Lenders who will lend for 300k DP on 85 property portfolio

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Lenders who will lend for 300k DP on 85 property portfolio

Ryan Herald
Investor · Knoxville, TN · Member since 2015 · 31 posts · 3 votes

I have been given an opportunity to purchase a portfolio of 85 properties that each net ~$250 a month (if 80 are rented, 20k in net a month). The seller who is looking to retire is willing to finance the whole portfolio for 4% interest with 10% down (That comes to right at 300k).

Being new to this, I have enough saved to cover a reserve. Are there Hard Money lenders who will lend for a secondary lien? Or does anyone have any strategies on how to approach this. I have a few ideas, but I would appreciate any advice I can get before I post it.

TLDR: I have the cash flow to afford a loan to cover the DP, but I do not know who to go to get it.

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Victor Jernigan
Investor · Knoxville, TN · Member since 2011 · 205 posts · 91 votes
10y

@Ryan Herald you are getting solid information from @Jay Hinrichs and @Jacob Pereira - it is an un-bankable transaction. The unit calculation of about $35K - regardless if it is apartment doors at $25K and houses at $45K -  makes this a low value asset with the potential of significant capital expenses. I also am just backing into your numbers, but at a net of $250 per month, one bad AC unit or roof repair will get most, if not all, of the annual income.

In most areas around Knoxville, properties such as these rent for $425-$550 per month - simple math $42,500 annual for the 85 units. If the total of mortgages, insurance and taxes is $20K as Ryan calculated, it is essential you accurately identify all of the operating expenses. If you are lucky, the owner has perfect records for the previous 3 years so you can actually check expenses. Most probably, he does not. (You may not believe this but sometimes and owner will get paid in cash - pay for repairs in cash and show the apartment as vacant.) 

Realistically the tenants are stressed in their daily lives and making rent payments is not their highest priority. Any vacancy rate will be understated until you add uncollectable rents and cost of evictions. Use a minimum of 10% and that still may not be enough - now $38,500. Because late payments will be at least 25% of your tenants, management expense is significant. If you do it yourself or hire it done, use a minimum of 10% in your calculations - now at $34,650. If the unit turn cost is $500 per unit, it is another $4,000 - now at $30,650. This leaves about $10K to cover all ongoing exterior maintenance repairs, plumbing issues, appliance replacement, yard work, plus creating a reserve for parking lots and roofs. Plus or minus a few thousand, it may be possible for the units to pay for themselves but it does not look like fun.

Finally, since I live in Knoxville, if the portfolio is North or Northeast, it is in coal country. A declining market area and it will be hard to find either a bank or partner. If it is South or Southeast, it is in the manufacturing corridor and there may be people who will want to work with you, for a long term hold.

However, from your information, the price, as they say in the movies, Is Just Too Damn High.

Congratulations on the 16 units you now own.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Ryan Herald  this is a friend and family deal... but most likely you will want to find an equity partner..  you found the deal partner puts up the cash you do not have.

    NO HML or lender is going to go behind a HUGE first with a small second that's lending 101 of what you don't do... you could find some sucker of course that has no clue how dangerous that is for them.

    If you don't have friends and family reposition and post and look for equity partner.. give some upside to get the deal done.. you don't want to lose it looking for some phantom lender who is not there.

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  • Ryan Herald
    OP
    Investor · Knoxville, TN · Member since 2015 · 31 posts · 3 votes
    10y

    Thanks Jay Hinrichs. I am up to 16 properties now and have a fairly good idea of some aspects of the lending world, but I was hoping there may be something out there that I did not know about. I am hoping that a combination of loans from friends and family may work (along with a few unsecured loans).

    Anyway, I did not think about posting on here to find a partner to work with (I just assumed that would be against BP rules). Thanks for the idea.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Ryan Herald  Ya I screw up on the rules all the time.. yes you need to have a pro account I believe and put an add in Market place.

    but friends and family would be a great play for this... 300k is not much to raise on a 3 mil buy..

    Nice way to add water and have instant 100 home portfolio.. then you can just sit back in your barcolounger and let the cash flow roll in.

