Buying 10 single family homes portfolio

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Buying 10 single family homes portfolio

Lauryn Meadows
Ironton, OH · Member since 2015 · 104 posts · 31 votes

Hello!

So I'm looking into purchasing 10 houses from one owner. These houses are small (7 have 1 bedroom 1 bath/ 2 have 2 bedrooms and 1 bath/ 1 has 3 bed rooms and 1 bath/ all are around 1000 sq ft or smaller.) My husband and I are really wanting to get into multi family investing, and while this isn't a multi family complex it is an opportunity for us to jump start our real estate portfolio. 7 of the units are HUD (section 8)/ tenants pay their own utilities. 100% occupied. Do not know the terms or length of the leases. Here are the numbers.

10 Houses

Asking price: $269,000

(These are numbers he gave me)

Gross monthly rent: $4,524

Annual gross rent: $59,388

Taxes: $4,640.54

Insurance: $4,168.00

Total of Annual expenses: $8,808.54

NOI: $50,579.46

------------------------

Loan with bank portfolio lender:

-20 year commercial loan

-No balloon payment

-Interest rate: 4.75%

-Interest barring every 5 years at a 2% cap on interest rates

-20% down payment ($53,980)

-Estimated monthly payment: $1754

-Annual amortization $21,048

----- it may be worth noting that we have $20,000 cash for this but will have to take the other $30,000 out of my husbands annuity retirement account which would inevitably lower the cash flow for us personally but we haven't called the financial planner to see what those payments look like. We do plan on doing that this week.

--------------------------

NOI- loan payment is:

$50,579.46-$21,048= $29,531.46

Cash return= $29,531.46/ 12 months

= $2,460.95/ month

-$460.94 cap ex

=$2,000/ month cash flow / 10= $200/ unit

So looking at this, it is close to an 18% cap, and close to a 50% cash on cash return. This is in a small area in eastern Kentucky so it's normal for cap rates to be around 13-15%. Also, this deal has been on the MLS for 3 years so I'm a little worried to numbers look too good to be true. Of course, I'm going to try to talk down the price to increase returns but assuming the deal "as is" what are your thoughts? What else should I be doing in the due diligence stage in order to make sure my numbers are correct? Can I renegotiate the HUD (section 8) rental income to increase that revenue?

Any thoughts, suggestions, words of wisdom are welcome! This is the first buy and hold deal that we are really wanting to tackle. We are currently working on our first flip house as well, but end strategy is buy and hold. The flip business is strictly to fund buy and hold deals.

Thanks for any and all advice!! 

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David Faulkner
Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
9y
Originally posted by @Lauryn Meadows:

It's worth noting that I do live only about 10 mins from the neighborhood these houses are in. I live in the KY/OH/ WV tri-state area. It's also not unusual to be able to pick up a house on the MLS for $30k in this area. In this area the medium house hold income is $37k, and it seems that low income housing is what most investors are doing in this area. This is an older man that is wanting to liquidate his investments. I want to look into investing in better markets in the future but would like to get a small portfolio built out my back door first in order to get my feet wet in land-lording. My question is, what steps should I take to look closer into the deal to foresee possible costs?

If you think that investing in $30k SFRs that rent for $450 is the path to wealth and financial independence, then start out by buying 1 all cash ... self manage it for a year. You will still get all of those valuable lessons out of the investment, but at 1/10th the price/losses.

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  • Bill Pate
    Real Estate Investor · North Ridgeville, OH · Member since 2016 · 97 posts · 81 votes
    9y

    HUD (Section 8) has a negotiated amount and is based off the lease. You could try raising the rent when the lease comes due, but that might trigger the tenant to move also. Personally I wouldn't raise it unless necessary. I don't see anything in your calculations for maintenance and vacancy? In my experience you need to calculate at least 10% for maintenance and vacancy. If I can't make at least 18% per year ROI after that then it's not worth buying. Remember multiple homes come with multiple problems. They are definitely a money maker though. I own one duplex and have had to put over $7000 into it since January just to fix the roof. Now that was a planned expense...

    0Reply
  • Bill Pate
    Real Estate Investor · North Ridgeville, OH · Member since 2016 · 97 posts · 81 votes
    9y

    Make sure you register with the section 8 office as soon as the property transfers or you will lose the rent they pay for that month.

