Analyzing a Package Deal

4 Replies

Greetings everyone,

I'm reviewing a package deal right now involving 6 properties – 14 units. Most of the properties are in the same neighborhood (D-Class), there is the option to extend the deal to 10 properties – 22 units. After pulling the real estate assessor data it really is a mixed bag. High and low valuations but very good purchase prices (back in 2008-2010) by this current owner. 4X duplex, and a 6-unit.

All of the homes are currently being rented (ranging 550 to 750) totaling 7900/month Gross. My best guess is that Net monthly would = 30% accounting for all expenses. After driving the neighborhood not all are in the best of shape.

What steps would you take to evaluate this mixed portfolio deal? Do you do a cash flow analysis on each property or the entire package? There are no recent comps for some of these and in obtaining a loan how is the value/appraisal determined. The owner says he doesn't want to sell homes individually and cherry picking individual deals would dilute his benefit. Owner has experience and wants to sell and move to commercial property from these mixed Multifamily properties (his motivation). I want to scale up but trying to avoid a package which includes his non-performing deals??

Any thoughts would be greatly appreciated..

A couple of points:

You didn't state your goals. long term Buy and hold for yield, appreciation, or flip?

When I analyze a portfolio deal, I usually lump all of the numbers together unless there are 3 or less properties in the portfolio. After the acquisition, there are fewer economies of scale to be gained from a portfolio compared to a single-parcel multi-unit. As such, I tend to evaluate them as sum-of-the-parts. Of-course there may be some synergies (maybe get a package deal from PM, stocking similar paint, repair items, maintenance items, etc.) If you do go for a portfolio, i would recommend you try to standardize on materials and systems to gain those benefits.

Do you have experience in D-class properties or have a PM that does? Apparently, their are business models that work, but it's a specialty skill set. Does D neighborhoods align with your personal investment philosophy, or are you just looking at this as a one-off opportunity? To begin with, you'll need to be seeing very large gross yields to make up for the high tenancy and potential damage.

Am I reading your analysis right that you're expecting 70% of rents to go to expenses? What went into those expenses?

To evaluate the deal, ask for a T12 P&L (trailing-12 month profit and loss) as well as the 2016 and 2015 schedule E's, and current rent roll. Those will give you his "actuals" so you can base your projections on real numbers instead of projections. Don't be surprised if he doesn't the full set of books if he self-manages.

That's a starting point to make sure it at least makes financial sense. Evaluating the resale value of the homes individually is another proposition altogether.

Hope that gave some food for thought!

James

@Tom Moran - @James Kojo makes some great points and it would be beneficial to know your long term strategy for the investment.   I have a close family friend that does well with properties in D Class areas but he is very hands on and goes door to door on the 1st to collect rents.  Many of his properties are worth equal to, or less than, the price he paid for them 20+ years ago.  The cash flow is great but long term he's seeing very little, if any, appreciation.  Given that it's only six properties, I'd probably review each property individually.  Is he offering some sort of discount to purchase the whole portfolio?   As James mentioned, you need very large gross yields to compensate for the tenancy and market risk. 

Greatly appreciate your advice @Brendan Kelly @James Kojo

Sorry it took me so long to return to the forum. I work long hours. I read the replies and I am so grateful for all the information. Yes I think you both got where I was coming from, the areas are not so good - but the basic income is.

My aim would be to hold for cash flow. Brendan you may be completely correct on the appreciation piece and James I overcompensated (most likely) in the determination of expenses mainly for maintenance issues. This offering is different than what I’m used to given tenancy and market risk but the hope is to avoid buying one Multifamily property at a time (long time) and scale up quickly - saving on closing & other costs by putting together a package offered at a discount. The deal works from day 1 but might involve a lot of oversight.

Any further recommendations of this type of deal – like the properties themselves I doubt the owner keeps great records, rents are cash, most leases MTM. 

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