96 Rental Home Bundle

15 Replies

This is probably really bad timing or great timing.  I have been educating myself on investment properties over the past month.  I feel I'm 85-90%% there before diving in, maybe a week or two.  Then, I had this opportunity (maybe) drop into my lap.  A owner or 96 rental properties wants to retire and is offering all homes in a package deal.  This is a true friends network where this came from, the homes are not listed.   I received the homes taxes, accessed values, a lot of information, monthly rentals, pics, addresses, property management fees, etc..  The average assessed value is around 21K (small and in pretty good shape, but know there can be some fixing up to increase the rent.  Also  9 section 8 shelter care plus homes.  They also have zillow estimates which are actually low to what they on zillow.  Two million dollars is his asking price (close to the assessed value price, and zillow has total value at 3.1 million.  Talk about getting started one house at a time...this is overwhelming.  What would anyone suggest or how would even begin to break this down.  I could come up with 10 - 15% down but that really is a lot, almost an all in for me.  Overwhelmed and any suggestions would be welcome.  Thank you.

Howdy @Jon Horton

Wow.  Talk about jumping in over your head.  Where can I start.

  Financing.  How would you plan to finance this deal?  A commercial lender would not take this for several reasons.  You would have to put at least 25% down.  You also be required to have a cash reserve.  You do not have either.  So would the seller provide owner financing?  If they did you still need a cash reserve.  The lender may also require you have experience managing properties.  Your best option is to find an experienced partner.

Your CapEx budget will be astronomical. Why? Because you must be prepared to repair/replace 96 roofs, HVACs, Water Heaters, Refrigerators, etc. Along with covering mortgage payments when properties are vacant. That's why you need a cash reserve.

Property Value.  We do not use the tax assessed value to determine the Fair Market Value of properties.  Appraisals are used to determine the current value.  Zillow is not a good source either.  They do not keep their data up to date.  That being said.  If the seller is using the assessed value for the Asking price that's good for you.  Appraised values are almost always higher.  Strongly recommend you find a good "investor friendly" Realtor/Broker and a good Property Management company to help assess and manage this type deal.

Finely, there are many BP investors (myself included) who stay away from these type properties (small/$30K homes). Mainly because of the potential CapEx cost compared to the minimum income they produce. That's not to say we haven't purchased properties for $20K - $25K. The difference for me was after I Rehab them the value is closer to $100K.

The bottom line.  If I were you I would not jump into this by myself.  Try to find a partner experienced with this type of deal.  Learn from them.  Good luck.

If you can come up with 10-15% down, and you have other assets that can be counted towards reserves and the deal cashflows, you might could get commercial financing with seller carry back on the remainder of the down payment. If you have other experience starting an running a business write a business plan and check out local portfolio lenders.

@Jon Horton Since you've stated you're one month into educating yourself on investment properties, you may not have gotten to the section on the different classifications of investment properties. Not all investment properties fall into the same category of management needs and requirements, A 96 unit portfolio with an average property valuation of $21,000 is nowhere near the standard RE portfolio of properties, this is a portfolio that falls into the specialized property sector and will require a specialized REI skillset to succeed in this sector.

There are a few questions for the owner that may help mitigate your risk depending on his answers.

1) How much time is he contributing to the business? If he's spending a lot of time managing a 96 unit portfolio, it's not enough money in this specialized portfolio, at the 96 unit level the owner should not be boots on the ground anymore.

2) As an investor you should not be paying market value for all 96 units, there's the expectation that some of these units will be way less than what you're seeing on Zillow (looking at Zillow for valuations is a hole other conversation I won't cover here) but regardless you should be expecting a discount for helping him cut 6-12 months out of his sell-off timeline if he had to do these individually or in smaller packages, What type of discount are you able to get?

3) You mentioned fixing up to increase rents, properties in the 21K range can only be increased so much in rents, most of these are going to be Section 8 and I'm sure he's collecting the allowable Section 8 rental amount, don't expect to convert a great deal of Section 8 properties to Non-Section 8 and collect higher rents, these properties are in the average of 21K range for a reason, Ask How many of these units are Section 8?

4) Is he selling you an entire RE management infrastructure as a part of this deal? Meaning is there an office where this business is being run with a few staff members and this all comes with it as well. This will make a big difference if you inherit a team that's already in place, I would have this question near the top of this list since you don't have any experience. 

   

@Jon Horton Wow. I don't think I'd recommend anyone start this way. And  every time we've been offered bundles, there are a ton in it we don't want. We only buy when we can pick and choose.

Low end properties and Section 8 can be their own kind of nightmare. We no longer accept Section 8 because we had so many horror stories.

I say all this to warn you not to think of this necessarily as a home run. There's so much you don't know and I'd hate for this project to take you out of the investing game.

