I just recently joined BP and the information/advice I have seen so far is always very solid, so I thought I would ask your opinions on a opportunity my wife and I have.  We currently own 5 single family rentals in the Greenwood/Whiteland/South Indianapolis area and have an average of 35% equity in each.  I met an investor/landlord about a year ago who owns 60 or so single family rentals in the same area.  We have been talking with him pretty much the whole year about him wanting to liquidate some of his properties.  He has agreed to sell us 5 of his that are tenant occupied for 20 to 25% below market value.  We would obtain a commercial loan to buy the 5 from him.  We would not have to put any money down due to the discounted selling prices.  They are all in A and B neighborhoods which is what we are used to with our current 5.  I know the deal sounds great so far, but here are my concerns:

*Even though we would buy them below market value, due to the appreciation this area has gone through in last few years, and the fact his current tenants all pay below market rent, the cashflow, atleast in the beginning, would not be good. ( I do realize I can raise the rents at the end of leases, but if we end up getting new tenants due to the raised rents, I am certain we would have to put some $ into the houses to get them rent-ready again).

*While none of the properties are "crap" properties and are in good neighborhoods, I am not sure how well they have been maintained the last 5 to 7 years as the main reason he is selling is because he spends most of his time on his Flipping projects and has certainly neglected his rental inventory a bit in recent years. 

*The lack of good cashflow along with the unknown of the maintenance makes my wife nervous on this deal.

Any thoughts/advice would be greatly appreciated.  

Thanks!  Jason

If you are buying A/B properties below market value, it seems you likely have multiple exit strategies.  You could always sell them full retail price if you decide they don't work out.  When you say the cashflow would not be good...how not good are we talking?  Are they positive cash flow?  How far below market rents are they?  Do you have some capital set aside to do the necessary repairs once they are needed?  If it was me, as long as there was some positive cash flow I would probably do it.  

@Samantha Soto

Thanks for the reply.....really appreciate your thoughts.  Cash flow would be $100 to $125 per month per property.  On average, his rents are $100 per month below fair market.  We do have capital set aside for necessary repairs, plus our monthly cashflow from our current 5.  As I am typing out the answers to your questions, I am thinking these are convincing points to present to my wife. :)  Thanks again for the reply.   Jason

@Jason Flint

Its a numbers game.  What do the numbers tell you?  Are you happy with the cash flow?  I would make a list of what needs repair and put a cost to it.  Also create a timeline for the repairs.

every market is different but I just couldn't imagine being in the real estate game if I was only making $100 -200 a door a month.  if the houses need work, are you really getting them below 20-25% below market value?  in other words, is your estimation of their market value based on the current condition they are in or what they would be worth if they were in solid condition?  

Dont buy properties just to buy properties.  If it don't make dollars, it dont make sense.  Your wifes concerns are very valid here.  You need to get in and see all the properties and really understand what you need to do to make them rent for the max and limit your future capital expenditures and maintenance costs.  Perhaps the play is to buy the 5 from him but flip one of them to fund repairs on the others.  Last but not least, dont forget about the lost money due to vacancy while you are making repairs.  

@David Ducille.

Thanks for the reply....realy appreciate it.  I should have explained the properties better than just saying they are not "crap".  They are not fixer uppers.  We will be buying the homes for 20 to 25% less than there current appraised values.....not of our estimated value of them.  2 of them have actually been completed remodeled 5 years ago or so.  The other 3 are very presentable homes as rentals that would need paint, some replaced floor coverings, clean up the outside, HVAC tune-up, etc if current tenants decided not to stay.  

The key thing that attracts us to these homes is the same thing that attracted us to our current rentals......quality homes in quality neighborhoods.  We definitely take a different approach than the average investor/landlord as we take tremendous pride in providing a nice home for our tenants to live and treat them with the upmost respect. (provide lawn treatments for weeds, fix issues within 24 hours most of time, provide furnace filters, etc).  In return, in the years we have been doing this, we get very few calls and our monthly cashflow is truly passive income....We have never not returned a full deposit because our tenants have taken great care of our properties and it would have just been flat out wrong to keep it.  

I definitely respect the comment about not being in real estate investing to make $200 a house.....but the vast majority of the time, its $200 per month for doing nothing.....and obviously it will be a lot more when the homes are mortgage free. Our main goal in real estate has always been to provide a nice retirement through passive income. (I totally get the BRRRR method and DEFINITELY a better way to make more money....and I am certainly not opposed to it.....but wanting to have rentals in neighborhoods we would live in ourselves makes the BRRRR very challenging in the current housing market).

