Tricky Portfolio - Bouncing Ideas

[Ryan Kurth]

Hi all, 

I've come across an owner that has a portfolio of 8 rental properties, all single-family. After discussions and a meeting with him, it seems his real goal is to smooth out cash flow and off-load management risk to begin to set himself up for retirement. I'm trying to figure out a win-win scenario, and was hoping to gain some experience and input from the community here.  I'll be general on the details now, but we can get into the weeds in whatever direction this post brings us...

7 SFR properties -

Various market quality, from meh to promising

2 are in the meh market, and are rented through and qualified for a section 8 type program (but not section 8, as I'm made to understand it)

The 4 in the best markets all have traditional bank loans on them - roughly $925K of 'market value', $580K of debt (most LTV around 70%, one is at 35%)

The other 4 have no debt, and about $650K of value

All seem to be pretty low maintenance as far as structure, yard etc, especially with improvements made since acquisitoin

He bought these with a partner/contractor from 2010-2014, did extensive rehab to some, light rehab to others

All are claimed to be rented (leases to be verified), total monthly rents are $10,315, taxes in the area are around $1,600/month across the portfolio.

He is open to owner financing and/or some sort of master lease 

He has a close relationship w/property manager charging him 6%

We would not like to commit a lot of cash to this portfolio

[James C.]

Ryan,

I think the best approach is to divide the question into two parts:

1) What are the properties worth to you?

2) How can you find a deal that works for you and the seller?

#1 is fairly easy, you simply run an analysis on each property to come up with it's value and add it up. Make sure that you know which properties are financed, which are free and clear etc. From that point, you can segment the portfolio for financing, Which leads us to #2

#2 - It seems as if your seller is primarily interested in maintaining cash flow. There are a number of choices. You could run all the properties as a single portfolio, and find a financing structure that works for both of you as a whole portfolio. You could segment the portfolio based on current financing structure, and write different financing for each segment. For the 100% owned, say Z% in cash, 100-Z% owner financing. For the 70% LTV, say wrap/assume/L/O the 70% and S% in cash, with D% in owner second, such that 70%+S%+D% <= 100% of YOUR value.

You could also see if the seller would be an equity partner for part of it, i.e. offer them x% of the portfolio as an equity part. 

Maybe think about it this way: A% down, B% Owner Financing, C% Assumption/wrap, D% New Loan, X% equity. Or some combination thereof, either by whole portfolio or segmented. Keep in mind that A%+B%+C%+D%+X% <= 100% of YOUR VALUE. Also note that your value can change based on financing. I might be inclined to pay more for a property whose owner a) is willing to finance 100% for 30 years at 1% simple interest over a property whose owner b) wants all cash today. But I wouldn't do "a" if the numbers didn't work for my business.

Another option might be to MLO the whole deal, then do takeouts in bite sized portions at some interval agreeable to the seller. Just keep in mind that the seller will most likely want to have 100% of the net sales proceeds to pay down loans. You could also do takeouts with owner financing, once the portfolio got to that point. Takeouts with assumption/owner financing/cash etc. are possible as well.

I am guessing the seller likes his PM. If you think the PM is good, you'll want to have your seller help you negotiate the same deal they have with the PM. A negotiation point might be keeping the same PM at the same rate. It's something to explore.

Overall, the financing options can be complex, but it all hinges on the analysis. If your analysis comes in below where the owner thinks it should, that is your battle. You can use the owner financing to win the battle, but keep your head and stick to your numbers.

Let us know how it turns out.

Good Luck!

Jim