If it's such a great deal and makes a lot of money, he wouldn't be selling. Our properties are set up to pass to our kids - we have no intention of cutting off the cash flow, especially at retirement. Cash flow for retirement is what we've set all our properties up to produce. From my experience, no one sells a great deal.

At any rate, is he interested in owner financing any of it? That's certainly where I'd start. Gives you nothing to finance, or less to finance if he'll do part of it, and he continues a steady cash flow without any management/ownership hassles left in his life.

Owner finance would be the best deal for both of you if he's open.

PLEASE keep us posted on how this all works out and Best of Luck to you!

@Jon Horton . The scope of this and financing it (outside of seller financing) is going to be a nightmare. If I ever do a package it’ll probably be under 15 properties, and I’ll want to be able to pick and choose

@Jon Horton I echo the same as above. You need a partner or group to help you properly evaluate this deal and determine its viability.

I think its great you want to get involved, but I would not start with something so big. Your entire life will be consumed with this from jump street. You would tie up every penny, every moment of your life, getting this thing production-ready. And it would last months.

No one thinks about the operation of this when you actually get it. It's like trying to capture a great white whale with your bare hands. It sounds great in theory until your underwater, with no tools, no oxygen, and a mouth with sharp teeth wide open ready to snatch you up.

If the possibility to partner with someone immediately, who you trust, and knows what they're doing...I'd say walk away. Not to mention almost a 100 units at 21k value? Eek.

@Jon Horton Sounds like a LOT to delve into for you first deal. You definitely need more cash and/or a partner. 96 SFH in the $20K range sounds like a nightmare of tenant issues.

  • What is the gross monthly rent on average for the last 2 years?
  • How old are the houses?
  • How much in immediate CAPEX repairs/deferred maintenance are needed as soon as you take ownership?

Sounds like you need to go to local meetups and network. you should find a partner to jump into a deal like this. First deal can make or break you. Best of luck.

What market are you in?  You don't mention that in your post or your profile.  I'm just curios so we can put the law average price in context.

Wanted to say thank you for all who replied.  Upon further drill down and more information, I think this would be a nightmare start for me as many of you have suggested.  Talking with a realtor friend who was somewhat familiar with some of these properties, suggested that I pass.  They are in need of makeovers  inside (and out) and it would just be way to much starting out.  I am in Kansas City and these are in another town (Topeka KS) about 1 hour away.  With that being said, I am back to looking for my first investment property, get the experience I need with it, then gradually start building my portfolio as I learn.  Thanks again everyone!   Much Success!

Sounds like a good deal (we had one that was very similar at 97 houses). We brought in a partner and basically syndicated it like you would with an apartment (it was actually a TIC, but that's a long story), which is probably the best way to do the deal. We also go seller financing on the first 75%. That's a lot easier than financing the whole thing with a bank, which would be tough unless 1) You have a good relationship with a bank or 2) use one of the national SFR lenders like Lima One Capital. I would also be hesitant if you don't have much experience or property management in place. If so, it might be best to try to wholesale this deal or something like that.

@Jon Horton , location is everything.  And Topeka is in the thick of it.  KC growing all directions Univ of KS 20 miles east, KSU 50 miles west both growing like crazy.  The State of KS actually has a huge growth study of the Highway 24 corridor that anticipates massive growth over the next decades from Fort Riley to Topeka.

All that to say that while this portfolio is certainly a huge chunk for a rookie to take down that doesn't make it a bad deal.  I agree with everyone here saying no or heck no or yes only with a partner.  But you can also take this one step at a time working with the seller.  Guaranteed he's not going to get traction immediately on a sale of this magnitude quickly.  

I'd say go slow and keep investigating.  It might be a jewell if you can make the right pieces fall.

Originally posted by @Andrew Syrios :

Sounds like a good deal (we had one that was very similar at 97 houses). We brought in a partner and basically syndicated it like you would with an apartment (it was actually a TIC, but that's a long story), which is probably the best way to do the deal. We also go seller financing on the first 75%. That's a lot easier than financing the whole thing with a bank, which would be tough unless 1) You have a good relationship with a bank or 2) use one of the national SFR lenders like Lima One Capital. I would also be hesitant if you don't have much experience or property management in place. If so, it might be best to try to wholesale this deal or something like that.

For the asking price those houses are likely all going to be dumps.

I've lived in Topeka for the past year and do not want to invest here in rentals.  The city has a lot of cleaning up to do - has lots of potential but all the big money lives out of town in Lawrence or Western burbs of KC or the SW part of Topeka, or for those simply not wanting to live in town regardless of your resource level you locate out in the country/county like we did.   Acreage on a blacktop road out of city limits I've learned is a gold mine here due to folks feeling like I do and not feeling safe living in town.  I think we go to Kansas City (an hours drive from our house to Downtown) to do activities more than we do in Topeka.  

 My goal next  year is to get involved in the chamber or some sort of committee that could possibly steer development one way or the other - 

To the OP - id seriously do your homework unless you want to be a slum lord.