    0Reply
  • Lauryn Meadows
    OP
    Ironton, OH · Member since 2015 · 104 posts · 31 votes
    9y

    Thank Bill! I did not know that. 

    0Reply
  • Lauryn Meadows
    OP
    Ironton, OH · Member since 2015 · 104 posts · 31 votes
    9y

    I will be sure to re- calculate with a 10% vacancy and maintenance. 

    0Reply
  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    9y

    10 houses selling for under $27k each, renting for $450/mo each, in an out of state market ... what could possibly go wrong?

    Seller would rather get rid of them then hold for a 50% CoC return on paper, but none of the local investors want to touch it from the MLS after 3 years ... too good to be true? Really? Ya think?

    On the plus, you would learn some very valuable lessons if you bought this portfolio.

    1Reply
  • Lauryn Meadows
    OP
    Ironton, OH · Member since 2015 · 104 posts · 31 votes
    9y

    It's worth noting that I do live only about 10 mins from the neighborhood these houses are in. I live in the KY/OH/ WV tri-state area. It's also not unusual to be able to pick up a house on the MLS for $30k in this area. In this area the medium house hold income is $37k, and it seems that low income housing is what most investors are doing in this area. This is an older man that is wanting to liquidate his investments. I want to look into investing in better markets in the future but would like to get a small portfolio built out my back door first in order to get my feet wet in land-lording. My question is, what steps should I take to look closer into the deal to foresee possible costs?

    1Reply
  • David Chan
    Investor · Omaha, NE · Member since 2016 · 34 posts · 24 votes
    9y

    @David Faulkner To David's point, if you want to treat the 50k as a lottery ticket where you can either win big or lose it all, then this deal is it.

    This your first time dealing with class C and section 8? The numbers can be 20% ROI a year and I still wouldn't touch it with a 10 foot pole. In fact, if you came to me with this deal, I really wouldn't have much interest to take on this type of portfolio even if you gave it to me for free.

    I don't think we need to flesh out the difficulties of class C assets. There's plenty of articles about the type of investor and manager that's required to run class C assets. Are you wanting to hire a manager and pay him maybe $40 bucks a month to help you run each house? Maybe it's time to wonder who would say yes to that kinda offer.

    100% occupied? You need to ask why is the seller selling when this portfolio on paper is running full steam ahead. (because it probably is not.)

    It's been sitting on the MLS for the last 3 years. It's a public deal. There's no informational advantage you are proposing here and that means the majority of active investors in this local market agrees with the risk profile.

    Move along. No point to waste time with a subpar asset in a foreign market when the masterclass of class C investors have passed it by for the last 3 years. Anyone pitching 50% cash on cash isn't doing you any favors, especially in today's markets.

    0Reply
  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    9y
    Originally posted by @Lauryn Meadows:

    It's worth noting that I do live only about 10 mins from the neighborhood these houses are in. I live in the KY/OH/ WV tri-state area. It's also not unusual to be able to pick up a house on the MLS for $30k in this area. In this area the medium house hold income is $37k, and it seems that low income housing is what most investors are doing in this area. This is an older man that is wanting to liquidate his investments. I want to look into investing in better markets in the future but would like to get a small portfolio built out my back door first in order to get my feet wet in land-lording. My question is, what steps should I take to look closer into the deal to foresee possible costs?

    If you think that investing in $30k SFRs that rent for $450 is the path to wealth and financial independence, then start out by buying 1 all cash ... self manage it for a year. You will still get all of those valuable lessons out of the investment, but at 1/10th the price/losses.

    2Reply
  • Lauryn Meadows
    OP
    Ironton, OH · Member since 2015 · 104 posts · 31 votes
    9y

    So with this being the majority of my area (low income rentals) do you all think it is best to start investing out of state? I do think there is a demand for middle class rentals in the area but the very few B class multi family properties. I've contacted a few of the people in the area that own medium sized B class multis to let them know that I'm interested in buying if and when they are ready to sale. I want to buy right, but I also want to get started!

