Real Estate Investing Basics

I Just Bought 26 Properties at Once—Here’s What You Need to Know About Purchasing Portfolios

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Buying portfolios of properties has become one of the most effective ways to grow our business. Recently, we added 26 doors spread throughout the Kansas City metro. This deal included 22 houses, three duplexes, and a fourplex. And when I say “spread throughout,” I mean it.

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The package included a house in Pleasant Hill, Missouri (a small “exurb” outside the city limits), as well as another in Kansas City, Kansas—which are almost an hour apart. It also included houses in Kansas City, Missouri, north of the Missouri River, and in Peculiar, Missouri (a southern exurb), which are about 35 miles away from each other.

(Indeed, about half of our units have come from the acquisition of portfolios of properties—mostly single-family houses—which led me to write a short how-to guide on the topic. You can also check out breakdowns on the other portfolio deals we’ve purchased, including nine houses, 17 condos, 41 houses, and the 97-door deal that kept me awake a few nights.)

One nice part about Kansas City is that there is very little traffic. One not-so-nice thing is that it is sprawled like crazy. This is, of course, a disadvantage of portfolios in general. Buying many houses or small multis means you have to do offsite management and drive more. Generally speaking, this is more of a challenge than onsite management like you would have at an apartment, where everything is consolidated and a maintenance tech can walk to his next job instead of driving 30-45 minutes.

At the same time, being spread out also reduces risk by diversifying the areas you’re in. If, for example, a factory closes near one of your properties, it’s not that big of a deal if you have a bunch of properties spread out all over town. On the other hand, if a factory closes next to your one-and-only 100-unit apartment complex, that could be a serious problem.

Finding Deals: The Power of Networking on BiggerPockets

One of the best ways to find properties (or banks, contractors, private lenders, etc.) is by networking. And BiggerPockets is one of the best places to network.

I met the seller on BiggerPockets before he was even looking to sell. I told him about our business, and I believe I had mentioned some of the previous portfolios we had bought. Naturally, when he and his wife decided to sell, we were one of the first groups they contacted.

You may not be looking to buy a large portfolio—or any sort of portfolio—right now. But regardless, I hope this still illustrates the importance of networking. As they say, “It’s not what you know, it’s who you know.”

So, get out there and get to know some people. Get active on BiggerPockets, attend your local REIA, and perhaps a few other groups like CCIM, IREM, your local Chamber of Commerce, other real estate or entrepreneurial meetup groups, etc.

Analyzing Deals: The Right Way to Evaluate a Portfolio

As I noted in my article on buying portfolios, when evaluating such deals, there are two things you need to look at carefully:

  1. Analyze portfolios based both on their cash flow and actual value. I evaluate the cash flow based on the previous 12 months of operating history and creating a pro forma. I want to make sure the portfolio will cash flow at a 1.2 debt service coverage ratio and bring in at least $100 (and preferably $200) a month per house.
  2. Analyze the values of each property. I do this by either going through a data tape (a list of each property in Excel and their key specifications like bathrooms, bedrooms, and square footage) and put down my estimated price based on my knowledge of the area and/or the Zestimate from Zillow.

It can be particularly helpful to use Zillow Zestimates to see if the properties in areas you are unfamiliar with are priced reasonably. (For example, I knew very little about Peculiar.) But don’t’ rely on the Zestimates, they are only a ballpark estimate.

If the portfolio does look interesting, make sure to comp each and every property. Although up front, you can do a “quick and dirty” comparative analysis. You don’t need to be particularly detailed until you get closer to signing on the dotted line. It’s just not worth your time to do an in-depth CMA on 26 properties when you have no idea if the deal has any potential yet. In the same vein, it makes no sense to walk all 26 (and the seller would never agree to this) until after you have the properties under contract.

Related: How to Determine a Property’s Value Using Real Estate Comps

For that reason, buying portfolios is a bit tricky—you are not going to be able to see every property before making an offer. I make sure to view a couple and look over all the pictures. I also ask the seller to show me the worst ones. Then I list out my assumptions in my offer and tell them to “correct me if I’m wrong.” This way, I can point back to these assumptions if we find something amiss during due diligence and need to ask for a retrade. I believe doing this enhances the possibility of such a request being accepted. (Although not in this case for reasons discussed below.)

On this deal, we included the following in the contract:

  • Physical occupancy is currently X of Y units. Occupancy will be maintained at close to the current level (no more than Z vacancies).
  • The large majority of tenants are current with their rent and will remain so (no more than X behind on their rent).
  • All tenant deposits are on hand and none have been applied to a tenant’s rent.
  • With the exception of 123 Main Streat, the remainder of the properties are in either good or mostly good condition. (Very few if any major issues, such as foundation repairs, roof replacements, non-functional HVAC, etc. Mostly just standard turnover items, such as paint, flooring, countertops, a few appliances, etc.)
  • The average turnover of these units should be approximately $5,000 or less to get into functional and rent-ready shape.

To be sure, $5,000 is generally high for a turnover. But this made it clear I was referring to actual significant damage and not just a difference in the level of quality between our perception and the seller’s of being “rent-ready.”

Related: How to Scale Your Investment Portfolio With Turnkey Properties

Learning Lessons: The Flaw in This Deal

Two properties were near finished when we got the portfolio under contract. We decided to make it a condition of the contract that those properties would be completed before moving out of the inspection period. This, and a few other issues regarding financing, slowed the deal down. It ended up taking almost three months to close instead of the normal two months for such deals.

We found a few things that we thought were worth requesting concessions on, but since we waited until everything was done before asking, it had been so long it came off as a “last-minute” request and was denied. Had we asked sooner, it may have been at least partially accepted.