With the new purchases, we would hopefully just raise the rent as the leases expire to increase monthly cashflow and the current tenants would stay.  However, if some tenants did decide to leave, we would certainly put the elbow grease in and make any upgrades to make them homes tenants will be proud to live in.  

I like your idea of possibly flipping one and keeping 4.....that makes alot of sense financially.

How are you able to buy them with no money down? Typically banks want to have 20-25% of the purchase price down not the sales price.

Originally posted by @Grant Anderson :

How are you able to buy them with no money down? Typically banks want to have 20-25% of the purchase price down not the sales price.

Hi Grant.  Small bank financing......they offer more creative financing than big banks.  Also, with the commercial loan, they are going to take the total value off all the houses and as long as we are only borrowing 75% of the total value, they said that would take care of the down payment.  They said worse case scenario would be us throwing in one of our current rentals we have a lot of equity in into the commercial loan to provide even better loan to value for the commercial loan.....which we would have no problem with because it would be a house that is financed now anyway.

What bank are you using? I am looking for a good small bank.

Originally posted by @Grant Anderson :

What bank are you using? I am looking for a good small bank.

 First National Bank

Have you thought about asking to see 10-15 of his properties and picking the 5 you want instead of just taking the 5 least desirable from his portfolio? 

$100/house/month is not too bad with 100% financing.

Originally posted by @Jason Flint :

I just recently joined BP and the information/advice I have seen so far is always very solid, so I thought I would ask your opinions on a opportunity my wife and I have.  We currently own 5 single family rentals in the Greenwood/Whiteland/South Indianapolis area and have an average of 35% equity in each.  I met an investor/landlord about a year ago who owns 60 or so single family rentals in the same area.  We have been talking with him pretty much the whole year about him wanting to liquidate some of his properties.  He has agreed to sell us 5 of his that are tenant occupied for 20 to 25% below market value.  We would obtain a commercial loan to buy the 5 from him.  We would not have to put any money down due to the discounted selling prices.  They are all in A and B neighborhoods which is what we are used to with our current 5.  I know the deal sounds great so far, but here are my concerns:

*Even though we would buy them below market value, due to the appreciation this area has gone through in last few years, and the fact his current tenants all pay below market rent, the cashflow, atleast in the beginning, would not be good. ( I do realize I can raise the rents at the end of leases, but if we end up getting new tenants due to the raised rents, I am certain we would have to put some $ into the houses to get them rent-ready again).

*While none of the properties are "crap" properties and are in good neighborhoods, I am not sure how well they have been maintained the last 5 to 7 years as the main reason he is selling is because he spends most of his time on his Flipping projects and has certainly neglected his rental inventory a bit in recent years. 

*The lack of good cashflow along with the unknown of the maintenance makes my wife nervous on this deal.

Any thoughts/advice would be greatly appreciated.  

Thanks!  Jason

 How do you know what the market value is if you have not thoroughly inspected inside?

@Jason Flint , have you considered making one or more of these houses vacation rentals? If they're in a good area it might be prime location and if you're willing to put the work in they might cash flow CONSIDERABLY higher as vacation rental, for the right area and the right size some people will pay top dollar. Take a look at Airbnb and Homeaway in your area and look what similar houses are charging, especially the ones with a lot of good reviews. I'm doing very well in an area that people are "surprised" that people come to stay (suburbs north of Detroit) thinking that it's strictly a quiet neighborhood with nothing going on but people have 100 reasons to travel and some are not so obvious. I'm looking right now for one near Downtown Detroit and even though I want a "deal" I would consider something that might be borderline good or barely not qualify for a regular rental because I know the demand for short term stays near downtown is crazy. 

Originally posted by @Michael Plante :

Originally posted by @Jason Flint:

I just recently joined BP and the information/advice I have seen so far is always very solid, so I thought I would ask your opinions on a opportunity my wife and I have.  We currently own 5 single family rentals in the Greenwood/Whiteland/South Indianapolis area and have an average of 35% equity in each.  I met an investor/landlord about a year ago who owns 60 or so single family rentals in the same area.  We have been talking with him pretty much the whole year about him wanting to liquidate some of his properties.  He has agreed to sell us 5 of his that are tenant occupied for 20 to 25% below market value.  We would obtain a commercial loan to buy the 5 from him.  We would not have to put any money down due to the discounted selling prices.  They are all in A and B neighborhoods which is what we are used to with our current 5.  I know the deal sounds great so far, but here are my concerns:

*Even though we would buy them below market value, due to the appreciation this area has gone through in last few years, and the fact his current tenants all pay below market rent, the cashflow, atleast in the beginning, would not be good. ( I do realize I can raise the rents at the end of leases, but if we end up getting new tenants due to the raised rents, I am certain we would have to put some $ into the houses to get them rent-ready again).

