What are a good set of questions to bring to the table when being offered a multi-unit portfolio opportunity with 100% financing?

Question

We have beginning experience with SF home investing and are currently using cash for smaller deals.  I just want to make sure we are asking all the right questions when we evaluate this next level deal.  Cap rate is supposed to be 13,  there is going to be a new property mgt firm in place, the local rental mkt has a shortage of properties.  It sounds like a no-brainer but I am sure there are more questions and verifications such as price/cash flow amt.  Please suggest a list of questions to help me make sure I am covering all the bases.  Thanks

Jon Holdman · Answer

No different than any other purchase.   Assume every number the seller gives you is wrong and verify them yourself.  Don't be sucked into buying poor properties by the offer of 100% financing.

If you're using a property manager and that claimed cap rate is based on expenses that are less than 50% of the gross rents the cap rate is overstated.  I'd bet you $100 it is.

Are you talking about a group of SFRs or multi's?

Verify the rents for the area.

Verify what repairs are needed.  Inspect each and every unit and property thoroughly.  Every one.  If you're not comfortable doing that yourself, you'll have to pay someone.

Verify the values in the area.  Don't over pay just because of the good financing.

If there are tenants in place, verify the existing leases.  Get estopple letters signed by the tenants reiterating key lease terms.

Check that the loan terms are reasonable and the lender hasn't put in some onerous terms.

If you're getting one loan for multiple properties be sure it allows partial releases.  If you want to sell one you don't want to have to refi all the others.

Use a servicing company for payments.

Ben Leybovich · Answer

Sonia - I try to be a teacher :)

OK, so if the Cap Rate juxtaposes the NOI to the Cost (Value), then in order to achieve a high rate like 13%, either the price has to be quite low relative to the income, or the income quite high relative to the price...

If the cost is low relative to income - why?! What gives? There's no magic in this world, Sonia. If the marketplace says these assets aren't worth very much - why?

Further, if the NOI is high relative to the cost, and the NOI is Gross Potential Income - Economic Losses - Operating Costs, could it be that either the GPI is high, or some of the losses are low? Agin - there is no magic anywhere in this...

13 Cap is surreal. There are big structural deficiencies with every deal I've ever seen with a Cap rate this high. Look carefully :)

Howard Abell · Answer

Cap rate is based on NOI (net operating income but does not include the mortgage (debt service) or capital expenses. When you subtract the mortgage and cap ex you get Cash Flow.

Sonia Spangenberg · Answer

P.S.  Ben you asked that like a true teacher.

Ben Leybovich · Answer

A 13 CAP is indicative of a lot of things, @Sonia Spangenberg. Do you know what those things are potentially? Can you name a few?

Jon Holdman · Answer

For the PM you want to know ALL their charges.  Many charge a percentage of collected rents.  Most also charge a half month to a full month to fill a vacancy.  Some mark up actual maintenance charges or add fees if they have to have maintenance done.  Some have completely ridiculous fees such as charging a full months rent to renew a lease.

Give us more details.  Is this a tired landlord wanting to be rid of the hassles?  Someone who's build a turnkey package?

Sonia Spangenberg · Answer

Jon, thanks for your guidance.  I also found the BP questionnaire for evaluating property managers and used that for each of the three I interviewed.  They ended up being 20 and 30 minute conversations.  Two of the three were great and one was really not good.  One of the two good ones really rose to the top as he volunteered to go out and look at the property/location where we had just purchased a SF, to advise me on the level of rehab we should pursue.  We know we bought in an area of rising values but his expertise on the timeline for a more expensive rehab based on rental rate potential was valuable.  The fact that he volunteered to go do that before we engaged his services was impressive.  The other good company told me that I was asking really good questions and that I sounded like an experienced investor, because he indicated they were particular about which investors they would take on to property manage.  I was proud to have had the resources to help me as a new investor.  Just wanted to say thanks to you and to BP's.  BTW, we chose not to pursue the larger portfolio opportunity as there were too many unverifiables as far as operating costs and Cap expenditures.  We decided to build our own portfolio rather than take on the risks of someone else's mismanaged portfolio.  The suggestions of the group of respondents to my question was very helpful in making that clear quickly.  Thanks all.

Sonia Spangenberg · Answer

P.S. Am I disclosing too much on this one?

Sonia Spangenberg · Answer

There are several community banks investing in revitalization of the area as well as some government funds, and I got names from two unrelated sources of the banks involved. One has spent their own funds on a community center among other things.  We've been inside investor rehabbed properties on the market and see this occurring with multiple homes on a number of streets. We purchased a property on the edge of the revitalized area and will keep it as a rental for now and rehab it for resale later as higher prices come our way. (two blocks away now)  We saw evidence of downtown revitalization with higher end units, geared toward younger tenants.  We plan to drive to each of the 30 properties but coordination with tenants will be difficult to see the insides of all of them.  We will see how it all rolls out but I will certainly take your word of caution.  I will push for that but we have some time limitations ourselves as out of town investors.  Thanks.

Jesse T. · Answer

I don't think this will end up being truly "no money down".  The bank hopefully will be able to take care of the back taxes.  I think they are unlikely to take care of delayed Cap Ex.  I would evaluate the properties individually and make offers on those that look promising.  Is it possible to get estimates from contractors before making offers?

What are a good set of questions to bring to the table when being offered a multi-unit portfolio opportunity with 100% financing?

Most Popular Reply