    ( just kidding I know its a full time job chasing these renters in these asset class's)  good luck with it.

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  • Justin P.
    Investor · Brandywine, MD · Member since 2013 · 84 posts · 21 votes
    10y

    @Ryan Herald, Are you open to doing a 1st position note on one or more of your other properties as collateral for the 300K? This would feel safer and more equitable to me.

    @Jay Hinrichs, What do you think of that as a strategy?

    Could you share a few of the main risks you alluded to that a second position takes on behind such a big first? The first ones I can think of are the potential lack of equity to be able to recoup a loss in second position and the complexity of having a note that spans so many properties making it hard to pursue a foreclosure. 

    Thanks.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Justin P.  if the OP has free and clear properties IE the 16 are all owned out right then yes that would work for sure .. subject to finding a lender that likes the collateral and will lend.

    Small seconds behind large first are just a NO NO in the lending world

    for the very simple reasons you stated.

    see threads on BP about those that have been doing gap funding on rehab projects and the borrower goes dark and they are fubared.. loss of the entire loan is most likely out come.

    UNLESS your a loan to own guy.. and if this OP failed you fine stepping in and taking over the whole maryann..

    But realize your only way out is to collect rents for a very long time to get your money back. these type of low value asset portfolios have little hope of selling for cash.. you could then piece meal off the properties until you get cash.. but I suspect there would be no equity to get.

    as the value for cash probably exceeds what he is paying for these..

    its a rock and hard spot for owners of big low end asset cash flow portfolios and owner carry is usually the only way they can exit without STEEP discount for cash..

    I had a 54 house portfolio in ATL.. and when the hedges were going nuts there and ours were B to B - when I got a cash offer I TOOK it knowing how hard it is to exit rentals.

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  • Ryan Herald
    OP
    Investor · Knoxville, TN · Member since 2015 · 31 posts · 3 votes
    10y

    I wouldn't have a problem with it, but it isn't up to me to give. I can talk to the seller and see what he has to say about this. 

    The properties I am looking at are a combination of: a 26 unit apartment complex, a 16 unit multiplex, and then a mixture of houses and duplexes. The multi units are units meant to be multi-units, not that weird lets split a house 6 ways places.

    For family, I have been thinking to offer a ten year loan at 10% interest (even if all 300k was lended at this rate, it would be only 4k a month for me while giving a return of 175k). Those are just thoughts I have had though.

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  • Ryan Herald
    OP
    Investor · Knoxville, TN · Member since 2015 · 31 posts · 3 votes
    10y

    "But realize your only way out is to collect rents for a very long time to get your money back. these type of low value asset portfolios have little hope of selling for cash.. you could then piece meal off the properties until you get cash.. but I suspect there would be no equity to get."

    I wouldn't say that these properties are low value, and I didn't intend to ever imply such. These are largely B properties that can be resold. They are located in a small town, so they may not be sold as quickly as larger areas like Knoxville (that I am near), but it is possible.

    The current owner is someone who has worked with my family before (donated to our campaigns) and that is how I have come across this. These properties are actually not listed and have not been offered to anyone else.

    And yes, the properties are free of any liens.

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  • Justin P.
    Investor · Brandywine, MD · Member since 2013 · 84 posts · 21 votes
    10y

    Thanks, @Jay Hinrichs. I just about always learn something from your posts. Happy that I was on the right track with my thinking.

    @Ryan Herald, I was actually referring to you providing 1st position on one or more of the 16 properties you already own as collateral for the $300K. You can then use that as down payment for your 85 unit deal. The two can be completely separate transactions.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Ryan Herald  my statements are general in nature... just computing

    10% down equals 300k  which means  3million buy / 85 = 35k per house

    and in the lending world those are viewed as low value assets.. not a negative connotation just what they are deemed in the lending world.

