How to analyze a SFR Portfolio?

[Rick Baggenstoss]

I'm *not seriously* looking at a large portfolio for sale. It's ~350 SFR houses spread across Florida. My question is how would you evaluate and conduct the due diligence on the portfolio? I did want to go thru some of the steps to be prepared for acquiring portfolios in the future.

I'm thinking I should slice and dice the data to look at:

Counts and cap rate by city, by property manager, and by product (2/1,...)

Cash flow over time and CAPM

BPOs?

What are the steps you go thru?

Are there good books or blogs on the subject?

Thanks,

Rick

[Dion DePaoli]

There is no shortcut to working at some point on an asset level basis. All assets would go through the same process that you would do as if they were one off transactions. So they all get title reports, RE valuations and other typical types of vendor services (on a per asset basis) as needed. In some operations this will look like cause and effect type systems. For instance, if a property comes back from a BPO/Appraisal data round, and shows it is fractured construction, you will need to apply construction diligence ideas to it. Some of the 'features' (for no better word) which create these iterations are know upfront and sometimes they are not. That depends on the data set you are working with and the Seller or their agents efforts in the same.

If the populations you are working from need be trimmed down then you would apply filters based on your own internal criteria from whatever data points (those given or those revealed as a function of diligence) you have. A simple idea, if the pool has a national footprint and you only want assets in Iowa, then you would apply a filter to the population to delimit to Iowa. That type of population reduction can be applied pretty easily to field even those expressly given, revealed or calculated.

The financial modeling side of the work is a little more work to setup the proper evaluation models. Many times those are applied as iterations over the top of the pool regardless of the asset's relation to such an analysis and then the results in conjunction with some other field are used as a delimiter. For instance, if you run a rental analysis on all assets you will want to filter out assets within the population that can not be rented for what ever reason. If you were open to purchasing assets that do not have rental capacity, then the Universe (in terms of population of assets) that you are working with would include those types of assets which you could pull out the assets suited for the analysis or run the analysis on all and pull out the meaningful results. These types of things may be pretty upfront, like remove all vacant lots from rental analysis then run it or run analysis on the entire population using a zero for rents on vacant lots. Etc, etc.

I have never ran any analysis on the current property manager. Just the assets, which function sort of like a report card for the manager anyway. Most portfolios are sold with the Buyer's ability to move management as they see fit.
Since most natural persons do not have millions to throw at portfolios. Some of the filters applied are pretty simplistic in nature and might even seem unscientific. For instance, if you see a pool of 200 assets and just do not like a specific geography, then you would filter that out simply because you do not like it or are not interested in it.

In regards to the equations in the financial modeling. This will be at the hands of the user. Folks with higher levels of financial modeling understanding will apply those concepts. NPV, IRR perhaps PV calculations. (those are your TVM calcs). Certainly applying any CAPM is going to give you bearings on a comparison basis to other suitable investments as a benchmark to pursuing the asset or pursuing the asset at the input or output values. There is no real magic there, just math and an understanding of the inputs and outputs and how you want to work the them. Folks with lesser knowledge of those equations and models might have their own, perhaps even simplistic metrics to apply. There an infinite amount of those in the world. For instance, start at 65% of value and deduct for X feature or X dollars or X percent, etc, etc.

I am not aware of any books on the topic as it relates to RE. There are some books and articles out there on working with portfolio of assets which tend to be more securities driven. Some of those ideas, if you can survive making the link in relations between the asset they use in example to the asset you wish to apply, then those may help. They could also be pretty confusing if it is not your cup of tea. There is nothing written specific to a real property portfolio trade that I know, but I also do not know of all books published.

My final thoughts for you on the matter, it is pretty important to approach any portfolio in a manner which allows you to work with given data and yet be flexible to allow that data to be updated. A property occupied last month may not be this month. The Seller's data may be dated in that regards. A usual method, is assume Seller data to be True until updated data changes it to be False. (or similar logic depending on field) I would also suggest you understand how you are evaluating assets and look to normalize the process. Using tenancy as an example, all assets go through rental analysis but not all assets will be rented and some assets are currently rented, those in turn maybe at, above, or below market value. So you will want systematic ways to deal these ideas. That said, to some degree when you actually dig in on an asset by asset basis, it is hard to not have meaningful results on that level. Then it is simply a matter of aggregating the data to produce the portfolio metrics.

There are other ideas in that we have asset level data and portfolio level data and each level has inputs and outputs which can be meaningful however, portfolio dynamic discussions attached to this already long thread likely have you retiring before you finished reading.