How to turn 5 random houses into a real estate business portfolio? Rent or Sell?

[Blue Presley]

After a  few deaths in my family over the past 3 years, I've inherited 5 properties. For context, professionally Stocks and Options is my career course and comfort zone. And although I've wanted to invest in real estate, I just haven't had the opportunity until now. All the properties are empty, and I'm just paying for basic upkeep, taxes, etc., and that has started to add up, so it's now or never.

Three of the homes are 2 bed, 1 bath, appx 1000 sq ft. Local market rents are between $1400 and $1900 /mo within 2 mile radius.

Two of the homes are 3 bed, 1 bath, appx 1230 sq ft, same rents as above.

Each home is worth appx $265,000. So, for easy math, let's say $1 million as that's roughly what I'd get to sell them in current condition after transaction costs. They all fall within a 50 mile radius. Relatively local, but I DO NOT want to manage my own properties, and well, can't given other time constraints, so a property management company is a must in the decision making.

Each home is paid for, each needs about $15,000 in rehab to make rental ready. (They have the deferred maintenance you'd expect after a fixed income senior lived in them for several years, plus smokers, pets)

So how do I turn 5 straggling houses into a proper real estate portfolio and well-managed rental business?  How do I structure everything to be profitable? (See below)

The stock broker inside me wants to just sell and add that to my portfolio where I know I can consistently make my ROI goals. Further more, some back of the napkin math at an avg of $1500 per month per property is:

$1500 x 12 x 5 = $90,000. So, what, let's say $75,000 after vacancy, PM, taxes, and other operating costs.

$75,000 / $1,000,000 = 7.5% ROI? 

As is, the current structure I mean, that's abysmal. It just doesn't seem make sense to collect rents on free and clear properties. 

I'm an avid reader having recently finished Flip, Rent, BRRRR, and The Millionaire Real Estate Investor - all great books, but if there is another to recommend please do or point out chapters in those I should pay more attention to.

Thoughts? How would you structure these properties to be a profitable real estate portfolio and grow it as a business?

 

[Greg Scott]

Quote from @Blue Presley:

$1500 x 12 x 5 = $90,000. So, what, let's say $75,000 after vacancy, PM, taxes, and other operating costs.

$75,000 / $1,000,000 = 7.5% ROI?

It is worth noting that the 7.5% is free cashflow.  I doubt your stocks have that kind if dividend yield.  You also get a portion of that sheltered by depreciation write-offs.  Don't forget, just like stocks, houses go up in value.  If they appreciate 2%, your return is now 9.5%.

Adding some debt will improve your total returns. To be ultra-conservative put a 50% LTV FNMA loan on each of these, putting $500K in your pocket. Use $100K to fix these places up nice and do what you want with the rest. (Remember, a loan is not a taxable event.)

Given that mortgage rates are also close to 7% this won't boost your cash on cash returns much, but a higher percentage of your free cashflow will be tax sheltered, potentially all of it.  Once leveraged, your tenants are paying down your loan to the tune $5K per year so add +1% to your returns.  In addition, when you get appreciation, you get it on the $1M even though you only have $500K in equity. So, if the value goes up 2% you gain $20K on a $500K in equity or +4%.

If you boost leverage to 75% the cash in your pocket is even greater and the returns get boosted again.

Now go forward in time a few years and you can do a few things you can never do with a stock:
If the property has appreciated, take out another loan and put more money in your pocket.
Or, you could sell the property you can use 1031 exchange to buy a much bigger property, reset the depreciation clock and pay no income taxes at that time.