*While none of the properties are "crap" properties and are in good neighborhoods, I am not sure how well they have been maintained the last 5 to 7 years as the main reason he is selling is because he spends most of his time on his Flipping projects and has certainly neglected his rental inventory a bit in recent years. 

*The lack of good cashflow along with the unknown of the maintenance makes my wife nervous on this deal.

Any thoughts/advice would be greatly appreciated.  

Thanks!  Jason

 How do you know what the market value is if you have not thoroughly inspected inside?

We will definitely thoroughly inspect insides of homes before we sign purchase agreements, but all the homes will be appraised by our bank we are using for financing......and we will pay 75% of that appraised value......so this deal will not be based on our estimated market value of the homes.

Hi Roy.....thanks for the feedback.  No I have not considered making any of them vacation rentals......Kudos to you for doing that and being successful with it in Detroit.  I would love to hear some more specifics on your cashflow, number of nights occupied in the last year, any setbacks you may have experienced with this, etc.    Thanks!!

Originally posted by @Roy Gutierrez :

@Jason Flint, have you considered making one or more of these houses vacation rentals? If they're in a good area it might be prime location and if you're willing to put the work in they might cash flow CONSIDERABLY higher as vacation rental, for the right area and the right size some people will pay top dollar. Take a look at Airbnb and Homeaway in your area and look what similar houses are charging, especially the ones with a lot of good reviews. I'm doing very well in an area that people are "surprised" that people come to stay (suburbs north of Detroit) thinking that it's strictly a quiet neighborhood with nothing going on but people have 100 reasons to travel and some are not so obvious. I'm looking right now for one near Downtown Detroit and even though I want a "deal" I would consider something that might be borderline good or barely not qualify for a regular rental because I know the demand for short term stays near downtown is crazy. 

Why would he sell to you for 20% below market value? Other than a very close relative, like my parents or kids, I am not selling below market value To anybody and certainly not a stranger. 

@Jason Flint welcome to BP. Your approach to buying SFR properties sounds exactly like ours was up until several months ago. To your question about these 5 homes. I'm getting mixed messages from your comments.

At first, you sounded very leery due to the deferred maintenance.  I would be too.  You know this, but there's a difference in buying at a discount due to value-add opportunities and buying at a discount due to deferred maintenance.  In adding value, we do the things renters are willing to pay for (updated kitchens, egress in the basement for another bedroom, etc).  Deferred maintenance (e.g. roofs) are things renters already expect (table stakes) and are unwilling to pay for.

Then you sound like it's not really a big deal.  The current renters move out, you do some painting, replace floor coverings, tune up HVAC, etc, raise the rents, and new renters move in.  No big deal.

What really is the concern here?

Hi Chris.....thanks so much for the feedback.  The mixed messages would be my feeling about the deal compared to my wife's feeling about it.  Our first 5 rentals we purchased were all move-in ready updated homes that we were able to just put a good tenant into pretty much the day after closing.  We've never had a vacant month, no bad tenant horror stories, etc.  That is a really good thing obviously, but I believe that approach has somewhat "spoiled" my wife into wanting to do every transaction this way.  In our current housing market, my feeling is those days are long gone for now because the #s for those kind of deals don't work nearly as well as they used to when we first starting buying SFRs.   But as far as my real concern......it's that I want my wife to be comfortable with the deal without me having to do too much of talking her into it. (Not worth the resentment that could lead to if things don't go well). 
Does the deferred maintenance worry me a bit? Yup.  Do I like pretty much all other aspects of the deal? Yup.
So definitely a bit of "tug of war" going on in my head.

On a side note, I would love to hear more about how our approach was very similar to you and your wife's up until several months ago.  How did you change your approach and how has it worked out for you?  I am certainly open to changing/adjusting our approach.   Thanks!!

Originally posted by @Chris Jensen :

@Jason Flint welcome to BP. Your approach to buying SFR properties sounds exactly like ours was up until several months ago. To your question about these 5 homes. I'm getting mixed messages from your comments.

