All Forum Posts by: Michael Hoover

Buy out of a local portfolio or don't buy?

Self bio: 19single single-family homes rented and self managed all local all BRRRR style, cashflow avg 320 per home. 55% dti. Able to recoup all investment capital through each deal to fund the next. (it's just slowish and requires a lot of my manual work)

Potential Deal to take through Owner finance:

- Purchase Agreement in place until 7/31.

17 doors - mixed 1 quad 1 triplex 3 quadplex 2 single family 2 1br cabin houses. 

- all are occupied

- 90% of properties are in rentable but rough shape and need significant work in the near future.  In small college town with high rental demand

Ask price 745k

Gross rent: 9750/mth 177k/yr     (differed maint properties with potential 200/mth per unit increase once renovated) estimated reno (190k across portfolio)

NOI: 91,475/yr (12.6 CAP) (includes tax, ins, listed maint for past yr)

After reno NOI 127,475/yr   (14.6 CAP) 

Deal info: 

   - Owner finance 745k 20yr at 6% 20k down minus deposits (~13k)

Cashflow  = 2100mth     (self-managed) (self maint similar to the previous owner)

By this alone, 2100 cash flow added per month, it will put me at my financial freedom number of monthly cashflow is equal or greater than my families spending amount. (so very tempting). The HUGE downside is these homes all kindof need full renovations. Therefore this cashflow will all be burnt. The buy prices of these home are much higher than I am acustomed to in my area and my other investments althought the super low downpayment owner finance at  6%  is much better than i can get elsewhere. 

Unlike my current active stratagy on my 19 SFH,  I will not be able to recoup the renovation cost back out of the property value by having an 80% Loan to value pulled on the back end because the buy price is just not good enough. Kindof making me think I should walk, buyprice too high.

This is my first time buying a portfolio, I have not been able to view the active units as thoroughly as I have vetted all my other deals. This is in a small town that I own and operate other rentals.

I am a bit nervous of the type of renters that are in these deferred maint properties currently but see big upside if properties are restored, Partialy because all are within 1/10mile and many property boundaries touching the community college. 

Pros:

-2100/mth (29k/yr) instant cashflow increase for only ~13k in the deal. 

-30k yr appreciation at (3%)

-30k princ paydown yr1, increasing each year after..

Cons:

- 17 more self managed tenants with more problems than my current 19 freshly renovated homes

- All properties need reno

- Properties are priced at value, not below value therefore I can't recoup renovation costs from finance out after value add. 

         Buying properties as singles in my area i have found much better deals than this although these are up and flowing and require no initial investment. 

My plan if i get the properties will be to Buy, slightly increase rents (as they are currently 200 behind market,) as tenants move out, renovate the properties with my BRRRR team in between ongoing Single family homes.

Backside (2years in),  I will have 210k cash in the deal with ~680k still owed and 5428 or(65k/yr) cash flow. Est After repair value 1.3m

Other large scares: Many of the homes would have code violation issues, many have foundational issues (although my team is accustomed to fixing). no current city inspection but what happens when they implement code inspection department in 5yr 10yrs. 

I do not have large reserve of capital although do produce enough through my current properties to Fund 200k of repairs over next 2 yrs. 

I had the opportunity to sign closing on this deal last week but I have currently delayed to think.  I think this deal is a no but the instant cashflow (and holding princ paydown/appreciation)  is hard to turn down..Pretty rough maint needed properties (but rentable)...  Thanksfor your thoughts!!!!!   

@Bill B.    Financially, I have a somewhat tight budget, 

1) Single Fam Reno's - I keep 125-150k as working capital for my BRRRR's (normaly keep 2-3 houses purchased and in line). This reserve seems somewhat tight to keep this moving smoothly and stay off credit cards while waiting to the cash out. Overseeing and hands on in the BRRRR is my day to day.(a lot of manual work!!)(a lot o f my time!!) I pay myself and my wife a combined 120k/yr for this service (5-7 homes per year).

2) My previous 19 SF BRRRR's are cash flowing 74k per year (P.I.T.I.) and in my current model, this Cash Flow is increasing by about 25-30k per year.

Honestly, I still feel broke, My previous job 4-5 years back was 200kplus/yr (Subsea Engineer Offshore). My income is nearly half what it used to be but steadily getting back closer through semi passive income and not 1000miles away from home.            My largest goal has been to get my "semi" passive to 10-12k mth to exceed my family's 8-10k/mth normal spending.      I feel my current method is working me too damn hard but it is working and moving me in a steady upward direction...    

This deal is 20k down and the 8 appt is only part of the deal. Total 17 door: the remaining 9 are single family's. All but 2 split into Duplex/triplex also doted around this college.  I had only mentioned the Appt numbers as this is my largest concern and uncertainty.     

