I have had in the past and anticipate in the future being offered a portfolio of rental properties from a retiring investor. Back then it was like...deer in headlights response. I would love to get some advice on how to analyze and take down such a deal. Would one have to analyze p&l of each property and try to cherry pick or prepare some sort of business proposal for a bank commercial loan. Should it be analyzed like a multifamily on NOI or computed based upon comps for each individual property? One thought I had was compute the owners net monthly CF, purchase for him an annuity that gives him equivalent CF and take over all properties subject to existing loans.
Any advice would be appreciated
No advice so far? Really? there must be someone out there in BP land that knows how to analyze and offer on a portfolio of single family homes!
This is just my opinion but I suspect that you may not be getting any responses because you already seem to know what you're doing and have come up with some good strategies already.
With that said, SFRs are SFRs. Comps would be the most common way of valuing them. However, a retiring landlord with a portfolio of homes would probably be open to the ROI approach which could get you a better deal. That of course depends on what level of homes these are. A-B homes are going to mean a lower net ROI (higher price) than C-D homes obviously.
@Chris Licavoli , I know nothing about buying a potfolio but am considering an offer on one so let me just give you my thoughts. I have no experience so take them for what they are worth. First since they are single family homes you need to find out the value of each home. Whether there are 5 or 50 you need to look at each individual property. Since you are dealing with different houses you need to know status of plumbing, electrical, roof, heating/cooling systems, foundation/structural condition. Try to get info on the properties individually, how long has the tenant been in each one, what are utilities, how much have they spent on each house. location, location, location. Where they are is very important. Even if the first 10 are ok neighborhoods the next 10 could be in war zones. Find out and rank each of them.
Find out why they want to sale and the mortgage status of each of them. Some have portfolio loans most do not. You may be able to structure some of them on owner finance to avoid big capital gains issues. You must know rent and expenses by each property. If their books did not break them out it could be dangerous to look at it as a total. What if they sold off their best 5 rentals to their friend or relative a year ago?
Find out the true maintenance costs and how it is done. If they do 80% of the maintenance themselves and you do not, the upkeep will go up dramatically when you get it. Keep in mind if you get turnover it could be huge on some houses where they have had the same tenant for 10 years. Any flooding or landscaping issues? Lead paint, overhanging tree limbs, septic systems can all be hidden costs. You need to find out about insurance. Many insurance companies are very picky about what they will insure. The may have grandfathered policies, but old wiring like fuse boxes, galvanized pipes, or even Tlock shingles may prevent you from getting insurance or paying for riders or having exclusions.
As with any deal find out the motivation of the Seller and that way you can craft a deal that fixes their problem but has advantages for you. Sales are not always about money, sometimes they are about problems. If you do not know the area for each house get expert advice. Try to structure the deal so you can get rid of special problem properties. You may find a small number of properties create most of the headaches. Most sellers of portfolios do not want to sell off the best properties and keep the rest. It is usually opposite to that. If you can get them to list a value for each property it can help you negotiate better.
Finally there is no substitute for looking at the actual books. The income tax records will tell the real story. It is easy to print out spread sheets that may not be accurate. Getting feedback from each renter could help to verify actual rents and what repairs are truly needed. It may be better to have property inspections done on each so you know the actual status and repairs needed. That can get spendy, but so can rewiring 15 houses.
Hope this helps and good luck.
I would view these as one big multifamily deal. Focus on the financial statements from the seller's income tax returns. As Jerry mentioned, make sure you know what work is being done by the seller to add those costs into the projection. My assumption is that the seller will not sell you just the best performers. If they are looking to get out, then the good, bad and ugly likely goes along with the sale. Sell the ugly and fix the good after you take possession. Put those costs into the projections.
For the loan, the first place I would go is the seller. If the seller is not interested in taking back a loan (and make sure you know why they will not), then a good local bank, that you hopefully already have a relationship with, may be able to write all of the loans in one underwriting process.
Thanks for all the great advice and insight. Clearly taking one of these types of deals down is not a simple undertaking and I can see how difficult it would be for a seller of a portfolio of SFRs to sell it kit and caboodle to another investor.
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