At first, you sounded very leery due to the deferred maintenance.  I would be too.  You know this, but there's a difference in buying at a discount due to value-add opportunities and buying at a discount due to deferred maintenance.  In adding value, we do the things renters are willing to pay for (updated kitchens, egress in the basement for another bedroom, etc).  Deferred maintenance (e.g. roofs) are things renters already expect (table stakes) and are unwilling to pay for.

Then you sound like it's not really a big deal.  The current renters move out, you do some painting, replace floor coverings, tune up HVAC, etc, raise the rents, and new renters move in.  No big deal.

What really is the concern here?

Knowing the current owner is selling due to focus on flipping and neglecting his rental portfolio would definitely warrant inspections before purchase but that is just part of due diligence. I would consider too the cost of the repairs vs the increased rental income- $5k in repairs will take more that 4 years to recoup if you are only increasing rent $100. Would that be worth losing the tenant, vacancy etc? Especially if you would take pride in the home as is this may not make a great deal of sense given the limited info provided. 

your additional info, particularly surrounding financing is helpful.  the real question is, do you have the cash to make the repairs needed.  if the needed repairs are what you say than it's very minor.  my investment portfolio is similar to yours in that i'm mostly invested in good homes in good areas it's just that the rental market here in tampa is crazy so I can get way more than 1-200 a door and great appreciation.  but if you truly have the tenant screening to continue to get trouble free tenants than yes, it truly is passive money.  I would just be concerned that a market shift could easily cause someone to need to drop asking rent by 100 and there goes all of your cash flow and of course there aren't any guarantees of appreciation either, only a gurantee of a tenant paying down the principal on the loan. 

@Jason Flint I'm going to sound like a "glass half empty" guy but I'd imagine that most people that own 50+ houses would gladly sell their "bottom 10%" for 20% below todays market price.  It's like Jack Welch at GE getting rid of his bottom 10% annually.  So I guess that's a way of asking: Did you pick the 5 SFRs that are tenant occupied?  Or did he pick the 5 SFRs that are tenant occupied?  

Then again I'm always wary of "below market rent" houses.  I focus on apartments so I haven't wandered through too many of them.  However, when I have they are usually materially worse that the pictures.  Consequently, raising the rent $50 per month or $100 per month comes along with $10K worth of updates/repairs.  Even if the repairs allow you to raise the rent $100 per month it's still an 8+ year payback period.

So this could just be a landlord that wants to shed 5 underperforming properties that could perform well *but* the payback period to get them performing is my hypothetical 8+ years.  

@Jason Flint you asked how our approach has changed.

Our initial goal in investing, like yours, was to build a nest-egg for retirement.  We thought... buy a few rental homes, let them cash flow and paydown the mortgage, and when we retire we'll have a piles of cash sitting there waiting to be used.  A very common, understandable goal.  Our approach, also like yours, was to buy fully-updated, move-in ready homes in desirable neighborhoods... homes we understood and would have loved to live in ourselves when we were just starting out.  We paid market price (not inexpensive) and have taken very good care of them and our tenants ever since.  As such we've never had a problem renting them, and we've been very selective in our screening.  Our high quality tenants never cause us problems.  It's been great generally.

But several months back we decided we wanted to do more. As I looked at our situation, we were able to come up with enough cash for one more downpayment. Then we'd be done. Our money would be fully tied up in the rental homes, and we'd have to wait for a few more years until we saved enough for another downpayment. Too slow to really scale at all. Honestly, I think our goals have evolved over time. It's more than just a little nest egg in 30 years, we're looking for financial freedom (or at least flexibility) now. And another SFR every 3 years or so won't get us there.

As I began reading and listening to what others are doing, I came across two mind-blowing topics. First was the benefits of multi-family and the downsides of single family (many podcasts, blogs and forums devoted to this, and based on my experience with SFR I find myself agreeing). Second was that glorious BRRRR acronym (I'd certainly known about the concept before but never packaged into such a crisp, powerful way).

As I've thought about how we started out, I don't have any regrets. Our SFRs have been good to us. But I wish I'd spent more time thinking and defining our goals and then shaped our approach accordingly. So now we're changing approaches. Our strategy is now value-add commercial multi-family. Our tactic is SFR flipping to build funds to pour into MFH, and networking to build a team.

Long-winded response, but hopefully it all made sense.

Originally posted by @Chris Jensen :

@Jason Flint you asked how our approach has changed.

That's good stuff man.  I hope you post results from time to time with your evolved strategy as I am definitely open to following your lead with that strategy.