Considering Package of SFH Rentals w/ LT Tenants: What to know?

Question

I was approached with an opportunity to buy a group of about ten single-family homes. The homes have long-term tenants in them and are all occupied. The private investor is looking to exit the space, so I'm trying to assess the situation.

Numbers:

Cost: $250,000.00

Monthly Rents: $5,174.00

Monthly Tax & Insurance: $1,076.65

Property Management: $517.40

The obvious other things to consider and investigate further are the CapEx and vacancy, which I don't know much about. My hope would be to get the info on the age of the HVAC, etc per unit. What other things should I be looking into and what other due diligence is mandatory in this circumstance?

I ran a $250k loan through a mortgage calculator. At 3.92% interest over 15 years, it means monthly payments of $1,839. Is that a fair guesstimate? Or is it a different beast since these are individual housing units?

Eric James · Answer

They are very cheap. Keep in mind such things as whether the tenants actually pay the rent. See if the seller actually has other properties in the area and just wants to dump their 'dogs' (despite what they say about leaving).

Alex Huang · Answer

Thanks for all the feedback.

I went through the county auditor's website with the hopes of finding the purchase prices for each of these homes (they were all bought in 2012-2013), but unfortunately I couldn't find the info. I was able to get the "value history" on the houses (not sure how valuable that info is) and collectively, the total for the properties is $238k.

Could some one comment on financing options for an arrangement like this and what sort of an interest rate I could expect? In my initial calculations, I just used the default mortgage calculator that Google provided, which was at 3.92% over 15y, but I imagine the circumstances are a little different and will require something beyond a traditional mortgage.

Nicholas Scatton · Answer

What type of area are these in. @$25k each, and $500 a month in rents. There's a good chance were talking warzone properties here.

With that said if you decide to go the low end route, i would want ATLEAST want 2-2.5% rent to cost.

Jared Garfield · Answer

@Alex Huang, The numbers on this transaction look really good from a high level, they are double what they need to be for the 1% rule.  It looks like you have asked a lot of the right questions here, and here are a few things I might add:

Due Diligence on the Property

• When were the last major updates to each property (get an itemized list), you'll want to know the age of the furnace/boiler system, condensing unit, hot water heaters and roof.  Do each of the homes have updated electrical panels with breakers and romex instead of knob and tube or fuses?  What is the electrical service for each home and is it sufficient?  Are their cast iron pipes, and is their corrosion, when was the main sewer line replaced between the street and the home?
• What are the rent rolls, and can the tenants sign a affidavit saying that the rents on the rent rolls are what they are paying and that the maintenance listed in the rent roll information was performed.  Are there receipts for this work that the property manager can provide, and what is the length of warranty?  Are the rents below, at or above market rents for the area?  If the tenant moves out, what repairs are you going to have to make to get the property into marketable rental condition?  Does each property meet section 8 standards in case you need to accept a housing voucher to fill the property (this can add expense)?
• Contact the police department and ask for an incident report for the neighborhood, what are the police called out there for throughout the year?  Check www.familywatchdog.us for predators on the street, birds of a feather flock together and where there is a high concentration of offenders there may be other violent crimes.

Demographics on the Market/Neighborhood

• What is the population growth or loss?  What is the unemployment rate?  Percentage of owner occupants versus rentals?  What are the insurance risk scores for the area (tells you how often claims are filed)?  What are the educational levels of the residents (very low education levels can be a precursor to crime)?  What are the vacancy rates?  The income levels?  
• What do other property managers in the area who don't have a "horse in the race" think of the neighborhood and what has their management experience been on units they manage in that area?  How long do homes in this area stay vacant when tenants move out?  What type of vandalism happens when a unit  becomes vacant?
• What is the median home cost for the city?  If these homes are way below the median home cost, then you may be in a higher crime area, with bad schools and getting tenants that will rent quickly (avoid vacancy), dependably pay and not damage the property might be hard.

I hope this helps, thanks for asking great questions!

Considering Package of SFH Rentals w/ LT Tenants: What to know?

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