The full deal really has very little money into it. (20k) and should cashflow 2200mth with the current tenants. Potential of 5200/mth flow after an estimated 160k of repairs. 

The biggest down to this deal for me is the "partial" disruption of my SF BRRRR model that is currently making my 120k yr income. I would plan to reno these as tenants move out so it would only partially disrupt this, a few weeks at a time.

Backup options: 1(potential pull against appt equity after reno may be needed to keep money stable) 

2(Second option if i get into a bind is to sell a few of my Single Family. I currently have a LTV of 56% in SF portfolio, I could net 30-50k each from a couple of my SF homes if needed)

Any advice is welcome! I do feel I'm stringing myself out a bit with adding this deal to my current workload, but also feel I can adapt and conquer and maybe push myself into multi fam.           

Thanks all!   It appears everyone is a bit cautionary about the un-proportionally low OpEX. 

Gross rent: 54000/yr  Tax: 3593/yr   Ins:3900/yr     Maint: 5740/(past year)  Util/grass: 2000

        Vacancy is not included (what % should be used in med/high demand area?)

        Maint seems a bit low for the past year although, for the first few years after the planned reno, I would think this Maint would be sufficient.  The previous owner was handyman to the property(as I will also be) so I would think maint# is likely Material only.

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@Melanie P.    By previous conversations, the Seller is unlikely to extend/decrease payment past this point. He has offered numbers for both 15yr and 20yr. The 15yr would net right around 0 cashflow, so not an option.  Any advice on how to present a 30yr amortized (20yr balloon) that might be more appealing to him?  Would this be a deal breaker if he was non-negotiable on this?

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@Chris Seveney       Low OpEx again, Where would you think I am most significantly underbidding OpEx.?   This is a "tiny town" feel apartment, currently with very basic/ no amenities currently offered. Washroom bring your own washer/dryer(currently).    

You all are likely far more accustomed to running accurate numbers on appts so I am giving your opinions heavy weight in my decision but also trying to vet the specifics of this property.  

Maybe I am thinking of this in the wrong way but with this being my first Appt, 

A big pro to this deal would be that it is very conveniently located in a prime location of the tiny town in which I own many other Single Fam homes. Therefore makes this a very easy deal (for me) to break into multi-family (learning experience). If it is not a good buy in first place it might would scar me from multifam.  but if it showed success it would likely give me the needed knowledge and comfort to move forward with other Multi fam deals instead of specifically focusing on single fam.

Your recommendations/thoughts are a huge help! Thank you(for real!)

@Tim 

@Tim Ryan Yes, Rental demand is strong and rent rate is currently under the market avg. I feel a rent increase is semi-conservatively 150 to 200 with new reno.   

Water/ power metered ind. Only pay water for lawn.    Maint. came in at 5-6k for the past year.   Previous owner self managed property. I will likely also self-manage as I have a solid team in place in this local town.   60k could come in a bit low for reno depending on how far we take it but I have a very efficient team in place. 

@albert  Your correct this is quite low, Property condition has possibly been declining slightly at this Maint.  The insurance is from a year ago quote I am currently obtaining an updated quote. Property being previously self managed is likely a large driver of low Op.Ex. %

I have been offered an exclusive Deal by a local "friend"/ semi-mentor in my small town. 

 8 standard 2/1 apartments -  Quad, duplex, duplex, 1970 Dated buildings, little neglected but liveable

Owner finance: 20yr 6%rate with 20k down

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Total purchase 400K

Current NOI: 41k     Cap: 10
         (Tax,Ins,Maint, Util)

Gross rent 4500/mth

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Upgrade, Est repairs: 60k 

After reno: NOI: 59K   

Gross rent: 6100

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Loan pmt: 2865/mth,    34k/yr

Current Cash flow: 531/mth,  6,378/yr

After reno Cash Flow: 2131/mth,  25,578/Yr

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Added info- 
-Property line Joins with (growing) Community college

-Tiny town

-The Buildings are Currently "uglyish".

- Current Rent is 150$- $200 behind market avg.

I am very comfortable in single family homes in this town (own 18 SFH rented and performing well). First apartment purchase. Any advice welcome!!

Deal, no Deal!?

 Yes, I feel I will be doing the same as you at some point but I don't think I am as far along in my journey as you. I feel I need to get to a stable cash flow number much larger than my living expenses before the sell old and buy newer makes sense.  Also, all of my current 18 rentals have had an extensive remodel since acquired (3-4 years oldest brrrr).   Feel like they all have some good life in them at the moment.          @David ****Do you wish you would have done sooner or did it only make since for you after a certain point as well?****               Best investment wishes to you all!!!

 I have recently run the numbers on snowballing debt across my portfolio but it seems to not really make sense at my stage.    

 My biggest issue with snowballing is my family's budget must be paid by a decent percentage of the income I make.  

