Midtown Atlanta Multi - How Did We Do?

Question

Hello BP

I would love for some more experienced REIs to have a look at the details of a recent purchase my partner and I just completed and give us your thoughts on how you think we did.

THE PROPERTY

The property is a 2 story 4-unit brick multifamily with a basement in Midtown Atlanta. The units each have identical floor plans with 856 sq ft of living space and screened in patios. The property includes a fenced-in back yard and an adjacent parking lot for off-street parking partitioned for 9 cars. The property is a double-lot on a street of single-lot SFRs and MFRs. This provides for the potential to develop what is currently a parking lot into a second income property (long-term goal).

THE PURCHASE

We paid $119k (25% down on a 30yr fixed @ 4.75%) on a purchase price of $476k. This was negotiated down from the $565k asking (it was flat out over priced).

The seller covered all closing costs, reimbursed all of our prepaid items (appraisal, home inspection, land survey, etc.), and covered some of our first year expenses (insurance, termite re-treatment and warranty).

THE INCOME - $3820/month

3/4 units is currently renting at $910. The 4th is at $940.

4/9 of the parking spaces are provided for the building tenants to park 1 vehicle each gratis.

3/9 parking spaces is currently rented at $50/month (charged quarterly) to a neighboring building's tenants who want off-street parking. The remaining 2 spaces are not currently rented.

THE EXPENSES - $3447.32/month

Mortgage - $1862.28/month

Utilities - $387.45/month - I'm starting to recoup water by billing back to the tenants with the new leases. This will reduce this figure by $200/month.

Taxes (City/County/Solid Waste) - $548.94/month

Insurance - $98.50/month

Other Expenses (Vacancy/Repairs/Maintenance/Services) - $550.15/month

BOTTOM LINE

What it looks like now is that before we even bring this property in line with the rest of the neighborhood and up to its full potential, we're already looking at a cash flow of $93.17 per unit per month. Our expectation based on increasing rents (the property is already below neighboring properties in the market) and billing water back to the tenants (something many other properties in the market already do) is that we can push that number to  $208.17 per unit per month by this summer when 3/4 leases turn over and $230.67 per unit per month after.

CONCLUSION

I feel like the rules of thumb (50% and 1%) would have lead some investors to walk away from this listing so I'm curious to know how the community feels about it now that all the cards are on the table.

Ali Boone · Answer

Well I think everyone has good points, but they are better points to look at going into a deal, not for an analysis of an already-purchased deal which is what you are asking for.

As far as the already-purchased deal goes, this one, I actually think you didn't do half-bad (and trust me, I'm usually quick to criticize). There are some good points and some caution points about this one.

The main good point about this one, and the one that is most important above all, is you are positive cash-flowing. At the end of the day, that's all that matters. Even without the intended improvements, you are in the positive. That's excellent, and actually fairly impressive for a multi-family in Midtown. That alone constitutes a win. And just in hearing how you talk, I really do believe you can make those improvements happen. Not everyone could, but I think you can.

Another thing I have confidence in is that you likely will have a way with the tenants that will help out with one of my caution points about this property. That point being, the closer that property is to Ponce, the rougher your tenants are going to get (there is a drastic and quick progression of tenant quality between 10th and Ponce). That is okay, but what it means in order for you to secure your investment is you have to extremely diligent on tenant selection. Bad tenants will kill your investment. Not only do you have to do incredible screening to let them in initially, you then need to be diligent monthly about making sure everyone is behaving. That is the part I for some reason think you might be good at. If you can keep good tenants, you will avoid the issue of Fulton County evictions which is just as Joel says.

If you do all of that and keep everything running smoothly, you should stay in the positive. And especially with those improvements, you will see even nicer cash flow.

Here's the only downside to the whole thing, and more something to consider for future buys. Just running the numbers super fast, I come up with a 0.9% cap rate and a 3.6% cash-on-cash return, ballpark. This is insanely low. The reason it's so low is because of how much you paid for the property. As a reference, if I were to go to Atlanta right now and buy a house in great condition with tenants but more in the suburbs, I would easily be looking at a 5-9% cap rate and those cash-on-cashes could end up being anything from about 10-15%. And that would be for a single-family house which means better tenants and better exit strategy, maybe in the $100-150k ballpark. So in theory you could have bought 4 of those houses for the same price you paid for the 4plex and just about quadrupled your returns.

I think you did good. Just for the fact that you are in the positive as a new investor is great, most aren't. I'd love to hear how it continues! For the next purchase, I would focus on learning more about the numbers so you can really learn to maximize the returns. Numbers get quirky of course if you are set on a place like Midtown, in which case I would say you did fantastic. But if you are just looking for returns, I'd say look in a couple slightly different directions.

Joel Owens · Answer

I personally do not like anything in Fulton county. Simply because when you go to evict the Marshalls office is always behind and sometimes has thousands of writs to serve that month. Atlanta cut back on their staff due to budget issues.