    I suspect you will be able to put this together I bet you get people private messaging you already offering to help you/

    good luck and glad we did not break the BP rules of engagement  :)  Ok I got to go make some money so I can afford to be an investor

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  • Ryan Herald
    OP
    Investor · Knoxville, TN · Member since 2015 · 31 posts · 3 votes
    10y

    Hi @Justin Prevatte, I did not think of that. I would be willing, but all of those properties have a bank loan on them. If you have any ideas, I am more than willing to look at ways to do this though. I will likely be able to raise a large portion of the funds I need from family and acquaintances.

    @Jay Hindrichs, I can see why you think that. I think the price is from a combination of things. I think the large number of apartments units is helping lower the price for one, and another help is that this is applachia where prices and living in general is cheaper.

    0Reply
  • Justin P.
    Investor · Brandywine, MD · Member since 2013 · 84 posts · 21 votes
    10y

    @Ryan Herald Email or call anytime : )

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  • Jacob Pereira
    Real Estate Agent · Austin, TX · Member since 2014 · 636 posts · 486 votes
    10y

    @Ryan Herald, have you done all the analysis on this? Where I'm sitting (admittedly without all the facts) this looks like a lousy deal. A $2,700,000 loan at 4% for 30 years has a monthly payment of $12,890, Add in the other loan, which is likely to be much higher, but let's be nice and say 4% and that's another $1,432, to come to a total of $14,322, and that's not including the property taxes and insurance. For argument's sake, let's say 1% of the property value for taxes, which comes out to a monthly payment of $2,500, bringing your monthly payment to $16,822. I have no idea how insurance would work on 85 buildings valued at $3M, but I imagine it would be at least a few thousand a month, which is pretty much all you have left. And all that before vacancy, CAPEX, OPEX, and delinquencies.

    I don't have all the facts, so my analysis is very lacking, but please make sure you've done your numbers. It would be a shame if you had to forgo your $300k after a few years because you couldn't keep up with the payments.

    Either way, keep us informed; I think we're all interested to hear what happens.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Jacob Pereira   read again @Ryan Herald  Was saying this NETS 20k a month after all expense's.

    at least that's the way I read it.

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  • Ryan Herald
    OP
    Investor · Knoxville, TN · Member since 2015 · 31 posts · 3 votes
    10y

    Thank you Jay Hinrichs. The net is 20k a month (around 250 a property/unit). That is with what shoild be a gross over estimation on costs for vacancy, repair, and taxes/insurace. I'll try to break it down a little more when I get home tonight.

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  • Jacob Pereira
    Real Estate Agent · Austin, TX · Member since 2014 · 636 posts · 486 votes
    10y

    @Jay Hinrichs, ah, that makes a lot more sense. Thanks for correcting me. In that case @Ryan Herald, you should have few problems finding funding, although you might have to share some of that profit.

    0Reply
  • Victor Jernigan
    Investor · Knoxville, TN · Member since 2011 · 205 posts · 91 votes
    10y

    @Ryan Herald you are getting solid information from @Jay Hinrichs and @Jacob Pereira - it is an un-bankable transaction. The unit calculation of about $35K - regardless if it is apartment doors at $25K and houses at $45K -  makes this a low value asset with the potential of significant capital expenses. I also am just backing into your numbers, but at a net of $250 per month, one bad AC unit or roof repair will get most, if not all, of the annual income.

    In most areas around Knoxville, properties such as these rent for $425-$550 per month - simple math $42,500 annual for the 85 units. If the total of mortgages, insurance and taxes is $20K as Ryan calculated, it is essential you accurately identify all of the operating expenses. If you are lucky, the owner has perfect records for the previous 3 years so you can actually check expenses. Most probably, he does not. (You may not believe this but sometimes and owner will get paid in cash - pay for repairs in cash and show the apartment as vacant.) 

    Realistically the tenants are stressed in their daily lives and making rent payments is not their highest priority. Any vacancy rate will be understated until you add uncollectable rents and cost of evictions. Use a minimum of 10% and that still may not be enough - now $38,500. Because late payments will be at least 25% of your tenants, management expense is significant. If you do it yourself or hire it done, use a minimum of 10% in your calculations - now at $34,650. If the unit turn cost is $500 per unit, it is another $4,000 - now at $30,650. This leaves about $10K to cover all ongoing exterior maintenance repairs, plumbing issues, appliance replacement, yard work, plus creating a reserve for parking lots and roofs. Plus or minus a few thousand, it may be possible for the units to pay for themselves but it does not look like fun.

