Steps on purchasing a Portfolio of properties

21 Replies

Good Afternoon BP Family, 

I'm looking to obtain property(s) before the end of the year.  Besides checking out each unit or property to further access any and all expenses and talking to tenants to see if they have any issue recurring issues, Is it possible to conduct an initial financial analysis of the portfolio below with the information I have below? 

Portfolio includes 3 Single Family Homes, 7 Duplexes and 1 Fourplex

Units: 21

Ask price: $1,890,000

Price per unit: 90,000

Caprate - 7.80%

NOI $147,542

 Potential Total Gross Income: $196,500

Vacancy & Collection Loss 10% ($19,650)

Effective Gross Income $176,850 

 Real Estate Taxes $22,058 

Insurance $7,250 

Your calculation for NOI is grossly off unless you plan to have absolutely no expenses beyond taxes and insurance. What about property management, repair & maintenance, etc? I'm sorry but the above information provides you pretty much nothing substantial.

Hi @Alisha Decoteau ,

You should request ACTUAL (not pro forma) rent rolls and actual expenses for the last 12-24 months if you can get them. You can begin the analysis at that point but will still need to assess any rehab/cap ex required. You can put together an LOI with a longer due diligence period to do it properly.

Good luck!

@Alisha Decoteau @Robbie Reutzel pointed out the most important thing, Get actual numbers. When dealing with a portfolio purchase, you can't assume all things are equal with all the properties. You may have some terrible properties the seller is trying to unload within the portfolio and this is an easy way to do it if the buyer doesn't know how to analyze a portfolio deal properly. Ask the seller if you can sign an NDA to have access to the actual expenses broken out but property. You will want more information on each property within the portfolio and analyze them separately to ensure you're not overpaying for any of the properties as part of the portfolio deal.

It's also important to compare relative to other deals in your market. Vacancy rates, per door pricing, expenses, and CAP rate are going to vary significantly across markets. Make sure you have your deal reviewed by a local market expert.

@Michael Le   Thanks for the feedback.  I actually didn't calculate anything.   I simply showed the information that was provided in the offering memorandum.   

I did mention besides the checking out each unit or property to further access any and all expenses. 

I thought more due diligence is needed, which brought me back home to bp :-)  Your comment is confirmation.

thanks much 

@Robbie Reutzel items for list noted. Just to confirm, the LOI goes to the owner once the analysis checks out as a win-win deal on paper, then we can go in and do further analysis correct?

Appreciate you :-) 

@Alisha Decoteau

Basically that's how it goes.  There are a lot of other steps for due diligence usually.  Also, in my experience, most of these types of smaller deals have terrible record keeping which can make it challenging.  I also agree with @Ian Whitney that you need to know your market cap especially if you plan to refi or something.  Cap rates need to be viewed relative to the market as mentioned.  An 8 cap here in Boston is amazing but in other markets we invest in those deals are on the lower end of acceptable.

@Ray Johnson    I thought that was odd that each property price per unit was the same. That totally makes sense, never know what problems lye under the surface.

Love the tip on NDA, definitely, will include that in the discussion.

@Alisha Decoteau , as you had already told yourself, you need to dive into the numbers. You can provide me identical income, expense, and cap rate numbers for a property and after diving into the numbers I could come up with totally different prices I'd be willing to pay. Property A could be running at maximum efficiency and the numbers are the best I can expect. Property B could be poorly mismanaged and under rent and I can save a ton on utilities just by changing contracts or putting in simple conservation methods. So never go by the numbers provided by the seller/broker, although I do use their numbers as part of my express analysis. If I take their inflated numbers and it still doesn't work in my underwriting, I usually don't both to try to peel back the layers on that onion.

@Alisha Decoteau It looks like you're getting some kind of seller (or seller's agent) product pro-forma.  Which is, well, not indicative of reality.  As others like @Michael Le have pointed out, what they are claiming NOI is not NOI. So, at a base, they either a.) don't know how to calculate NOI and are just ignorant on the matter or b.) are being intentionally deceptive. Either way I'd toss everything into the trash that you can't independently confirm yourself.

That said, you're either going to have do a portfolio loan or some mix of a portfolio loan as well as conventional financing.  While each would (on their own) qualify for conventional financing you're at 11 units so that option is out of the window unless you can do some all-cash purchases.

So for the sake of simplicity, projected gross income is $196K. Use the 50% rule and that give you $98K in NOI. Asking price is $1.89MM so with 25% down you have debt of $1.42MM to service. Let's say you get a 5% rate on a 25 amortization table which yields a monthly mortgage payment of $8.301 which comes to $99,612 per year.

Hmmmmmmmmm...so quick (inaccurate) math gives you $98K to pay $99,612 in debt.

That's going to be a challenge. You had better hope that these properties have all been updated, that the tenants are good, maybe you can raise rents, etc. One thing that further creates a challenge (if I'm in your shoes) is that if a seller (or their agent) is willing to claim the NOI is $147K and ignore obvious expense items, can I really trust the seller-produced "Actuals"? In your shoes I'd hope that these are professionally managed so I'd have a chance at getting "neutral" financials by a property manager that wants to keep the contract.

