · 58 votes
    7y

    Water doesn’t seem that crazy to me especially if there is a lawn getting irrigated included in that number.

    I recently bought a home last year.  Your typical small yard suburban home and my first water bill was $350.  Just my wife and I and our 2 toddlers.

    Had a well drilled for irrigation and the bill hasn’t gone over $55 per month since.

    So maybe $60 per unit seems more reasonable but if that number includes and irrigation that for sure is where the problem is.

    Anyway. 

    Peace

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

    @Aaron Thivierge

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

    zoned RLD 

    I spoke to the seller yesterday, thanked her for the dialogue we had and respectfully declined to pursue this property any further. Thank you BP for all the words of wisdom.  I poured a lot of energy and time into this deal over the past 5 weeks, but it's time to walk away. I agree: the margins were too thin for this deal to cash flow continuously

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

    @Aaron Thivierge Your P&I seems too high at $1800 for 240k (320-80) loan. Is this a 30 yr fixed? What's the interest rate? At 5.5 or even 6% your P&I should be ~1400.

    Also water $440/mo is absurd, unless water in Jacksonville FL is very expensive. Do you know how many gallons are they using? How many people are living there? I would call the water company and find out average usage for the area or at least usage history to see if this is a recent increase.

    I would also look into how much rehab is needed to get market rents for the other 2 units and add that cost along with lost income during rehab to purchase price and figure out your CoC, ROI, ROE, and MIRR if you have an idea of when you'd refi or sell.

     Thank you for your thoughts.  The loan was 5.5% with 25% down amortized over 20 years. taxes are $6200/ year and Insurance is $3200 year.  

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

    Water doesn’t seem that crazy to me especially if there is a lawn getting irrigated included in that number.

    I recently bought a home last year.  Your typical small yard suburban home and my first water bill was $350.  Just my wife and I and our 2 toddlers.

    Had a well drilled for irrigation and the bill hasn’t gone over $55 per month since.

    So maybe $60 per unit seems more reasonable but if that number includes and irrigation that for sure is where the problem is.

    Anyway. 

    Peace

     Your waterbill at $350/ month for a family of 4 seems crazy high... I wonder if you have an irrigation leak.  My primary occupancy which we just sold had an irrigation system. I have 3 children under 6 years old, 5 bathrooms...and my water bill never went over $128/ month in 5 years of ownership. 

    This particular property has no irrigation system installed: it's all tenant consumption. I feel like there was a leak somewhere on this property when I compare other multifamily water bills in the area which are 50% less than this property's bill.  

    Thanks for taking the time to reply.  

    0Reply
  • Simon Collins
    Rental Property Investor · Saint Augustine, FL · Member since 2018 · 102 posts · 58 votes
    7y

    @Aaron Thivierge

    No leak (to my knowledge) it is a newly constructed home.

    But after I got the well drilled for irrigation water hasn’t been over $60/month yet so I will pin it on that.

    0Reply
  • Wesley WhiteheadPro Member
    Rental Property Investor · Depends on where my employer sends me · Member since 2018 · 171 posts · 142 votes
    7y

    @Aaron Thivierge not terrible if you can raise the get at least another $400 in rents

    0Reply
  • Account Closed
    Rental Property Investor · Sacramento, CA · Member since 2015 · 1k+ posts · 893 votes
    7y

    @Aaron Thivierge major agreement here with @Don Konipol

    And even though you can't get rich of market value in most places, there are still places where you can cash flow at market value. If your market of choice isn't one of those, then seek better deals for sure.

    This deal is a numbers nightmare. Your maintenance budget is way too low. I would budget a minimum of 10% for a STABLE property. For first year ownership with inherited & under market tenants it very well could end up being higher. even at market rents and a 10% repair budget you're looking at $350/mo cash flow... 4200/yr on an 87500 investment. That's a little lower than a 4.8% cash on cash return, and that's without you paying yourself for property management (should be factored in at 8% of rents regardless of whether you manage it or not.

    Online savings accounts have 2.2% interest without you having to manage the property. Good index funds offer you 9% average long term returns. They're a lot less work than owning and self managing a property! Why not? 

    2Reply
  • Matt P.
    Investor · Columbus, OH · Member since 2015 · 625 posts · 601 votes
    7y

    No comment on what I think of the deal but @Don Konipol is dropping some knowledge BOMBS in this thread. Good info Don.

    0Reply
  • Skip DellPro Member
    Investor · Vineland, NJ · Member since 2016 · 69 posts · 19 votes
    7y

    @Aaron Thivierge I didn't see any percentage for Capex.. What kind of shape is it in ?

    0Reply
  • Kevin Pereira
    Member since 2018 · 46 posts · 5 votes
    7y

    @Don Konipol thank you!

    0Reply
  • Kevin Pereira
    Member since 2018 · 46 posts · 5 votes
    7y

    @Ryan D. Don killed it on this thread!

    0Reply
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