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.

[Stephen Akindona]

@Trevor Scheiderer, I think as long as you have boots on the ground that you can trust in that market then go for it! Please do not try to manage this from a distance! You need a reliable property management company that will do the rehabs and get them online and performing for you. I would recommend actually getting on a plane and go check out the properties and shake hands with the people you will trusting at the PM. 

Do your due diligence and you can make it work! It is aggressive for the first acquisition but if you are sufficiently capitalized, have people you can trust, and have correctly analyzed and evaluated the opportunity then go for it! 

Let us know what you decide to do!

[Account Closed]

@Trevor Scheiderer - Is it not already profitable?  Why are they selling?

[Steve Rozenberg]

@Trevor Scheiderer

I would ask are you buying it because it is a deal or are you buying it because the deal is in front of two completely different scenarios

My question is does this deal align with your goals and is this part of your strategy for why you were involved in real estate?

Or was this deal just get presented to you and you’re justifying why it’s a deal without actually making it have to align with the goals or your strategy?

Don't buy the deal, buy the strategy because it aligns with your

Goals

[Trevor Scheiderer]

@Stephen Akindona Do you think traveling there on the weekends would suffice for an opportunity? It is about 3 hours away from where I currently live. Thank you for the feedback!

[Trevor Scheiderer]

@Aaron Wade It is profiting net about $149k annual. Not sure why they are selling yet.

[Trevor Scheiderer]

@Steve Rozenberg This is very helpful! Thank you for the advice!

[Stephen Akindona]

@Trevor Scheiderer yes weekend travel is fine and you don’t have to visit often you just want to make sure you feel good about the properties and the team!

[Randall Weatherall]

If the numbers work and you look at them and they check out, then it sounds like you'll be saving time not compiling your own portfolio of 6 units.  People sell for any reason, so it's not something that you should ever really ask (plus, an agent shouldn't tell you anyway).  We have people sell because of tax law changes, family issues, to build an office for their business, buying up or down, etc...  Not everyone sells because it's a failing endeavor so be sure to review and do your homework to see if it can work for your strategies and goals.  Good luck and hope it works out either way!

[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.

[Bill B.]

Are you defining “profit” correct? Your saying 6 properties are profiting $25k each per year. So the rent is at least $4k per month each while in “need rehab” condition. You didn’t mention the price of buying $150k per year in “income”. 

[Trevor Scheiderer]

@Randall Weatherall I learned that this is being sold as a portfolio because the owner is looking to upgrade property types. He is trying to sell so he can do a 1031.

[Collin Corrington]

I didn't read all the replies but I would tell you not to jump into the deep end on your first deal.  Investing in markets I don't live in, or know very well, is something that scares me.  When you say it has the potential for profit, that is dependent on so many things.  And knowing the area you're investing in is one of those things.  

For a first deal, I'd stay close to home and go small.  Get your hands dirty and learn all the ways it can go south.  

I don't mean to poopoo your excitement but shipping money to a different state and having, what I assume is limited eyes on the project, seems like a risky proposition. 

[Trevor Scheiderer]

@Don Konipol Thank you so much for your input. It brings many good questions to the table. In terms of calculating profit, this was completed using the BP calculator with all current expenses as is, according to the listing. It also reflects current rent rates. The main reason I am looking to go out of state is because I am originally from Wisconsin, and just moved to NY. To say that housing prices are high was an understatement compared to the real estate I was used to. However, for the value, I still stand beside this deal. You mentioned hard money can be as high as 12%. Would this be typical for a purchase of this size?

[Trevor Scheiderer]

@Bill Brandt Thank you so much for your feedback, Bill! The listing price on these is about 1.2MM. However, I figure at $950k, there is room for a 12% Cash on Cash and more than $150 per door per month after all expenses and fees. Does this sound worth while to you as an investor?

[Daniel Dietz]

We have 29 units right now and I would just caution you that I have yet to ever see the 'listed expenses' cover everything that is going on. One thing that is almost always left out is how much you should be budgeting for longer term expenses and capital improvements that might/will be needed. How much do you need to set aside for 6 roofs, landscape updates, exterior rehab if/when needed etc.... 

My theory is to use my own conservative figures and go from there. 

[Trevor Scheiderer]

@Daniel Dietz Thank you so much for your feedback! For something like a roof replacement, it would come out of a capex expense. So far, I have been taught to hold aside 8-10% every month for this. Is this something you also take into consideration or are you talking about replacements at the start of the deal in the rehab stage? Thank you!

[Don Konipol]

@Trevor Scheiderer

Condition and age of the property will be a large part of determining a sufficient amount to be expensed for capital improvements/repairs. As will construction materials, and original construction workmanship.

[David Miller]

@Trevor Scheiderer I’m going to be blunt, don’t do it, especially as your first deal. Turnover and bad tenants will eat up any potential profit. Each vacancy will cost a minimum of 1 months rent and repairs of $500. And I’m being kind with these costs.

[Trevor Scheiderer]

@David Miller Thank you for the feedback. These two things are definitely something to keep in mind.

[Michael Simolke]

@Trevor Scheiderer don’t do it

[Daniel Dietz]

@Trevor Scheiderer some of that has to do with the age of the building too. 

On most of ours they are less than 25 years old, and we figure 15% of rents for repairs and a capital expenses fund. We also figure 8% vacancy even though we run under 2% (you never know when economics might severely shift) and 8% for PM even though we self manage in case something changes in our ability or desire to self manage. Essentially that extra 6% in vacancies and 8% PM goes straight to 'profit'. We think of it more as a 'wage' for our work than a ROI since it IS our work that is creating it, NOT the property if we were hiring outside PM.

On the few older ones we have we bump that repairs and cap ex up to 20%.

When purchasing a NEW properties most have been in good shape with no deferred maintenance. There is one that we are looking at right now where we can tell the roof, water heater furnace and AC all have less than a few years left in them. We are factoring replacing those upfront into our potential offer price to be able to get things up to date before we ever place a tenant.

[Marcus Auerbach]

@Trevor Scheiderer - you have an excellent response from @Don Konipol - you don't have much of a bechmark to gauge the deal on. Why does nobody local buy it? I generally think that starting out with capital is a bit dangerous, because it makes you think and work less hard. If you have very little money, you tend to dig deeper.

I recommend you start with a market and a neighborhood, define your niche within that area and then become an expert in that niche. That is the only way as a new investor to know what a deal looks like. Hopping around geographically puts you into a different eco-system every time and adds a layer of complexity and uncertainty. Know your market!

[Trevor Scheiderer]

@Marcus Auerbach Thank you for that feedback. I think this definitely helps in terms of keeping options open for entry strategies and the best ways to proceed. Finding a deal is nice, but finding a business strategy is so much better.