One yellow letter=9 home portfolio deal. I need structuring advice!

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One yellow letter=9 home portfolio deal. I need structuring advice!

Ryan Pemberton
Investor · Newburgh, IN · Member since 2014 · 63 posts · 47 votes

I sent out some yellow letters a few months ago that I'm still getting calls on.  A woman I reached about one property has a 9 home portfolio that her late husband was managing. She's not interested in messing with the properties and wants to travel and enjoy her retirement.  I've gotten a list of properties from her and the homes are all great rentals.  Some are month to month because they've been rented for years, and a few are newly signed 1 year leases.  Some of them are duplex and triplex conversions with only one unit rented and rehab still needed on the other units. 

Roughly, the homes are worth around $60k each.  That's an average based on some speculation and recently sold comps.  Some $40k, some $80k, but averaging around $60k.  There are a lot of moving parts.  A lot.  She stated in her email that she's willing to sell on terms for "tax purposes."  

I have never dealt with a deal like this and don't even know where to begin trying to structure the deal.  

Any advice that can put me in the ballpark of a down payment proposal and/or what sort of terms I should entertain would be great!  I'm going to talk to my real estate lawyer next week but BP has more collective knowledge that is equally, if not more valuable.

I'm looking forward to the replies!  

Thanks in advance!

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Franklin Romine
Visalia-Fresno, CA · Member since 2009 · 1k+ posts · 863 votes
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@Ryan Pemberton

Stay engaged with the seller weekly or every other day.  If she gets the taste of another buyer there is a good chance you will get kicked to the curb.

For quick #'s if the total rents are $6K per month.  I would keep the monthly debt payment less than 1/3 of the gross rent.  Around $2K per month.  

She will probably want the one loan secured by all 9 properties.  Try to break up the debt into a few homes.  Maybe 2 or 3 loans depending on the type, equity and location of each property.  This will give you more flexibility to refinance or sell in the future.  Think of future, future, future.

Frank

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  • Ryan Pemberton
    OP
    Investor · Newburgh, IN · Member since 2014 · 63 posts · 47 votes
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    Anyone know why this posted twice?  Can I delete one?

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  • Jordan Thibodeau
    Rental Property Investor · San Jose, CA · Member since 2013 · 486 posts · 170 votes
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    @Ryan Pemberton

     wow that sounds great.

    Are you thinking about buying the entire property? Or buying only a few?

    Sounds like she wants to travel and be free of this. Did you ask her about what types of financing she's interested in? Are all of the houses paid off?

    What's your cash position? Would you be able to buy all the houses yourself? Would she be willing to carry any of the paper?

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  • Juan R Perez
    Investor · Honolulu, HI · Member since 2015 · 5 posts · 0 votes
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    AWESOME!!! Breakdown the deal.. One property at a time for your analysis. Use the tools on BP. Negotiate for more that you think and really push for seller financing. It works well for the sellers.. Passive income without the risk. Also if these deals are out of your area align with a local PM or agent to meet and greet with the client to help close. Paying them is worth it to get help with inspectors etc. Hope that helps. Lemme know if you need more help.
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  • Ryan Pemberton
    OP
    Investor · Newburgh, IN · Member since 2014 · 63 posts · 47 votes
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    Originally posted by @Jordan Thibodeau:

    @Ryan Pemberton

     wow that sounds great.

    Are you thinking about buying the entire property? Or buying only a few?

    Sounds like she wants to travel and be free of this. Did you ask her about what types of financing she's interested in? Are all of the houses paid off?

    What's your cash position? Would you be able to buy all the houses yourself? Would she be willing to carry any of the paper?

     I want the whole lot of homes.  Just from my quick comps and google street views, they all look nice and in decent neighborhoods.  

    I haven't talked to her about types of financing or about mortgages yet.  That conversation is coming. 

    I can put money down but not much without borrowing, which I'm willing to do.  I'd rather buy them all for myself.  I still have a lot of evaluating to do but I wanted to reach out to BP to get some thoughts.  I've gotten a lot!  (This forum post double-posted so there's an identical thread with more info on it.  I have no idea how it double posted!)

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  • Franklin Romine
    Visalia-Fresno, CA · Member since 2009 · 1k+ posts · 863 votes
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    @Ryan Pemberton

    Stay engaged with the seller weekly or every other day.  If she gets the taste of another buyer there is a good chance you will get kicked to the curb.

    For quick #'s if the total rents are $6K per month.  I would keep the monthly debt payment less than 1/3 of the gross rent.  Around $2K per month.  

    She will probably want the one loan secured by all 9 properties.  Try to break up the debt into a few homes.  Maybe 2 or 3 loans depending on the type, equity and location of each property.  This will give you more flexibility to refinance or sell in the future.  Think of future, future, future.

    Frank

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  • Jeff Starkey
    Investor · Newburgh, IN · Member since 2013 · 7 posts · 0 votes
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    What is your goal/strategy with these properties?  Long term buy and holds?  Fix and flips?  Possibly a combination of the two?  You could definitely get creative if you do your most of your own rehab (you are/were a contractor if I remember correctly).  You might be able to offer to spread the down payment over 2-3 years if you elect to fix and flip some, rent others.  She might be interested in some sort of a modified down payment strategy if she owns them all free and clear and is using it to fund her travel.  