    Finally, since I live in Knoxville, if the portfolio is North or Northeast, it is in coal country. A declining market area and it will be hard to find either a bank or partner. If it is South or Southeast, it is in the manufacturing corridor and there may be people who will want to work with you, for a long term hold.

    However, from your information, the price, as they say in the movies, Is Just Too Damn High.

    Congratulations on the 16 units you now own.

    2Reply
  • Ryan Herald
    OP
    Investor · Knoxville, TN · Member since 2015 · 31 posts · 3 votes
    10y

    Hi Victor. Thanks for your post. Though we have not met, I know you are thought well of in the Knoxville area. With that said, I will have to disagree with what you have assumed (though you were limited to only the few scraps of info I have posted). 

    These properties are not in Knoxville or even the Knox metro area and thus have a significantly different market.  A nice 3 bed home in Knoxville may rent for as much as $1200, in this area a 3 bed in a good neighborhood is a round $700-750. Extras and improvements may push for a higher rent, but not enough to really justify them. This happens to be in a small town where property is cheaper and so is rent (though properties are generally far more than 35k each). Do these lower prices mean that this is a town of solely D class properties? Hardly. The rules for Knoxville and the rules for there aren't interchangeable. If you tried, I can go ahead and tell you that your bank account isn't going to be happy.

    I actually had a property in the Knox area like what you described, and ultimately sold it for a small profit and decided that low C-class and D class property wasn't for me. While some people like those properties, I find that I prefer my passive income to be a bit more passive.

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  • Victor Jernigan
    Investor · Knoxville, TN · Member since 2011 · 205 posts · 91 votes
    10y

    @Ryan Herald Thank you for the kind words. The fact you already have 16 units is a testament to  your success and your ability to do the necessary due diligence. I am counseling against being in a hurry to purchase at this price. To me it appears to be a classic investor value trap. (I have always liked the Investopedia definition and example of a value trap, http://www.investopedia.com/articles/stocks/08/val... - just change the word "stock" to rental property when you read the article )  

    It does not make any difference where the properties are located. Rental income is a function of the competition from other properties as compared to total demand for housing. In declining markets, buying rental properties is like trying to catch a falling knife. In growing markets, existing properties must compete with new construction of tax credit units. Even if the town is Mayberry, it is still a small market, the rental income is most likely now at top of market and is unlikely to increase unless significantly more people decide to move there. Unfortunately, the expenses are still variable and are always unexpected is such properties - the price of a roof, hot water heater, or air-conditioning compressor replacement will be about the same, regardless of market size. 

     @Gino Barbaro has a book on multi-family housing which may also give you additional perspective. 

    Good Luck,

    Victor Jernigan

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  • Ryan Herald
    OP
    Investor · Knoxville, TN · Member since 2015 · 31 posts · 3 votes
    10y

    Hi Victor, thank you for cautioning me on this. While I do have some experience, I know it doesn't compare to yours, so I do appreciate you chiming in.

    With a few new discussions, I doubt I will be putting anywhere near what I posted down. I have a relative who is a commercial lender for the area also overlooking it, and he'll have valuable input. With the seller's records and my advisors, this is a deal that will be measured and known before I take it. Or at least as known, as can be expected. 

    @Gino Barbara was actually kind enough to take some of his time to talk with me in the recent past. I believe he sent me the book you're reffering too.

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  • Gino BarbaroPro Member
    Rental Property Investor · St Augustine, FL · Member since 2014 · 2k+ posts · 1k+ votes
    10y

    @Ryan Herald

    This sounds like a fantastic opportunity to you.  It may be a game changer, and one of those deals where you hear everyone say "You can't do that".  If the deal truly is special, you can always look to a money partner for some of the down payment.  You can charge the entity a management fee to manage the property.

    My partner and I raided our pension plans and did everything we could to invest.  

    Good Luck!

    I hope you land them.

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