Would you buy a package of 13 SFHs today?

Question

What extra precautions would you consider now when buying SFHs for buy/hold?

We have a deal of 13 SFHs with a 30% ROI after taking the following allocations:

- 21% towards repairs/vacancy/capex,

- Paying taxes and insurance

- Paying mortgage (principal and interest)

- Paying for property management

- Extras like utilities in some, grass, etc.

I may be overthinking this given the uncertainty in today’s market, but what else would you consider if you were to buy 13 SFHs today?

Very thankful,

Manny

Mike Dymski · Answer

I'd recommend using dollars rather than percentages for repairs and capex.  Those costs have nothing to do with the rent amount.  And then nail down your vacancy assumptions based on current economic conditions.  If that analysis generates a 30% predictable return, you have a good one.

Kenneth Garrett · Answer

@Manuel Prado

Great job landing this deal.  I agree with @Joseph M'Mwirichia are there tenants occupying the property and I like the 90 day guarantee of rents.  Are the tenants actually paying rent? What is the long range plan?  Are you going to rehab units or just take care of minor repairs.  I would ask for a record of repairs since they owned them to see If my repairs I have been budgeted are correct.  I always talk to tenants when I do walk throughs and ask them if they could have one thing fixed what would it be.  I then usually get more information then I asked for.  It’s a great due diligence tool.

Joseph M'Mwirichia · Answer

Great work Manuel! If they are already have tenants, you could consider a 90 day rental guarantee held in escrow at closing. Looks like you have a solid ROI though, so already good on the entry. Your strategy after you acquire the properties is where you'll probably need to build in contingencies.

Jack Butler · Answer

I recommend getting an estoppel document / agreement for each property. This should be filled out and signed by the tenant and current owner. It will help you discover discrepancies between what the lease states, what tenant says and what owner states. Do this during the due diligence period. Just search the forum for Estoppel Agreements.

Consider getting copy of photo ID for each resident.

Manuel Prado · Answer

Thanks for the advise here Luke. We have the rent roll and will get leases soon. We were thinking about asking for bank statement copies to corroborate rent roll with rent coming in.

Thanks again

Manny

Manuel Prado · Answer

Thanks for the help and the wonderful tip of asking the tenants what would be the one thing they would like to have repaired in their units. Wonderful tip sir. In regards to some of your questions: yes there are tenants occupying the properties. Long plan is to buy and hold, and slowly convert these regular rentals into rent to own type of rentals. Given that the homes are already occupied, the plan is for now to continue renting and not changing too much for the tenants due to so many stress that is going on for them and for us as well. Thus, the plan of converting them into rent to own would be dictated by where we go with the current real estate scenario. We walked through all the properties and have a list of things they have done to them. Most CAPEX items have been replaced within 5 or less years. Thanks again for your ideas.

Manuel Prado · Answer

Thanks for your ideas Joseph, I have never thought about asking for rental guarantee to be held in escrow. Definitely another tool to have in our toolbox. And  correct, I will be inheriting tenants. When you propose building contingencies after acquisition, what ideas first come to your mind?

Luke Sass · Answer

@Manuel Prado

I would get copies of the current leases and rent rolls to look for some sort of stable rental history.  Careful using %’s if it’s in a low rent area you knight underestimate your repair costs.

Best of luck

Luke

Joseph M'Mwirichia · Answer

@Kenneth Garrett great tip on asking for the record of repairs to verify one's own projections. Must remember this!

Would you buy a package of 13 SFHs today?

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