input on this quadplex

26 Replies

Hi BP, I am still trying to acquire my 1st buy and hold. I found a quadplex (4 units at 2 bedroom/ 1 bath each) that is in a C+ neighborhood.  Here are the numbers.  What do you think?
Purchase price: $69,000

$17,000 out of pocket cost to buy includes 20% down and $3,200 in closing costs. 
Property tax: $1600/ yr
mortgage: $3250/ yr
Repairs: (5%) $960/ yr
Vacancy: (10%) $1920/ yr
Insurance: $1800/ yr
I'll be my own property manager
Currently rented at $400/ unit/ month = $1600/month

20% cash down, financing 80% at 4% interest amortization over 30 years. 
Annual expenses: $9425
Annual income: $19, 200

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I think your repairs are too low. You should be at 10% for that and even though you plan to manage yourself you still need to figure 10% management because it's taking your time.

Thanks, Kyle for your input. Ok, so lets change those two numbers:


Repairs change from 5% to 25% (very conservative: worst case scenario): $4800
Property Management 10% (my time) $1920

Overall expenses $15, 290
Overall income    $ 19,200 
With these numbers, the property still cash flows $325/ month or $3910/ yr 

What do you think? 

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@Aaron Thivierge Sounds good go for it.  How long has it been on the market?  Are any of the units occupied?


Frank

Frank, thanks for commenting. On the market about 30 days.  All 4 units are currently occupied.

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hi Aaron,

I'm just wondering about how accurately you've assessed the neighborhood. I've only passed through Jacksonville a few times so I'm not familiar with the area, but over here in Tallahassee I would expect a quad in that price range to be in a much worse neighborhood than c+. The price seems extremely low for a quad to me. Thus, I'd be concerned about other things like delayed maintenance or whatever else would reduce the ROI.

Have you run any calculations yet like IRR? I've been reading Frank Gallinelli's book - What Every Investor Needs to Know About Cash Flow and 36 other key financial matters recently. It has shed some light on a few things for me. I am currently working on a flip that I init intended to use as a rental. I've decided to review that decision by way of statistical calculations to help determine the best disposition of the property before I finally sell it. I've just read througa second time, well, mostly anyway and plan to run numbers this week. If you haven't heard of it maybe check it ou.

David Clay , your words are true about assessing the neighborhood. This is one of the three areas that I am struggling with objectively qualifying vs. subjective interpretation. The other two ambiguities for me regarding REI are 1.) ARV assessment and 2.) repair cost.
I know if I get either of 1 or 2 wrong, the ship has sunk before leaving port.  

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How old is/are the buildings?  How long has the current owner held the property?

I'd second @David Clay comments about deferred maintenance.  In this price range, you have little wiggle room for capital expenses.  Think mechanicals you're supposed to depreciate - water heaters, stoves, A/C, plus roofing.  The current owner doesn't have much cash flow for these, so it's more likely to get deferred.  You'll have the same tight budget.  4 kitchens and 4 baths mean lots of stuff that wears out.  You'll often see "maintenance" and "reserves" as separate budget line items to accurately capture this distinction.

Other than that, keep in mind the opportunity cost on your $17k out of pocket.  Figure out what you could reliably make investing that elsewhere with minimal risk and give that some weight.  I do this by paying myself 8% interest on any money I put into a property as a separate budget line item.  This is your cost of capital.

That said, my experience is in a very different market, so I don't really have anything useful to say about this particular property at this price. 

Good luck!  For your first buy-and-hold, pull the trigger if you've analyzed it as best you can and you're no more than a little uncomfortable.  :)

Aaron,

I am here in the Jacksonville area, (Duval County), as an active R/E investor but I do only flips....no buy and holds. I am quite familiar with the various areas of town and would be happy to give you my thoughts on how I would rate the neighborhood in which you are considering. Send me a note with the general neighborhood and I'll tell you my thoughts and experience, (if any), regarding the area. 

