Biggest deal to date - 10 houses, 14 units

6 Replies

Hey guys. I was wondering if I could get some insight into a deal I just got under contract. The numbers are great, but I've never put together anything like this before. Any feedback would be greatly appreciated.

Deal: 4 duplexs & 6 SFH

Purchase Price: $400k

Interest: 5%

Term: 10 year Balloon

Down Payment: $40,000

Monthly Payment (to owner): $3000

Gross Cash Flow: $11,000

Net Cash Flow: $4000

All of these properties are located within a small town. The owner inherited them and is sick of the job. She is at retirement age and wants to do just that, retire. These properties are all within 5-10 minutes walking distance, which should make it a breeze when doing monthly inspections and repairs. They're all late 1800's B- / B properties in (as good as it gets) town blocks. It's a mixture of working class people & HUD. She has done her part and maintained the properties by fixing them up as they've needed it. Only one needs some patch work done on the roof. The rest don't need anything.

She owns them all free and clear except for 2. We've negotiated an owner financing deal where we cash her out after 10 years. We will be giving her $40k down, and will be making monthly payments of $3k per month to her. She wants us to assume the 2 mortgages (which we intend on doing if the bank will allow it). The payments from those mortgages will be deducted from the $3k we are paying to her.

Now for the kicker. There isn't enough sales activity to generate accurate comps to value these properties. I would have to to branch off into the closest city which is 15 miles away, making the comps worthless. The only comps on the market are houses way nicer or houses that are full gut foreclosures. There's doesn't seem to be a middle ground. If we value the properties based on the tax assessment then this portfolio is valued just shy of $700k. I'm not going to take that as the true value, but I'd say its pretty close. Averaged out, we are getting each property for $44k, which is the cost of the full gut fixer uppers in the area.

What worries me IS the near complete stagnation of the real estate market in this town. It's slightly confusing because it's in a highly sought after school district, and it has a lot of business in the area. I guess people just aren't moving?

My plan is to come in and adjust rents to market. Many of the houses are below market AND she is paying some of the utilities. I will be adjusting all HUD's to the max they're willing to pay and finding an affordable middle ground with the working class tenants. I don't want to run anyone out, but I'm not going shoulder costs that I don't need to be incurring. Eventually I would like to have the entire portfolio assessed, and do a full cash out so I can pay her off early, and use the remaining funds to leverage into a large 30+ deal. I currently own 7 houses with 13 total units. My goal is to own 100 units by the end of 2019.

My question is, should I have negotiated this differently? Should I be worried about the extreme lack of comps? I'm pretty excited about it, but also a little nervous because of the market activity. However, I know the rental market is good, and these are in fact rentals. Maybe I'm just over thinking it.

Thoughts?

Michael,

If you are getting rentable properties for full gut prices, my gut says it's probably an ok deal. Most of the time, if you are in a stagnant market, you are looking at cash flow. Look very carefully at raising rents. If the market can bear it, then good, but small towns can be tough. As it sits, $1000/mo on 40K is nice fat 30% cash/cash ($12,000/$40,000), but it's only a 3% cap rate ($12,000/$400,000). That is a bit concerning for me, given the lack of appreciation in the area. You would have to go to $2667 to get to 8% cap. That is a 167% increase in NOI (2667-1000)/1000)*100). I'm not entirely sure that is doable.

Your exit strategy is going to be crucial, my guess is to make your money, you are going to have to sell some properties. Without appreciation, you could be in a tough boat refinancing, especially in an increasing interest rate environment. I would also negotiate a buyout provision, where you can take out one house at at time, so you can sell the house to tenants.

Just my 0.02.

Good Luck!

Jim

Hey @James C.

Sorry, I didn't clarify as well as I should have.

Gross cash flow is $11k.  Taxes, insurance, vacancy, Cap ex (ect) are about $4k per month, which leaves us $7k.  Then we are paying her $3k of that towards P & I.  We are left with $4k net cashflow per month

Michael, Yes much better at 21% (84000/400000). As long as you can keep them full, and they aren't being beaten to a pulp, the numbers look good. I think I'd still go for individual takeouts to maximize flexibility in exit strategies. Let us know how it goes! Good luck Jim
Michael, Yes much better at 21% (84000/400000). As long as you can keep them full, and they aren't being beaten to a pulp, the numbers look good. I think I'd still go for individual takeouts to maximize flexibility in exit strategies. Let us know how it goes! Good luck Jim

@James C.

Good to hear!  Yes, I like that idea quite a bit.  I was wondering how the mortgage umbrella would look.  So I ask for a buyout provision which would allow me to sell off or refinance one of the houses wrapped into the main mortgage?

Michael,

Yes.  Any competent real estate attorney can write it in. I wouldn't try to do it myself, since it's a bit technical. You would have to have an agreement with your seller/note holder as to how it would work. Generally, it's one of two ways, either a fixed amount (could be a percentage) or the net amount of the sale. The second is more common than the first, since it protects the note holder from having too little security.  This also means that you get your profit at the end, as you pay off the note holder first. What it gives you is flexibility in selling/refinancing assets. 

Good Luck

Jim