negotiations on a 4 unit multifamily in Jacksonville, fl

[Aaron Thivierge]

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? 

[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.