    0Reply
  • Mark Allen
    Real Estate Investor/Broker · Irving, TX · Member since 2015 · 520 posts · 263 votes
    9y
    Your high level analysis is missing many major expense items - Utilities, leasing fees, PM, ins, taxes, R&M, etc etc. I'd assume this 50% cash on cash is more like 12-19% And 18% cap rate is more like 10-12-% Best of luck and portfolios are a great way to quickly scale!
    0Reply
  • Jeff Hall
    Attorney · Las Vegas, NV · Member since 2016 · 44 posts · 14 votes
    9y

    I'd certainly be wary and do plenty of due diligence.  I'd find someone experienced in the area to run through all the details on this sort of deal.  But I wouldn't be scared away because they are C class properties if your willing to be hands on.    

    0Reply
  • Derrick E.
    Investor · The Creek, WV · Member since 2014 · 890 posts · 1k+ votes
    9y

    @Lauryn Meadows I am from the same area. I know the houses you are talking about and I think you can find much better deals in our market. I sent you a connection request. 

    0Reply
  • Lauryn Meadows
    OP
    Ironton, OH · Member since 2015 · 104 posts · 31 votes
    9y

    Thanks everyone! I appreciate the feedback. It seems like a lot of the investors in this area (Ironton, OH/ Ashland, KY) do section 8. A lot do month to month rentals as well which is not something I'm interested in. It does seem like there is a demand for middle class renting in the area but not enough properties. We've considered building a small to medium size multi ourselves but I worry the returns may not be as good as just purchasing an existing property.

    0Reply
  • Steve Osowicz
    Real Estate Broker · Louisville, KY · Member since 2014 · 121 posts · 91 votes
    9y

    @Lauryn Meadows I just had a portfolio that wouldn't sell (11 properties multi and sfr's) on its own so it is headed to auction (next month actually) the numbers look good on it too, but with the condition and area it is a tough sale. I haven't dealt with Section 8 in a while I think they do an annual certification so I assume the properties are habitable but I'm guessing they are filled with a lot of deferred maintenance, and unless I am mistaken they are on one year leases per Section 8. Dealing with those properties is a pretty big challenge if you haven't already dealt with tenants, if you buy expect a deluge of calls when they find out the properties are under new ownership with all the issues that the previous owner did not take care of (which may or may not be correct). Also, if your husband takes money out of a retirement account (IRA?) you can pretty much count on paying around 25% in taxes plus another 10% penalty, not that I'm against using retirement money and there might be some ways you can mitigate those amounts, but if not, 35% is steep. Are you having an inspection on each home? Also an appraisal and title search on each home, with that many you can get a deal but still going to run you quite a bit for all those. If you want multi-family you can try contacting a commercial broker and see if they have any "off market" properties or if they can look for you. You will find a lot of commercial brokers have these properties that are not advertised for sale but can be bought, some with owner financing. Good luck!

    0Reply
  • Lauryn Meadows
    OP
    Ironton, OH · Member since 2015 · 104 posts · 31 votes
    9y

    Thanks @Steve Osowicz! That is all great information. I really appreciate it. I've contacted several real estate agents, and quite frankly haven't had any luck with them. I need to reach out to the commercial brokers in the area.

    0Reply
  • Lesley Resnick
    Real Estate Agent · Jacksonville, FL · Member since 2015 · 1k+ posts · 1k+ votes
    9y

    Perhaps I am in the minority.  I would not automatically rule out section 8 and C neighborhoods.  I do not know the area you are referring to and can not speak to it first hand.  However, one can not ignore the returns, granted there will be greater turn over and potential maintenance  costs.  These units are generally very simple.  One bath no disposal, washer dryer, etc.  It is all just part of the equation.  I do not manage these types of properties myself.  I am not in the slum lord business and only rent a fair priced, clean, safe, place to people who don't make a lot of money and have jobs.

    These are not areas I would personally want to live in. However, if I would not visit the neighborhood myself, then I would not buy in that area. With that said, I am not sure this is the right first transaction, especially using retirement money. The 3 years on the MLS does raise some flags, it is hard to say why. Was it priced higher originally? Agents typically do not want or recommend leaving properties on the market that long. If you take it off the market for a month it resets the clock.

    0Reply
  • Andrew Holmes
    Rental Property Investor · Chicago, IL · Member since 2015 · 275 posts · 271 votes
    9y

    @Lauryn Meadows

    This is a scary situation as far as I am concerned. There is too much going on. 1 bedroom single family properties that makes no sense. Out of state. Commercial lender willing to lend on this with no balloon. Just does not add up.  

