Purchasing a multi property RE Portfolio with little cash available

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Purchasing a multi property RE Portfolio with little cash available

Blake Ziegler
Investor · Lebanon, PA · Member since 2015 · 6 posts · 0 votes

BP Members,

I'm looking to dive in to real estate investing and came across an interesting portfolio that is being liquidated. The portfolio consists of 6 SFH's and 1 Duplex. All of the utilities are being paid in full at all properties with the exception of 3 units where the owner is paying water/trash/sewer and 1 owners meter electric bill. All the properties have been rehabbed with in the last 3 years. It is currently managed by a local PM company and the current owner is very satisfied with their performance.

The properties are located within 40 minutes of where I live and I would continue to use the current PM company if all goes well. The PM company deals with collections, repairs, evictions, etc.  The vacancy rate is currently under 10%.

The responsibilities of the current owners is just paying the bills.

I am looking for creative ways to acquire this portfolio but have little cash funds available because I just purchased my personal home 4 months ago on an 20% down, 15yr fixed mortgage.

Here are the numbers on the portfolio:

  • Gross Rent: $65,000
  • Annual Operating Expenses: $26,750
    • Management Fee: 10% of collections
    • Annual maintenance: ~$3,500
    • Annual Operations: ~$3,750
    • Annual Taxed/Ins: ~$13,500
  • NOI before reserves and Debt svc: $35,000

The current owner is liquidating the portfolio to pay for a child's college. Asking price is $275,000.

Now for the financing ideas:

  • I don't have  anywhere close to the 25% down that a typical investment loan requires.
  • Will a bank view this as a "company" loan and see that it is making money and the management of the portfolio isn't going to change?  Only change of ownership will change.  If so, how do I go about asking for that type of loan.
  • Seller financing is an option but doubtful because the owner wants out.  Maybe the properties could be acquired one at a time as they to pay for the college bills.
  • What about hard money lender, still kinda new to that. 
  • Find a partner to put the down money and then buy them out as it cash flows.
  • Or is this just a bad idea and doesn't cash flow enough to make it worth it?
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  • Kevin Bellavance
    Investor · Sherbrooke, Québec · Member since 2015 · 52 posts · 50 votes
    11y

    @Blake Ziegler

    Hi Blake!

    How much cash do you have in hands? I'm thinking of combining the cash you have + seller financing + bank loan.

    If you tell me what you have, I can help you figure out the numbers and all that.

    Best regards,

    Kevin 

    0Reply
  • Blake Ziegler
    OP
    Investor · Lebanon, PA · Member since 2015 · 6 posts · 0 votes
    11y

    @Kevin Bellavance,  

    I only have approximately 10K in available funds. 

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  • Matthew Saskin
    Chapel Hill, NC · Member since 2015 · 74 posts · 29 votes
    11y

    Financing aside, you should consider whether this is actually a worthwhile deal or not.

    Your Gross/NOI is off as you didn't account for vacancy, so given that (be conservative, use 10%) you're at an NOI of $28,500.00. Assuming you had cash for a down payment (20% with some of the commercial lenders I've used) you'd be looking at say, 4.25% for 20 years, so $1362/mo in principal & interest, we're now down to $12,156 in annual cash flow. With that many small properties I'd be personally putting at least $100/door/month aside for future repairs, now we're down to $2500 in annual cash flow.

    I'd pass on this deal personally.

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  • Matthew Saskin
    Chapel Hill, NC · Member since 2015 · 74 posts · 29 votes
    11y

    ...and to answer a few specific questions, while it's entirely possible to work with a commercial lender to have this viewed as a portfolio, they're still going to require skin in the game from you, plus (typically) some proven track record of profitably managing a real estate investment business.  For all the deals I've done with commercial lenders, it's a combination of my down payment plus the track record (or potential) of the investment that's worked together to get things qualified.

    Unless the seller carries a second mortgage, and your primary lender is OK with that (doubtful) I don't see a way to make this work without having the standard 20% give or take down.

    0Reply
  • Blake Ziegler
    OP
    Investor · Lebanon, PA · Member since 2015 · 6 posts · 0 votes
    11y
    Originally posted by @Matthew Saskin:

    Financing aside, you should consider whether this is actually a worthwhile deal or not.

    Your Gross/NOI is off as you didn't account for vacancy, so given that (be conservative, use 10%) you're at an NOI of $28,500.00. Assuming you had cash for a down payment (20% with some of the commercial lenders I've used) you'd be looking at say, 4.25% for 20 years, so $1362/mo in principal & interest, we're now down to $12,156 in annual cash flow. With that many small properties I'd be personally putting at least $100/door/month aside for future repairs, now we're down to $2500 in annual cash flow.

    I'd pass on this deal personally.

     @Matthew Saskin,

    Thanks for your clarification on some of the numbers. In the spreadsheet that I have for these properties, there was a 5% vacancy figured in to the numbers. I increased it to 10% and it is returning a NOI of $32,000 before reserves and Debt svc.

    At $100/door/month for repairs and debt service, it brings the annual cash flow to $3,600.

    When you look at it like that it does seam like a weak investment. 

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  • Keith H.
    Investor · Richmond, VA · Member since 2015 · 4 posts · 0 votes
    11y

    Just a thought but if he's trying to pay for college it seems like $35k/year in cash flow would be a pretty solid amount to cover college expenses.  Is there another reason he wants to sell?  