We also set ourselves up for a possible disagreement as to what “finished” meant. There was a minor disagreement on one of the two properties, but we were fortunate it was nothing noteworthy. Regardless, while you want the seller to continue leasing and turning units over, be very careful when it comes to making finishing rehabs a part of the contract. Such things could very well lead to delays and disagreements.

Luckily, the deal still worked for us. We went ahead and closed it, and it has worked out well thus far.

Related: The Mega-Profit Potential of Apartment Syndication (Double Your Money!)

The Bottom Line

Portfolios are a great way to scale your business. Indeed, they fall in a sort-of-Goldilocks zone, where new and small investors won’t buy because it is too big, and institutional investors won’t buy because it is too small, spread out, or not in the A and B+ areas they prefer. Thereby, there is much less competition to worry about.

Financing can be difficult. But there are ways to go about it. For instance, consider syndication, tenancy in common, private loans, or a bank loan. Due diligence is also challenging—but certainly doable.

Overcoming these challenges can lead to great opportunities. Indeed, buying portfolios is definitely a great way to grow quickly and effectively (if done right). This 26-property deal, I believe, was done right.

Questions? Comments?

Join the discussion with a comment below.

Andrew Syrios has been investing in real estate for over a decade and is a partner with Stewardship Investments, LLC along with his brother Phillip and father Bill. Stewardship Investments focuses on the BRRRR strategy—buying, rehabbing and renting out houses and apartments throughout the Kansas City area. Today, they have over 300 properties and just under 500 units. Stewardship Properties on the whole has just under 1,000 units in six states. Andrew received a Bachelor's degree in Business Administration from the University of Oregon with honors and his Masters in Entrepreneurial Real Estate from the University of Missouri in Kansas City. He has also obtained his CCIM designation (Certified Commercial Investment Member). Andrew has been a writer for BiggerPockets on real estate and business management since 2015. He has also contributed to Think Realty Magazine, REI Club, Elite Daily, Thought Catalog, The Data Driven Investor and Alley Watch.
    Rachel Morrow Real Estate Agent from Kansas city, KS
    Replied 27 days ago
    Thanks for sharing, Andrew. I live in the KC area, and it is very interesting to learn your take on portfolio purchasing and the steps you take to analyze such a large investment. Glad it worked out in the end and cheers to you for finally closing on the deal!
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied 26 days ago
    Thanks Rachel! If you're interested in portfolio investing, I would also recommend checking out my article on how to buy portfolios of houses: https://www.biggerpockets.com/blog/introduction-buying-multiple-property-portfolios
    Mitch Speigle
    Replied 26 days ago
    Love the listing of your assumptions in the offer, great write up. Can you share any more information on financing? All cash? non recourse? Since you were able to buy occupied I'm assuming you were able to receive financing based on NOI over sale comps?
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied 26 days ago
    I think the listing assumptions things was one of my best ideas actually, I'm glad you liked it. We bought this one with a combination of bank loans and private loans. The loans were recourse (we've never much cared for getting non-recourse loans as if we go down, we're going down hard and non-recourse ain't gonna matter... but we aren't going down). The appraisals were based on the value not cash flow.
    Colin Kanuch
    Replied 26 days ago
    As said above, would be interested in knowing how the finance worked. Compared to more traditional deals, were closing costs (as a percentage) much different?
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied 25 days ago
    We bought some with a bank loan and got private loans on the rest. Loan fees were no different than usual. I go more into financing when discussing how we bought this package if you're interested: https://www.biggerpockets.com/blog/purchased-portfolio-41-properties
    Nick D. Investor from Irvine, CA
    Replied 26 days ago
    Great content Andrew. I worked for a lender specializing in these type of scattered site portfolio loans for a few years and am definitely aware of the challenges it brings. I'm interested to hear which concessions you waited to present that were ultimately denied and why you waited to do so.
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied 22 days ago
    Just a price reduction to make up for some repairs that weren't expected. Luckily it wasn't a huge amount. But I think they would have said yes (to at least some) if we had got through everything quicker.
    Maryanne Cameron Rental Property Investor from Finger Lakes, NY
    Replied 26 days ago
    Thanks for the article - I'm acquiring two multi unit properties from a single seller, you make some good points even on a much smaller scale (such as evaluate each property on it's own). There are a couple of things I should have learned ahead of time that you found in this deal, like keeping tenants or what happens with a vacant unit during the closing process. Anything not in writing isn't guaranteed.
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied 22 days ago
    Absolutely. (And even some of what is in writing isn't guaranteed which is why you need to verify just about everything.)
    Allen B. Investor from Chicago area
    Replied 25 days ago
    I’m curious what the exit strategy is on a deal like this? Someday sell as a portfolio? Or sell individual properties at retail, assuming your financing allows it? I’ve got to place some 1031 funds and have a bit of a soft spot for portfolios, so your article was dead-on. Thanks!
    Marina Wong Investor from Westford, Massachusetts
    Replied 23 days ago
    Selling a portfolio has various things to consider. 1) Very often when people buy a portfolio, the kind of loan might make it difficult or maybe costly to sell one by one so they have to be sold as a portfolio 2) If someone is planning to do a 1031, then a portfolio sale will work better than putting 20 properties on the market at the same time. Though in very hot seller's market, it might be doable. But if you don't have the above constraints, then you need to consider capital gain. Do you want to pay all capital gain at once or spread them out over multiple years. I think these are the major things to consider. I am not there yet but might have to make such a decision soon so would like to hear other people's opinion.
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied 22 days ago
    It really just depends. We're trying to build a very large portfolio so have no interest in selling right now. We like to say, jokingly, that our exit strategy is death. But in all seriousness, selling it as a portfolio is probably the easiest way to exist. Whereas selling them off individually will be very arduous put probably net a bit more overall.