43 Unit Portfolio of small rentals. Partial owner financing

[Thomas Bryan]

Hey BiggerPockets! I have recently been presented an opportunity from a neighbor of mine to purchase a big piece of his portfolio of 17 properties consisting of 43 total units. The properties range from two single family, 2 units, 3 units, 5 units, a 6 unit. He currently has the 17 properties in two separate blanket loans, with enough equity in the properties to carry the down payment needed to purchase the rest. I believe we will end up around 1.6 million for a final purchase price, leaving roughly a $400,000 down payment which will be financed through the seller. How can I make this work!? It will be 100% financed. Here is a breakdown of the numbers below:

17 properties, 43 units

Purchase Price: $1,600,000 (100% financed)

Financed with lender $1,200,000

Financed with seller: $400,000

Estimated value of all properties: $2,120,000

Rents w/ 10% vacancy : $305,000 per yr

Monthly breakdown:

After taxes, insurance, and utilities the portfolio is cash positive $ 19,950 per month

Any advice would be greatly appreciated! I am working with two partners. We all have experience with rental properties, owning and managing 10 units between us currently. We all work full time jobs and have wives that work full time jobs. Salaries ranging from $45,000 - $65,000 py in a very affordable area of Northeast PA. We have researched and seen all of these properties, everything is transparent and all are within 2 miles of my home. Any thoughts, suggestions??

Thank You!

Tom

[Account Closed]

@Thomas Bryan with those high payments I would make sure you're being as conservative as possible on your pro-forma operating expenses.

-Definitely include a management budget, and it's going to be 8-10% because this is going to be a residential property manager.

-Get rehab scope of works on these buildings, find the age of all of the major cap ex items. I would also use a higher maintenance cap/ex reserve based one 1) the condition of the collective portfolio 2) the fact that these are not a single conforming building, but a bunch of singles with a lot of surface area.  Have some sort of reserve fund. If you have as much equity in the portfolio as you say you do, then maybe get the seller to sell at a slightly higher price but transfer you cash for operating reserves at closing (not sure how the lender will like this, you may have to place the funds in an escrow account of sorts to demonstrate they are really just for operating reserves not just cash at closing that the seller is giving you out of the lenders pocket).  If you have 5 roof replacements, 15 furnaces, 50 windows, etc... all go in year 2 you're going to be in trouble with your low cash flow. 

-Better start talking to banks now! A lot of traditional banks aren't going to like the fact that you have no skin in the game. They don't care if the seller signs a subordination clause or if the cash flow numbers meet their debt coverage ratio- a lot of them are accounting for cap rate expansion now too. They're also going to want to see a certain amount of liquidity on your end. Try a mixture of traditional and local banks!

It sounds like there's some promise in this deal for you, although the whole 17 properties thing for 4 units isn't ideal. Good luck and keep us posted!