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  • Ryan Pemberton
    OP
    Investor · Newburgh, IN · Member since 2014 · 63 posts · 47 votes
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    @Jeff Starkey

    I'd like to do a buy and hold on all.  Even if I can structure it to break even for the first year or two, I'd be thrilled.  If I'd have to sell one to make it happen after I took possession, that would be fine, too.  I like that there are unfinished duplexes and triplexes in the deal. At the very least, I'd like to get those at a deep discount, finish the repairs, and make them great cash flowing properties.  Maybe I can wholesale the rest.  The possibilities are pretty endless and my lack of experience is TERRIFYING!  I'm calling the seller tomorrow to get all the information I can.  I'm also putting a call in to my real estate attorney tomorrow to start the process.  I have to take action immediately and lock this thing down.

    There's always a chance that she'll be completely unreasonable and the whole thing will fall through.. I'm prepared for that but hopeful that's not the case.

    @Franklin Romine

    Thanks for input.  That's a great idea regarding payments and breaking the deals up.  I'll run that by my attorney.

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  • Jerry Fatyhing
    Columbus, OH · Member since 2015 · 11 posts · 0 votes
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    keep us posted

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  • Frank Woodin
    Investor · Crystal Lake, IL · Member since 2014 · 64 posts · 17 votes
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    Before you start shooting terms at her I would ask her what she wants.  Specifically if she is trying to lower the tax bite she might just want a small amount down and then have the maximum amount per month in payment from you.

    To make her more comfortable with seller financing you might suggest to have a loan processor to service the note, that way it is a professional company between you and her.  In my experience that is the best way to make some sellers feel better about seller carry back financing.

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  • Ryan Pemberton
    OP
    Investor · Newburgh, IN · Member since 2014 · 63 posts · 47 votes
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    @Jeff Starkey @Franklin Romine

     @Jordan Thibodeau

    I got rental numbers today.  Met with the owner.  All are owned free and clear.  Total value approx $400k - $450k. 

    Here's what sucks:  She wants 1/3 down and full payoff in 5 years. 

    My cash position is basically zero and structuring this EVEN at break even with HML for the down payment given the rental numbers is pretty impossible by my numbers..but I'm not experienced running numbers like this. That's factoring a little vacancy and a 2% of home value for maintenance. I've got all the tax numbers factored but not insurance because I don't know what to figure.

    How long can I get a hard money loan for?  I'm assuming the terms are short and steep and more geared towards flips. 

    I'm really green here and this opportunity just kind of fell in my lap and I HATE to pass it up. 

    What about trying to get it under contract and trying to wholesale the whole portfolio?  Do investors buy turnkey deals that big?  The rental income is $72k right now but some tenants haven't seen an increase in 19 years!  I know they're below market. 

    Thanks for the wisdom!

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  • Princeton Washington
    Anchorage, AK · Member since 2015 · 83 posts · 27 votes
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    I'd say if your cash position is zero you may have to partner with some and do a 50/50 split. I mean once you have the lot locked up you can utilize the properties at your discretion and with a portfolio that size partnering wouldn't be too bad. Do you know anyone that has that kind of capital or could obtain it? Have you reached out in the market place?

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  • Ryan Pemberton
    OP
    Investor · Newburgh, IN · Member since 2014 · 63 posts · 47 votes
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    Originally posted by @Princeton Washington:

    I'd say if your cash position is zero you may have to partner with some and do a 50/50 split. I mean once you have the lot locked up you can utilize the properties at your discretion and with a portfolio that size partnering wouldn't be too bad. Do you know anyone that has that kind of capital or could obtain it? Have you reached out in the market place?

     I haven't reached too far but I think I could come up with it.  I haven't checked the marketplace.  Isn't that a pro member only thing?  

    I have some rich relatives but real estate really isn't their thing...

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  • Princeton Washington
    Anchorage, AK · Member since 2015 · 83 posts · 27 votes
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    I think it is but I think it's worth the 9 bucks! Only reason I'm not a Pro member is because I'm still learning but hey if you can get a general business plan written up for your relatives I'm sure they'd be interested. Especially if you can give them a good return on their investment. You have a deal so the money going to follow brother.

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  • Jeff Starkey
    Investor · Newburgh, IN · Member since 2013 · 7 posts · 0 votes
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    With those terms, it definitely sounds like its something you will really struggle to do alone, especially with no cash position. Do you have anything with equity in it that you could tap into if necessary? Even with killer cash flow I think you would really struggle to pay that loan off in 5 years. How much equity do you think you would have in the deal after purchase? After repair? I think you will find yourself in a tough spot if you are requiring HML and you are having to fix these things up yourself, as your carrying costs are going to be tremendous. I think you might be better off buying and fixing up a duplex/triplex and getting a better feel for all your numbers. Evansville is a high cash flow low appreciation market. There are plenty of deals to go around, especially if you are willing to put in your own labor.

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  • Christopher Brainard
    Rental Property Investor · Rockwall, TX · Member since 2015 · 891 posts · 701 votes
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    @Ryan Pemberton

    On the surface, this seems like a very good deal, however, I think you need to review every property and determine exactly what the FMV for the home is, what repairs need to be made (if any), market rent for each home., and taxes/insurance for each home (est). If I were an investor that you were pitching this deal to and you told me the FMV for all 9 homes was between 400k and 450k, my first thought is, "Wow, that's a HUGE range. Why so vague? Why don't I have a breakdown for each property?". With that being said, if rents are at $72k/year, taxes and insurance aren't outrageous, I'm sure this will cash flow.

    It does sound like, however, that you aren't the type of investor she is looking for. Hard money is VERY expensive and can't be considered for a 5 year flip. Private money is an option, but I don't think you'll find 100% financing, unless you bring a partner on board. At the very least, I think i may also talk to the seller a bit more about her 33% down payment. Even with a conventional loan, you should be able to find a 25% down payment without no trouble at all. I'm not sure she's really doing you any favors with the terms she is offering and you may be better off with conventional financing or negotiating better terms directly with her.

    -Christopher

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