Buying Portfolios: How to Build a Multimillion-Dollar Real Estate Empire

Over the past few years, we have gone deeper and deeper into the niche of buying portfolios of houses and small multifamily properties. Since 2015, we’ve bought portfolios such as five houses, nine houses, 17 condos, 26 houses and duplexes, 41 houses, and 97 houses as well as a few more packages of two or three.

These opportunities are uncommon, and while most investors won’t be interested or able to buy portfolios of 100 houses, buying a portfolio of two to 10 can really jumpstart your business. How to analyze and purchase these types of deals, however, is something one should be very diligent and thorough about.

Institutional Investors vs. Entrepreneurial Investors

There are two major groups of investors who buy portfolios of properties. The first are institutional investors, the most famous of which is Invitation Homes, which owns roughly a mind-boggling 80,000 houses in the United States. These real estate investment trusts (REITs) and funds analyze portfolios in a similar way to how Wall Street looks at a potential stock or apartment investors look at an apartment.

The IMN conference meets twice a year with various institutional players in this market. The key terms they use are “buy box” (basically the area, quality, and cash flow requirements they are looking for) and “gross yield.” The gross yield is essentially the same as rent-to-cost that many investors refer to when they talking about getting a “one percent rent-to-cost” (when the monthly rent divided by total price equals 0.01 or one percent) or the godawful “2 percent rule.”

On the other hand, gross yield is just the annual rent divided by the total price. So a one percent rent-to-cost is equal to a 12 percent gross yield. Most institutional investors at the IMN conference aim for between an eight and 10 percent gross yield. They also tend to only buy fully performing portfolios (completely rehabbed with above 90 percent occupancy) and in middle-class to upper-middle-class areas.

As you’ll notice, this is not a particularly entrepreneurial way to evaluate a property. I always analyze portfolios based both on their cash flow and actual value. I evaluate the cash flow by on evaluating the previous 12 months of operating history and creating a pro forma. I want to make sure the portfolio will cash flow at a 1.2 debt service coverage ratio and bring in at least $100 (and preferably $200) a month per house.

I also analyze the values of each property. I do this by either going through a data tape (a list of each property in Excel and their key specifications like bathrooms, bedrooms, and square footage) and put down my estimated price based on my knowledge of the area and/or the Zestimate from Zillow.com. (You can also have a virtual assistant fill this in.)

This will give you a good approximate value to see if it’s worth pursuing. That being said, I do a comparative analysis on each and everyone before making an offer. Zestimates should never be relied on fully.

One key advantage that portfolios have for investors is that there are not very many buyers for them. Most investors are rather small and only looking for a single property or at maximum, two or three at a time. Institutional investors are looking for fully performing portfolios of at least 50 and only in nicer areas.

If you are an intermediate or advanced investor looking to buy portfolios of five to 25 in working-class to middle-class areas, you do not have much competition. I’ve heard the average discount is eight percent on a portfolio from the actual value. I’m not sure if that’s exactly true, but it sounds right.

I also know we have gotten even better than that when we find motivated sellers. There are definitely opportunities to be had here. And you don’t need to stop buying single houses one at a time or apartments to take advantage of portfolios.

Finding Portfolios

Renters Warehouse has a lot of the portfolios institutional investors are interested in. But for entrepreneurial investors such as ourselves, they come from all over. Oftentimes, they are listed on the MLS or a site like LoopNet.

Sometimes they will be on Craigslist or Facebook Marketplace. The majority of ours have simply come from networking with other investors and agents. For example, the 17 condos came from an agent with a motivated client and the 26-property package came from another investor who saw an article I wrote on BiggerPockets.

You can also market specifically for them by using a site such as ListSource to find people with multiple units and send letters to them. Or you can network with other investors who have a significant portfolio (particularly older ones) and let them know you are interested if they ever decide to liquidate.

Rehab and Deferred Maintenance

I like to buy vacant houses, but unless it is a very small portfolio, I would definitely not want them all, or most of them, to be vacant. Again, buying portfolios is kind of like buying apartments. And buying a vacant apartment means you have a massive reposition on your hands.

Unfortunately, portfolios usually have some deferred maintenance. I would try to get a feel for how much by viewing a couple of houses and looking at as many pictures as you can. Then list your assumptions about the portfolio’s condition in your offer. For example:

Two houses need full rehabs, approximately $25,000 each
Approximately five houses have substantial deferred maintenance and will require large turnovers, approximately $10,000 each
The rest of the portfolio is in good condition and will require no more than a normal turnover

Of course, this is all a bit subjective. But even still, if you get the portfolio under contract, you can point back to these written assumptions if they turn out to be wrong. The seller agreed to them, after all. And you can use that as a basis for retrading on the purchase price.

As with an apartment, you should walk every single unit. The only reason you shouldn’t is if you can’t as a condition of the sale as set by the seller. And if you do this, you should make very conservative assumptions about the units you do not walk. This happened to us on the 97-property deal and as it turned out, they needed a bit more work than we anticipated.

Financing Portofolios

Remember, there are not a huge number of buyers for portfolios, so that can give you an added advantage in negotiating, especially if the seller is motivated. Seller financing is definitely a possibility here.

You can also do a syndication as you would with an apartment complex, as Ben Leybovich, Matt Faircloth, and others do and write about here on BiggerPockets.

In addition, because each house is on a separate parcel, you can use private lending more creatively. You can use a combination of bank loans on some properties and private loans on others, or just borrow with private loans on all of them. And you can borrow from different lenders on different properties in the portfolio as they are all separate parcels.

You can also ask the seller to stagger the closings, which they will often agree to on larger portfolios. This is what we did when we bought the package of 41; we split the deal into four closings each spaced two weeks apart. We had just completed a large refinance beforehand and were able to take many of the private lenders we just paid off and move them right over to the new purchases.

Portfolios only come around every so often (or at least, good ones do). They do not, by any means, need to be your sole focus. Still, knowing how to analyze, perform due diligence, and finance portfolios of houses and small multifamily properties can be a huge advantage for rapidly growing your real estate investment business. It’s definitely something you should keep your eyes open for.

Are you investing in portfolios?

Tell us why or why not in the comments.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.