Pros/Cons of buying an existing property portfolio from retiree

[Jonathan Wild]

Hi

I live in the most beautiful city in the world.

I'm a newbie, but not quite a complete novice. I'm in my 50s. I have 13 years experience of renting a cottage on our property (which includes leases, tenant vetting, maintenance, evictions etc.). We have also used Airbnb for short-term rentals of the main house. Usually to overseas guests holidaying in Cape Town.

Recently I have been looking to start a buy and hold strategy (BRRRR). My target market is families with young children who require homes with 3 bed, 2 baths, and 2 garages.

I quickly realised that it is very difficult to find cashflow properties in Cape Town. I have started networking with the intention of finding potential deals. I have one very close friend who has a been doing the buy and hold strategy for more than 10 years. He has been invaluable in helping me learn. I have also been devouring BiggerPockets podcasts (I have listened to more than 50 podcasts, read posts, used the buy and hold calculator, and connected with other South Africans on the BP website).

I have been focused on trying to identify potential BRRRR properties in B areas that look like they will become A areas as the city continues to grow. So far my marketing has been limited to driving around and then knocking on people's doors to ask if they want to sell, and also to find out about the neighbours, and what is happening in the neighbourhood.

However, at a recent networking event, I came across an interesting opportunity. An older landlord, with a portfolio of about 50 single-family units, wants to sell his business and retire. He built all the houses himself, maintains them (including the gardens) with a small team of staff, and has 1% vacancy rate. The business has no debt and includes an office building, 3 maintenance vehicles, a workshop, and a few staff.

He does all his own property management and has high standards. He doesn't have anyone in his family to pass the business on to. He has started advertising the sale of the business but he would prefer to sell to someone like me who would continue his high standards. We have met a couple of times and we get on well. At our next meeting he plans to show me the office, workshop, some of the properties, and how he operates the business.  

The portfolio is valued (at current market rates) at about $7million. (I'll use US dollars because most of you PBers will be thinking in US dollars). It generates about $28,000 net profit per month.

I only have about $50,000 cash. However, I've learnt from BPers that the money issue can be solved if the deal is good enough and if I have a good strategy to finance it.

Ideally I would leave my day-job and work full time in learning the business. Alternatively, I keep my day job and learn more slowly. Either way, as part of the deal, I would ask the owner to 'mentor' me for at least 6-12 months. 

In thinking about how to structure the deal I have been thinking about all the stakeholders (tenants, staff, suppliers, owner) and how they would benefit from continuity in the business. 

My wife has her own business and is supportive of the idea.

Assuming that the business is solid (I will of course do the due diligence and get an independent evaluation), then my questions are as follows:

1. Would you buy it? If so, how would you calculate what to offer for it?

2. Would you advise me to work for the owner for a year in order to learn the business?

3. What creative financing strategies can you suggest?

4. If buying the whole business is not realistic, then would you advise buying a portion of it?

5. Do I buy the whole business using bridging finance and then sell off most of the units to pay for it? If the market prices remain as they are then I would end up with a small number of units and no debt. This is risky and I doubt any lender would be interested.

6. How about seller financing where I use the profits each month to buy shares? But doing it this way will take 20 years which will not be acceptable to me or the seller.

Thanks in advance.

Jon

[Larry Turowski]

@Jonathan Wild This is an intriguing opportunity, and worth learning about for education sake if nothing else.  I say that because no price was mentioned and it is all moot depending on price.  Let me first answer your questions:

1. Yes, if the deal worked for me.  But I wouldn't offer a price.  Let him tell you what he wants.  Lot's of people say they don't know what to ask for it.  Well, if they don't know what to ask, they also can't know what to accept.  They either already do have a number in mind, or need to do homework to figure it out.  You don't want to do a ton of homework just to find out that you are nowhere close to what he wants.  As politely as possible, get him to give you a number.  A serious seller will have a number, even if it is too much.

2. No, unless you are willing to do it just for the education and not buy in the end.  He wants a serious buyer.  You want a serious seller.   This middle of the road thing will leave you both wondering if the other is serious.

3. The biggest is owner financing.  Two things can make a deal, either the price or the terms.   He owns these free and clear so it is a possibility.  The price doesn't need to be great if he is willing to owner finance and they still cash flow well.  (That said, $28K net per month sounds really low considering he has no debt.)  Other possibilities are partnering with someone and/or syndicating. 

4. Yes.  I'd consider anything that was a deal.

5. You could do something like this.  Just keep it in the back of you mind for now, you are getting a little too far ahead of the deal.

6. Obviously you have to come up with something that is acceptable to both of you for this to work.  Find out what he WANTS.  Obviously, it is not just price, he wants someone who will run it as well as he has.  Find out what else he wants.

Don't get too far ahead of yourself.  Take this opportunity just to learn--it sounds you are interested in just learning.  Learn how an operation runs.  Learn how to get at what he wants.  Learn how to evaluate the deal after you know that.  Learn how to bring others in if it makes sense.