Buying properties too fast?

Question

I bought my first duplex in March '07. It's in South Dakota and managed by my father in law. The first one worked out well, so I kept looking for deals, but couldn't find anything that met my cashflow criteria. Finally, this year I found a motivated seller. He is '87 and wants out NOW before he dies. He has 65 properties and will sell be any of them at about 25% below market value. They already have tenants in them and are in good but not great condition. I have bought one per month for the last 3 months (a 3-unit and two 2-units). I just made him an offer on a 4-unit and he said he would accept it if I buy another 2-unit from him at the same time, also at well below market. The 4-unit meets the 2% rule and the 2-unit is at about 1.5%, but is an incredible house in a very nice area, which will attract great tenants. I also met another motivated seller this week and made an offer on two duplexes, which I am waiting to hear back on. Additionally, I found a potentially fantastic deal on an REO fourplex that I want to make an offer on, which would also meet the 2% rule. I'm finding the kind of deals that I only dreamed I would find, but if they all work out, I'll be at 21 units in a few months. This is a big jump from two units! Two units is a hobby and 21 units is a regular small business. Am I setting myself up for failure by growing so fast?

Peter Giardini · Answer

As you are experiencing finding quality deals in today's environment is not that hard.

The challenge will be to properly manage them once you own.

Are you going to manage them yourself or hire a property manager?

If you are going to manage them yourself, you will have just created a second full-time job... alibit one that has great profit potential.

Your biggest challenge will be developing the systems needed to go from managing 2 uints to managing 21.  Without processes and systems in place you are going to become very overwhelmed.

Jeff Tumbarello · Answer

just mae sure you have the reserves. email me at the email addy in sign line. i have a spreadsheet I would like to share with you

Richard Warren · Answer

The big question for me would be your financial reserves, do you have enough capital to handle problems?

21 properties IS a business.  You should have a proper business plan. Hopefully you are being guided by a capable CPA and attorney.  You are well on your way, just be careful about biting off more than you can chew.

:cool:

Michael Zuber · Answer

I went through a similar growth spurt many years ago.  It was stressful but very doable.  I would try to work with the sellers so you could spread the acquisitions out.  Even if you had a two week window between closings it should be enough time to turn vacate units and re rent.  The most important part would be the cash reserves.
Here is a crazy idea for you.  Offer to buy all the properties from the current landlord.  Ask him to take back a small second secured against each property so you can go get a traditional first mortgage.  Then you could keep the ones you like and sell the extra's and pay of some debt. Again just an idea. I believe each of us can find "The Deal of the Decade" every month.

Tammy Harris · Answer

I would agree that your reserves and management of these properties will be your biggest hurdle.  You should make sure you will be able to cover most unexpected expenses.  
          
          You are well on your way and Kudos to you for not being afraid to take those steps.
          
          Tammy

Chase T. · Answer

I'd spend the time to get organized at this point. Get your properties all organized. Get your website up, and property software going. (I highly recommend using buildium, for your sanity!) Get your LLCs in order. Rebuild your reserves a bit, and then start adding properties when you are ready. Use the downtime to improve your operations!

Mariah Jeffery · Answer

I'm financing them all with 20-25% down. The prices range from $60K-$94K so far. The $94K is for a 4-unit. They average around $30K-$35K per unit.

Mark N.A · Answer

What a great 'dilemma' to face, Mariah.

In addition to the great advice already offered, I would ask:  are you personally protected from a catastrophic 'black swan' event?

That involves insurance, of course, but also probably some sort of asset protection entity such as an LLC (there are other approaches, too).

Add a good business / estate planning attorney to your team (an attorney specializing in closings will probably not be knowledgeable enough).  This will be high-dollar advice, but money well invested.

Good luck and keep us posted on your adventures.

J Scott · Answer

Another avenue to consider is to wholesale some of the deals to generate more cash to purchase and hold the ones you want to hold.

In other words, if you can get great deals on all 65 of the properties this gentleman is willing to sell, why don't you find some other investors in your area who are looking for properties, sell them some percentage of these 65 (for a markup of what you can get them for), and then use the profits to purchase and hold the rest of the units.

This is a win/win/win...this guy gets all his units sold (perhaps he'll give you an even steeper discount if you buy them all), other investors get some great deals, and you end up with a bunch of properties without nearly as much risk...

Mariah Jeffery · Answer

My father in law is my property manager. He does an excellent job for the most part, but I do worry about him being organized enough to handle this many units. I have the tenants mail a check to me and half of them get their rent paid by the county, so he's only in charge of collecting if someone's check doesn't show up. If he starts to feel overwhelmed, I'll hire an outside property manager.

Cash reserves are ok now, but after the 21 units I will have to take a serious pause and build them back up before buying more.

Buying properties too fast?

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