Hi @Aaron Thivierge 

Couple questions/Considerations:

  • Who pays for utilities an how much? 
  • Condition of the property. It sounds like there may be deferred maintenance so make sure you account for Maintenance (10%) and Repair Rates (10%) as they will be most likely higher then what I indicated for the first year or two. 
  • How is your tenant profile and history? Long term tenants vs. Short term vs. month to month. How timely are the tenants with their payments? The numbers may look all good but if you have to constantly knock on the doors to get the rent the property can go from hero to zero pretty quickly
  • Account for PM - It seems you are doing that..Also speak to PM's in the neighborhood and see what they are charging and how the rent collections have been. If its a tougher neighborhood then some PMs might not even want to manage the property

Based on the numbers you have provided it looks like a good deal. Again please keep in mind I am not familiar w your local market trends and have no idea about the neighborhood  who are referring to so please do your due diligence and speak to local investors and PM's.

Good Luck

I don't really know what C+ means to you, so it's hard to gauge from that angle. 

But $400/month sounds like a pretty bad area to me (which might be what C+ means to you haha). I'd imagine either that grade is a little low or the rent is a bit low and you could inch up on that at the appropriate times. 

That said, sounds like the numbers will work out fine. The only thing you really need to think about is whether it's worth dealing with tenants in those neighborhoods, or if you have a good property manager who can take over if you so choose. 

Good luck!!

Justin R. , Craig Barnthouse, Azeez K. , Maxwell Lee : thank you all for your reply. I am having a conversation with the owner tomorrow. I will follow up with more details at that time.

I met with a realtor tonight about the area and specifically the property, and many of your concerns were validated. The area is more C- (optimistically).

I can not get feet on the ground and drive the streets until Tuesday.  Ill know more by seeing it personally. 
I wanted to run my numbers by you all 1st. If they made sense, dig deeper. 
Thanks again.  I am learning every day, both from BP and locals here in Jacksonville. 

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i second @Justin R.   @Azeez K.  

I bought a 5unit

I knew I needed a new roof... Bc I can see the sky!

I had calc worst case scenario of needing 70k deferred payment.  Renov of apt when current tenant moves. And putting in commercial tenants (build out)

My 5 yr plan, became a 5 wk plan. But since I had planned we are OK.

I have 3 new tenants at higher rent. Purchased tenant is an issue ;( still work in progress)

I'm 1 yr in and finally cash flowing.

I did a thorough inspection that was my saving grace. Prepared.

I did a rent analysis and my new rent rate was correct.

Most importantly, I had holding power! And had full control over the buildings decision process.

@Aaron Thivierge  One thing to look for is written lease agreement from each of the tenants.  Look for proof tenants are paying on time for the last 4 months.  A written and signed lease agreement will protect you in the future should you run into problems with the tenants.

Usually for someone to unload a cash flowing property is due to:

1.  To get rid of a problem

2.  Goofed up somewhere else and need money asap. e.g. divorce, medical bill, etc.

3.  To get money out and move on to the next better thing.


I think you should buy it as long as you are not dreaming up the ways you will spend that $10k of "profit".  Plan on spending a lot of that money on maintenance and understand that this first investment property is more like a class at the school of hard knocks than a quick way to up your income.

If you manage this one right you will probably make a good amount of money during the life of the property and if you learn from your mistakes on this one you will probably make a lot of money over the remainder of your life.

Think of the $17,000 down-payment as tuition 

Follow up: I just spoke to the owner. He also owns a local property management company.  His company manages this particular property. He owns about 45 properties personally and manages another 110.  Reason for selling: Freeing up money to buy other investments.
Utilities are 100% paid by tenants including water and electrical with separate meters for each.  The 4 tenants in place have all signed 12 month leases ending Sep, October, November and December of this year.  No month to month, 12 month leases only.  Current owner has owned for 2 years.  Roof has been repaired. No current leaks, but will need attention down the line...eventually (per seller). 
All rents are current, but he does have to stay on top of his tenants for timely payment. 
At $400/ month these units are always rented (per seller).  He describes this area and this investment as "higher risk area" but always cash flows.

Lots of more information...sounds like the neighborhood is not an area where I would live or put my friends or family.   Any thoughts? I am meeting the owner tomorrow at 930a.m. at the property. I intend to get there 30 minutes early to scout around, talk to folks, take pics, etc. 