So when you go to evict it's supposed to be 30 days but I have seen 3 to 4 months before. The hope is when the writ is filed before the Marshall comes that is enough to scare them to leave. The tenants do not know sometimes it can be another 4 to 5 weeks before the Marshall comes for the eviction.

I also do not like "talking yourself into deals". This is where you say the deal is marginal enough but if I do this and this then it will perform well. I like it to hit metrics going in and the other stuff is icing on the cake. I wouldn't want to push rent rates as it creates turnover and with long eviction times you can lose a lot of money. I like to stay middle of the pack in rents but increase each year. You get the most yield while not becoming overpriced and obsolete making them want to move elsewhere.

Anything 2 to 4 units in Atlanta is just way overpriced to me. Market rents and prices are much higher with lower caps. Any kind of correction or mini-bubble with rents drops and you are breaking even on cash flow at best. I like suburban counties part of the MSA area. You tend to not get all the rift raft that is in Atlanta  junking up the court system and delaying evictions. Cost per door is much cheaper and eviction is very fast. Fulton county has some of the highest water rates in the country almost increasing by 50% in the last about 5 years or so.

The 2 to 4 units you will get buyers who pay on living in one of the units and renting the others. Some areas in Atlanta in town people are paying 5 to 6 caps. It's just nuts to me personally and I do not see the draw. They are banking on rent growth and appreciation to make the property a winner. I don't like speculatory investment because of all the things that can go wrong.

I do commercial real estate and I see buyers buy things I would never go for so everyone has a different plan in life.

Basically control your water, and your evictions, and turnover to keep your purchase making money. All the best.

Colin G. · Answer

I appreciate all the tips and encouragement.

@Sebastian Baker The language in 1 of the 4 existing leases does read to allow billing back to the tenant for the cost of any utilities paid by the landlord on behalf of the tenant. DISCLAIMER: I'm not a lawyer, but I imagine this language could be used to justify billing back some pro-rata share of the water bill back to this particular tenant - even with the knowledge that the tenant has never previously been charged back for water since there is a "No Waiver" provision. I definitely wouldn't do that though. I've just been up front with the current residents that, looking at the market, it seems that not a lot of property owners in the area are covering water anymore and that I plan to join that shift and bill them for their use.

@Rick Baggenstoss Given the high original price on the property, it was actually the second lot that even made us stop and run the numbers to figure out what we make this a deal for us. When we had our number - based on the purported income/expenses on the place (which it turned out during our due diligence period were much rosier than reality) - we just threw it out there. We're looking at the lot as chickens we might be able to count later.

@Jimmy Moncrief We actually targeted this place because we knew it had been listed for a very long time (more than a year and a half if I remember correctly) with no movement and we were just hoping the seller was ready to finally come down. It doesn't seem like there's much turnover in the MFRs in this area but when there is, we understand they get snatched up pretty quickly so in spite of the original price this one caught our eye simply because over time it just kept popping up until we decided to run some numbers and just swing for the fences (compared to asking) with our offer.

Rick Baggenstoss · Answer

I suspect you'll do well with the property.  $120k/unit is pretty pricey for Atlanta, but it's Midtown so you can't do much better on location.  If they were condos, they'd go for $200k+

The real icing on the cake is the second lot in the great location.  If you can get another building in and provide ample parking for both, then this is a *great* deal.

Congrats on closing!

@Joel Owens All metro counties have cut staff and are slow to evict.

Rick

Siye Baker · Answer

Are you able to enforce the back billing of water without having the tenant sign a new lease?  Just asking because I think that was a great idea. I would never offer free utilities. And the use of parking spaces was a nice touch as well. Cheers

Colin G. · Answer

Account Closed

@Brandon Hicks Getting your cash out of a deal as soon as you can sounds like great tip - quickly free up your money to work for you on another deal. I'm still getting a bit of an education on this stuff, but that has primarily seemed like the foundation of the fix/flip type investors to me (not to say buy-and-hold folks don't care about how much money they tie up).

Account Closed · Answer

Where is it in Midtown? Are the units all 1/1? You shouldn't have trouble keeping it rented, but you obviously paid for that in lower cap rate. Tough to see any appreciation buying a fourplex at that price point.

Jonathan K. · Answer

@Ali Boone

Minor point of clarification: I think his cap rate is 5.6%. NOI of $26,819.52 and purchase price of $476,000.

@Colin Gillens

As to how richly priced the deal is, I'm unfamiliar with that area and what is appropriate. Regardless, best of luck with your new property.

Ali Boone · Answer

@Jimmy Moncrief

I don't personally own any multis but the ones I work with are similar in style and tenant-quality, but not in the more primo areas of the big cities. The prices are a lot less and would be looking at about 10% cap rates. But that is of course in exchange for area type.

Jimmy Moncrief · Answer

@Colin Gillens - sounds like a great deal.  How did you get it?

@Ali Boone - are these the type of deals you have in multifamily?

Midtown Atlanta Multi - How Did We Do?

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