Purchasing a Portfolio?

[Trevor Scheiderer]

I am considering purchasing a portfolio of 6 properties as a first deal (newbie mistake?) It is located in a different state, but has amazing potential for profitability. There would definitely need to be some rehab, but seems to be an interesting option. Thoughts?

[Don Konipol]

@Trevor Scheiderer

I don’t know you or the deal you talk about, so what I am about to say may not be reflective of your situation.

In my 40 plus years as a real estate investor, I have found the following to be true more often than not

1. People who live in New York and California think any property being offered at or slightly over market price in low priced areas are “great deals”. They usually aren’t.

2. Inexperienced real estate investors almost always leave out expenses when analyzing deals and hence overstate income

3. They also are wildly optimistic as to how easy it would be to increase net income because rents are below market, or the owner is burnt out, or renovation will bring higher rents. Usually, the property has some inherent and perhaps not too obvious defect that accounts for the lower rent, the owner is burnt out because the property is in a “war zone” and if renovation would be profitable to owner would have done it.

4. The inexperienced real estate investor completely underestimates how difficult it is to manage low c and D residential property profitably. Tenant turnover, constant disturbances, illegal transactions, drive by shootings, domestic disturbances, multiple evictions, bad checks, “professional deadbeats” are a constant day to day occurrence.

5. They also don’t understand how difficult these types of properties are to finance. Owner financing is commonplace. Hard money at 12% is a reality.

Again, I’m not suggesting the above has any relation to your or the property you describe. Just when I hear a new investor who lives in NY or Cal talk about a great deal “out of state” these thoughts come to mind.