   -72k/yr passive income (current), and then also making 

    -80-120/yr from my manual labor of sweat equity. 

my family budget is around 90-120k/yr.  (this is living on fumes and being somewhat money-scared, but we have everything we need.)

The above number leaves 70-80k a year that I can, and have been, reinvesting into homes.  Best use of this "extra" money has seemed to be for paying down payment of 3 additional homes per year at the 70-90k price range. (15-20k deposit each, 5-15k repairs each, additional cashflow avg 320/mth each).          

These type deals me and my crew has avg 1-3 weeks reno times into where a full BRRRR that I can make profitable (no money in after the cash-out loan) takes 6-9 weeks.

Money Compare:

Add additional homes -    with this extra 70-80k/yr can add a boost of 920/mth or 11,040yr passive. 

Snowball -     Where if I were to payoff a single home with this "extra" money it would increase my cashflow by 8500/yr (but I also lose bank principle pay of 2000/year) so the effective added cash flow is ~6500yr.

By the time I add Principal paydown and "slight" appreciation the add homes method seems to be the clear choice.     

  *** I would love to hear your comments on a debate in favor of the snowball.****

At some point, future, I think I will want most all properties paid off so I can have great flow with minimal stress and maintenance numbers but kinda feel growth phase is still smartest as of now. 

Thank you again for making my brain work through these numbers! You all are helping me and it is appreciated!

 Yes, I feel I am in a bit cleaner environment that Jackson but I too have heavily considered to sell everything. My current 18 are B- to A- properties(in  C to B+ neighborhoods).   I have  800-900k in equity and have considered moving it into long-distant A rated properties with a more passive approach. I feel like this is my smartest future play although do not feel it is the correct choice yet.  

Equity   -    my 800-900k equity is currenlty producing, 72k liquid cash per year,  40k principle paydown per year.      

My renovation business -    of these previous 18 homes produces 120k/yr salary. plus ~100k/yr equity added. monthly Cashflow increase of 2100-2400 each year (approx 30k cash flow increase per year).    

Sell all homes and move equity to an appreciating market has always been a thought. 

Any advice is greatly appreciated.    I'm trying to make the right choices but still feel like a newbie. 

 Yes, Buy and hold! I have flipped 2 homes to keep the family budget where needed but hold and long-term growth is my one true focus.  

Previous 18 homes- (Began first investments, first BRRR's 4 years ago)

  The homes I have Renovated I renovate to a Very Very nice condition with the intent to have home in a stable position for 10-15 year run with an expected medium reno at 5-8 years in. 

My low loan to value (56%LTV) and considerable value add will keep any sell of any properties at good profit. My main focus of investing has been cash flow to reach family budget.

All my current homes are Single Family 1 door homes. This upcoming potential purchase is a partial multifamily. I somehow hove more confidence in the 20 year potential of my SFH than the multi family/duplex/triplex layout of the potential portfolio. (your thoughts?)

--Potential-- 17 door addition:

These properties are dotted around a community college campus.  I feel the 20 year aspect will be heavily affected by this campus. The remainder of the town only has a Subway and a Wards and 2 gas stations. Walmart in next town over 7 miles away.  

These properties are on there way to slums, old home death, unless they are brought back with rather in depth remodels.  Although, The community college and great high school make this a  very desired area and therefore may warrant the somewhat costly renovations.  

My crew now has 20 remodels under its belt and 16 or so of these being very extensive, So I do have the means of getting these into shape although to aquire 17 at one time is not what i am accustomed to.  I commonly keep 3 homes purchased, 1 in which we continuously are remodeling 2 in line for renovation.

This 17 door possibility would be to renovate as tenants move-out type bases. (renovate and raise rent). 

In regards to your post. Overall I would say I am much less confident that I would be happily keeping these homes for 10-20 year span than the current 18 that I have in renovated condition.

I also feel like after renovation of these properties the 20 year outlook would be much more solidified.      So many question marks with 17 "older" doors.        

Perks of this deal that keep drawing me back:

#zero down,   #small cashflow from start,  #average cashflow potential after renovations, #Quickly add substantial numbers to my portfolio.

Thank you for your comments. I have very few people, to bounce ideas with. I feel this is a substantial help to my decision-making/thought process.  Thank you for helping me and please let me know if I can contribute to your success !!!

Added info: 

My current 18 single family portfolio has a Loan to value of only 56%,  (1.8m value 1.03m borrowed). 

another negative These additional doors would be leveraged (owner-financed) at nearly 100% of their as is value. Sweat equity added would likely put these back around 70-80 LTV after Renovations. (kinda scary to be leveraged at such high LTV) (right?)

My area I feel has very little appreciation at the moment although rental prices have increased rapidly over the past couple years (many landlords have not yet raised prices to what market can support). 

Thanks for the Insight/ advice/ potential piviots to make deal better?