You could make the offer based on the numbers they are stating. Once under contract, get the actual numbers from the property manager, tax records, etc. The lender will ask for this up front anyway. If it turns out their numbers are wrong, you can renegotiate or walk away. If the gross income is correct and the NOI is correct, it means they are spending a LOT of money for expenses. If the new owner can operate the business for less money, like 40% of gross, this will increase the value of the property before you ever renovate a single unit.

@Michael Le You're right, a quick look will let you know if the numbers are correct. e.g. Huge CapEx and the property needs a new roof and paint job :-O

Makes total sense @Ian Whitney I am totally going through and working with REA or Brokers. Here is the issue I'm running into: I've requested information on properties from a Broker and a REA that's sent me listings on the MLS the info is very vague or delayed in getting back to me.

one focuses on residential but states she partners with commercial experts on any commercial deals. When I asked her for the details like operating expenses, vacancy rates & cap rate I'm getting a very delayed response. Is that normal? or that may be what @Robbie referred to, the information might not be available bc of bad record keeping.  

With the broker - should I approach her differently, are they expected to get the operating expenses ( since listed on MLS) review and give details information since their the expert even though we may not go forward with the deal? Do they get a small payment? If so, how much is suggested?

      

@Robbie Reutzel      @Ian

What is the best way to find out the Cap Rate in Atlanta or in the area of the property?  When you say across the market are you referring to SF vs Multi-Unit? 

@Michael Le Definitely understand, makes sense and noted for the future.

@Andrew Johnson   Thank you for the break down i really appreciate it. I will confirm if the properties were professionally managed or not. 

personally for my first rental purchase I would not do so many units 

Originally posted by @Alisha Decoteau :

Makes total sense @Ian Whitney I am totally going through and working with REA or Brokers. Here is the issue I'm running into: I've requested information on properties from a Broker and a REA that's sent me listings on the MLS the info is very vague or delayed in getting back to me.

one focuses on residential but states she partners with commercial experts on any commercial deals. When I asked her for the details like operating expenses, vacancy rates & cap rate I'm getting a very delayed response. Is that normal? or that may be what @Robbie referred to, the information might not be available bc of bad record keeping.  

With the broker - should I approach her differently, are they expected to get the operating expenses ( since listed on MLS) review and give details information since their the expert even though we may not go forward with the deal? Do they get a small payment? If so, how much is suggested?

      

@Robbie Reutzel      @Ian

What is the best way to find out the Cap Rate in Atlanta or in the area of the property?  When you say across the market are you referring to SF vs Multi-Unit? 

 You asked is it normal to be delayed?

In my experience, once I have proved i have  the funds to purchase the replies come much faster 

Hey Alisha-

If you're not getting expenses, it usually is because the Seller doesn't have them.  It's a business, and some people run them better than others.  The listing agent really should have pulled something together, but if they are more experienced in residential the numbers are often thin and can't be relied on unless you know what to look for (for instance are management and vacancy included).  Without the proper numbers, the underwriting doesn't hold up and you can't really compare to market if you're getting a good deal or not.

What you might try is the following,

- Visit loopnet.com and find a similar commercial listing in your areas (multifamily residential) and reach out to the listing agent.

- The questions you want to ask them are: 1) What CAP rate range should I be shopping in this area, and 2) What is a ballpark "per-door expense" you see/use for your underwriting

Here in CO for instance, per door expenses usually fall around $3,000 per door ($2,500 on the low end, $3,500 on the high).  That is an all in number (taxes, insurance, management, vacancy, repairs, water/sewer) so you count your doors, multiply by that number and you've got a solid estimate of expenses.  (ex: 10-plex * $3,000 per door = $30,000 annual expense).  It's not perfect, but it's far more reliable than anything you'll get from an inexperienced seller/agent.

Subtract expenses from income to get you're NOI, then divide that number by purchase price and you've got CAP rate. How that CAP compares to ranges from you're commercial broker should give you a sense of whether or not it's a deal to pursue.

And no, under no circumstance should you have to pay agent for underwriting - it's part of their job.  And if they don't have it, it usually just means it's not available.

Hope this helps.

Best - Ian

@Alisha Decoteau I'd just use the 50% rule for rough underwriting until you get the actuals from the seller. Divide the Gross Income by 2 and that should be a good NOI estimate.

Okay Noted,  thank you.   We have decided not to move forward with this portfolio.   I thanks everyone for their advice. I will consider the information moving forward. 

Agree with many of the comments. Looks like your NOI is closer to $90-$100k

@Alisha Decoteau I think the point is being missed that this is not a commercial deal.  These are all residential properties that will be appraised individually as residential units.  There may be a local bank that might treat this as a portfolio( I may have a bank for you that financed a similar portfolio in Ohio), but you will have difficulty with a commercial loan.  Get the comps on each of the properties.  You can use the 1% rule to see if it worth pursuing.  Is there an opportunity to increase rents?  What capex needs to be performed?  Are these properties near each other?

There a more questions than answers here.

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