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  • Kevin Bellavance
    Investor · Sherbrooke, Québec · Member since 2015 · 52 posts · 50 votes
    11y

    @Blake Ziegler

    Look, here's what I would talk about with the seller (you are quite lucky that seller financing is ''available'' even though it is not ideal).

    Going through college takes about 3-4 years (where I'm from). Therefore, he (the seller) will need cash over the same period of time.

    For the following analysis, take note that I didn't look at your spreadsheet. Therefore, it is being considered that your NOI is accurate and that it takes everything it should take in consideration when it comes to property analysis.

    I would come to him with this :
    I put 10K down.

    I finance 75% with a bank since it will probably be considered commercial. This means the bank could finance 206K.

    275 - 10 - 206 = around 60K missing. 
    You ask him to finance it with something like this : 

    Interest only (4-8%) for 36-48 months and a balloon payment of 60K at the end.

    This could leave you with something like that:
    Debt service =

    Mortgage payment of 206K, 25 years, 4% interest = 1085$

    Interest to seller (8%) : 0.08/12 x 60 000 = 400$

    Debt service = (1085 + 400) x 12 = 17 820$.

    NOI - Debt service = 35 000 - 17 820 = around 17 000$ in Cashflow or 1416$/month

    Also, in 3 years, your mortgage balance will be at around 190 000. Therefore, without any appreciation, you'll have around 16K in equity that you can pullout by refinancing at 75%.

    But, you'll have to pay 60K to the seller... 60K - 16K = 44K. 

    44K / 36 months = around 1225$/month that you need to put in reserve.

    1416 - 1225 = 191$/month that is left in free cashflow... 

    I believe that if the seller is really willing to sell, he should agree with this deal. As for the bank, I can't predict if they are going to agree with that much seller financing. But if you go there well prepared with all the numbers already done, they will be much more inclined to accept the whole thing. Banks want to see professionalism and that you know what you are doing. Show them what they want and you have much better chances.

    Please, consider that this is only a general number analysis. Before acting on any of this information, you should consider the appropriateness of the information having regard to your objectives, financial situation and needs.

    Best regards,

    Kevin

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  • Blake Ziegler
    OP
    Investor · Lebanon, PA · Member since 2015 · 6 posts · 0 votes
    11y
    Originally posted by @Keith H.:

    Just a thought but if he's trying to pay for college it seems like $35k/year in cash flow would be a pretty solid amount to cover college expenses.  Is there another reason he wants to sell?  

     @Keith H.

    That's what he said the reason for selling is.  I find it hard to believe as well so that is still a concern of mine. I know my college bills didn't cost that much.

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  • Blake Ziegler
    OP
    Investor · Lebanon, PA · Member since 2015 · 6 posts · 0 votes
    11y
    Originally posted by @Kevin Bellavance:

    @Blake Ziegler

    Please, consider that this is only a general number analysis. Before acting on any of this information, you should consider the appropriateness of the information having regard to your objectives, financial situation and needs.

    Best regards,

    Kevin

     @Kevin B,

    Thanks for explaining that for me. That seems like a reasonable plan.  I also appreciate the disclaimer at the end.    BP members are awesome!

    0Reply
  • Matthew Saskin
    Chapel Hill, NC · Member since 2015 · 74 posts · 29 votes
    11y
    Originally posted by @Blake Ziegler:
    Originally posted by @Matthew Saskin:

    Financing aside, you should consider whether this is actually a worthwhile deal or not.

    Your Gross/NOI is off as you didn't account for vacancy, so given that (be conservative, use 10%) you're at an NOI of $28,500.00. Assuming you had cash for a down payment (20% with some of the commercial lenders I've used) you'd be looking at say, 4.25% for 20 years, so $1362/mo in principal & interest, we're now down to $12,156 in annual cash flow. With that many small properties I'd be personally putting at least $100/door/month aside for future repairs, now we're down to $2500 in annual cash flow.

    I'd pass on this deal personally.

     @Matthew Saskin,

    Thanks for your clarification on some of the numbers. In the spreadsheet that I have for these properties, there was a 5% vacancy figured in to the numbers. I increased it to 10% and it is returning a NOI of $32,000 before reserves and Debt svc.

    At $100/door/month for repairs and debt service, it brings the annual cash flow to $3,600.

    When you look at it like that it does seam like a weak investment. 

     Fair enough - my point was not about being negative, more to make sure you're covering all the bases.

    Personally speaking, it's still a weak deal for me for two reasons. First, I don't invest in SFH. That decision aside however, if my conservative analysis of a deal doesn't look like it will result in $100/door/month, I pass. Maybe (almost certainly) I've passed on some great opportunities as a result of this, but that's just my own criteria.

    0Reply
  • Blake Ziegler
    OP
    Investor · Lebanon, PA · Member since 2015 · 6 posts · 0 votes
    11y
    Originally posted by @Matthew Saskin:
    Originally posted by @Blake Ziegler:

    Personally speaking, it's still a weak deal for me for two reasons. First, I don't invest in SFH. That decision aside however, if my conservative analysis of a deal doesn't look like it will result in $100/door/month, I pass. Maybe (almost certainly) I've passed on some great opportunities as a result of this, but that's just my own criteria.

    @Matthew Saskin, To clairfy, you look for a minimum of $100/door/month of cash flow after reserves and debt service?

    Also, the interesting thing about these SFH is that they are row-homes and cost half of what a duplex is. In your opinion, does that change how you would view these properties?

    Thanks.

    0Reply
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