Is this a Good Deal or Not??

Question

Hello Everyone!! I'm totally new to Real Estate Investing and wanted to ask if you all thought this was a good deal I came across!

Someone is selling their 2.4 million dollar portfolio comprised of single family homes, multi unit properties, and commercial properties. It's producing $280,000 a year with an instant equity of $250,000. He is willing to owner finance with $100k down. I'm new and wanted to get your input on whether this is a good deal or not.

Mike Makkar · Answer

@Stephanie Paulk, Lets look at it from a commercial valuation perspective.

Income Method to valuation:

280k on 2.4M, capitalization rate = 11.6%

Is 280k, gross income or net operating income after expenses (NOI)?

Cap rates are a heavily contested topic, but there's no other better method to evaluate properties very quickly. And at 11.6% isn't bad. Hard to get that with existing multi-family apartment complexes. You need to dig in on other deferred maintenance issues.

Market Method to valuation:

Here, you need to take each property one by one and do either an appraisal by recent sale prices and other comps and liabilities. Use tax assessed values to help with your calculation as well. Even in this approach, some of the commercial properties (Multi-family) may require an income method to valuation.

Asset method to valuation:

You have to think of the portfolio like a business and how much that business might generate in the future. Can you buy some other business for 2.4M, with owner finance and generate income of 280k? Can you add value to the business and increase from 280k to 350k?

btw, who claims the 250k equity? I would do a lot of due diligence on this. Pay for appraisals and look at each property with a fine-toothed comb. Also work with multiple lenders and see if they will finance it, before you go owner finance.

I'm in a similar situation with an opportunity to acquire a 1.5M portfolio. Got the jitters! Good luck!

Stephanie Paulk · Answer

Thanks @Mike MakkarYou gave me a lot to think about!! I'm still new at all of this and I was wondering what all I should be actually digging into when approaching a deal like this! @Gary HeadrickI was asking the same question!! Why sell if this is such a good opportunity and I would love to know the motivation behind it! If it was me I know I wouldn't be selling that kind of portfolio unless I was dying or something!! Lol!

Gary Headrick · Answer

Stephanie,

Mike offered a good analysis and his point on the $250K instant equity is well taken. Whenever I look at these kind of deals, one of the first questions I ask is why sell? If the deal is so good, why are they selling. The reasons may be legitimate but knowing the motivation not only helps with the evaluation but in the negotiation.