    3 years on the MLS - Some thing does not add up at all.

    You may want to call some local agent that do a lot of business there in the area. 

    0Reply
  • Lauryn Meadows
    OP
    Ironton, OH · Member since 2015 · 104 posts · 31 votes
    9y

    Hey guys, just to be clear I do live in this area. I live 5-10 mins away from the property. I live in a tri-state area. The no balloon payment is just the way this particular banking institution works on any commercial loan, but they can raise interest rates every five years at a 2% cap. I've been to the neighborhood and the houses are actually very cute and clean on the outside. They are small however, and I've not done a walk through of the inside of the properties. We do however have an appointment to do so next week. The current owner is older and wanting to liquidate his portfolio. We actually looked at another one of his properties (4 unit) about 6 months ago but passed because it was not very clean and looked very much like a C minus property. 

    0Reply
  • James WilcoxBusiness Member
    Real Estate Agent · Bowling Green KY ~ Lexington, KY · Member since 2015 · 1k+ posts · 602 votes
    9y

    @Lauryn Meadows I second that what @David Faulkner suggested about trying to purchase one home out of the portfolio. I had a similar situation and we cherry-picked the best out of the portfolio because taking on the whole thing would have been too much for us to handle. It would have sunk our whole company due to the type of tenant base that occupied the home, the amount of deferred maintenance, and just plain overall headache. We did not have the team in place or the deep enough pockets to take on that many projects at once. You will get a good idea of the current situation of the rest of the portfolio this way. If it seems like too much with just the best one in the portfolio, then do not pursue it any further. At least you got the best out of the bunch to add to your portfolio. If it works out well then you can open up the conversation about the rest of the portfolio. 

    If it has sat on the MLS for that long then maybe a creative solution would work. Is owner financing an option? Hate to undercut the agent but clearly, there are not that many buyers for this type/size of a portfolio in the area.

    As others have expressed, I would be hesitant on picking up these type of properties. They can sometimes look good on paper but be as profitable in real life. It also seems you are a little short of what would be needed in reserves for this type of portfolio. Having an open conversation with the seller is the best course of action right now IMO.

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  • Ben Garrison
    Real Estate Broker · Chattanooga, TN · Member since 2016 · 25 posts · 4 votes
    9y
    I like the suggestion of cherry picking a few of the houses out of the batch. I'm in the middle of a similar deal with 5 small sized houses. We offered on four of them and dropped the one in the worst condition to get us into residential lending territory and many more financing options. You might pick the best four of the ten and make an offer on them. Banks in our area LOVE the 1-4 unit residential category right now. If he goes for it then you can take down the other 6 units next year or as you go. You can also talk with him about how he can spread out his tax liability that way.
    0Reply
  • George SkidisPro Member
    Rental Property Investor · Belleville, IL · Member since 2017 · 875 posts · 529 votes
    9y

    Section 8 is a great tool for a new investor. It is also a club to beat you with. Section 8 does NOT SCREEN TENANTS and the DO NOT PAY for tenant damages. They check for financial need. Make sure you perform interior inspections, if possible meet all the tenants and then review all of the leases before closing. Normally Section 8 does not pay 100% of the rent. The tenant must pay their share. The lease is one year and the tenant's share can and will change each and every year.  We have a Section 8 tenant who is celebrating her 20th anniversary with us this month. When we first started we had others that were asked to leave after only one year. Learn to screen your tenants whether Section 8 or self pay.  The deal sounds like it needs more research. The reason is one bedroom homes are harder to resell. This will be a buy and hold issue for you. After your due diligence make a low ball offer. Gradually work up to what you are comfortable with. Don't be afraid to walk away and try something easier. If you make the purchase, notify Section 8 as soon as you take possession or they will keep paying the old landlord. Check the home page of Bigger pockets for a Real Estate Investor Association in your area. Find a mentor.

    0Reply
  • Jason Orr
    Yankton, SD · Member since 2013 · 15 posts · 10 votes
    8y

    Lauryn I am interested to hear if you jumped head first into this or not ?  I have a similar situation with someone in my area wanting to liquidate all his properties but they are all single family as well.  Did you move forward with this ?

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