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Sounds like the area might be a little sketchy.  The worse the area, the better the hypothetical numbers look but the less likely it is you will actually reach your projections.  The worse the area the more likely you are to have bad tenants, vacancies, unpaid rents, evictions, higher maintenance costs, etc.  so all of your projections are blown up and you own a money losing dog that is hard to sell.  This might be why the current owner is selling.  Periodically we have a property in our market come up that has projected numbers too good to pass up and they are always in less desirable areas.  I would personally take a lower, more reliable return in a better area.

i second @Ryan Ball  

I tried to give my client that same advise.

But said client decide that the return Out weigh the risk and that I have the luxury to "take lower, more reliable return" and she doesn't. I buy $200k she buys 20k

Fast forward 2 yrs, non paying tenants, on forth eviction. Boo-hoo calls me daily. Meanwhile she keeps buying more warzone. Not through me.

Meanwhile, I own stuff is cash flowing. My 8-10% return is more definite. Her 15-26% return is less bc section 8 is paying partial rent and tenant not paying their portion. Still work in progress. 

@Ryan Ball  

@Jennifer Lee  

 Thank you for your contribution and advise. Like I mentioned, I am still attempting to purchase my 1st buy and hold. This deal's location is a deal breaker for me.  Even though the education would be valuable, I don't want to tread down the C-/D path.  Numbers are there on paper, but the risk is too great. 

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A couple things you can look for when driving through communities to see if it's a suitable property.  Look at the vehicles parked on the streets or in front of the houses.  Do they look well maintained and look like newer vehicles?  Are there bars on windows?  Are there high fences in the front yard?  Every one has pit bulls?  Would you feel comfortable living there or would you put your family in the same building?  If you wouldn't live there, then you cannot "house hacking".  One of my co-workers lived in New Orleans and he could hear occasional gun fire in the night from where he lived.  It's not from gun ranges.  ;-)  

Here is a cool website that downloads Police's database for a particular area and put it on Google map.  Miami example.  http://www.spotcrime.com/fl/miami

Subscribe to alerts and look for places where assault or murder rates are low.  Good luck.

Originally posted by @Aaron Thivierge:

...  The 4 tenants in place have all signed 12 month leases ending Sep, October, November and December of this year.  No month to month, 12 month leases only.  Current owner has owned for 2 years.  ...


All rents are current, but he does have to stay on top of his tenants for timely payment.


At $400/ month these units are always rented (per seller).  He describes this area and this investment as "higher risk area" but always cash flows.

...

Those four leases all end at bad times of the year IMO, at least in my area. Would be better if they ended April, May, June and July. 

And this PM does not have much tenant history with the tenants already in there, with 2 years of ownership.  And the hassle factor on this seems high, so no way this is C or C+. And rents at $400 puts this at a point where you want to be getting rents a bit more than 2% of purchase price; since rents in the area are already set by the market, you would want to pay a little less. The seller's reason to free up cash for other investment = seller wants to buy something better :)

Still what area of the city is it in? I was born and raised in Jax and been all around from here to OP and back. From what I've found, most multifamilies are in low income areas where they're older buildings. Jax is mostly a single family home or apartment rental city. If it's a any#-plex, chances are it's in a bad neighborhood.

Originally posted by @Addison Perez :

Still what area of the city is it in? I was born and raised in Jax and been all around from here to OP and back. From what I've found, most multifamilies are in low income areas where they're older buildings. Jax is mostly a single family home or apartment rental city. If it's a any#-plex, chances are it's in a bad neighborhood.

 except for the trendy historic neighborhoods: Riverside, Avondale, San Marco. Springfield arguably...

Just a word of advice because I have been there.  You do not want your first investment to be a place where you are inheriting tenants you are going to have to chase down for rent like the owner has already told you.

It is worse than he is telling you.  I would not get involved with this deal just because of that fact.  It sounds like it will take you a while to get your 17k back as well.

Medium rzt hc 6483Michael Noto, SalCal Real Estate Connections | [email protected] | 860‑384‑7570 | https://www.zillow.com/profile/Mike-Noto/