So, you might already know your way around real estate and have picked up a property or two. And if that’s the pace you want to go at, there is absolutely no problem with that whatsoever. Not everyone needs nor wants to build an empire.
But if you do want to “build an empire,” there’s several ways to accelerate your progress substantially, one of which is buying portfolios.
This is where you buy multiple properties at the same time instead of picking up one at a time. Of course, that doesn’t mean you have to buy a portfolio with 100 properties right of the get go. Instead, you can start by buying portfolios of two or three or ten houses or whatever comes your way.
Institutional Investors vs. Entrepreneurial Investors
First of all, there are two significant group of investors who are interested in buying portfolios; institutional investors and entrepreneurial investor as I call them. Institutional investors consist of real estate investment trusts (REITs) and other funds which examine portfolios like Wall Street assesses stocks.
For example, such investors constantly talk about gross yield and what their buy box is. Gross yield equals the annual rent divided by the total price and their “buy box” is the range of gross yield they will accept.
You might notice that this is not the most entrepreneurial way to examine the property. They mostly analyze portfolios for the cash flows as they need to hit certain returns for their investors.
Entrepreneurial investors should aim first for built-in equity and second for cash flow. You can get approximate numbers by looking at Zillow or Redfin, but at the end of the day, I would recommend any entrepreneurial investor to evaluate each property individually and add up the total of all their values to determine the total value of the portfolio.
You can find portfolios on the MLS, Loopnet or sites specifically for portfolios like Entera. From time to time, you will also find portfolios listed on the Facebook marketplaces or even Craigslist. If you choose to, you can also market to these by using site like List Source to find people who have multiple units and then send them a letter or postcard (or both). You should also network and local REIA groups and other meetup events. Rub shoulders with investors who have a good number of units and when they finally decide to sell, you will likely be the first they reach out.
Rehab and Deferred Maintenance
Buying portfolios is similar to buying an apartment as there will always be some deferred maintenance on units that are currently rented.
Just like with an apartment you should walk every unit when you have the properties under contract. The only exception would be if the buyer will not allow it and it’s a sales condition. If you accept this condition you need to be much more conservative. It’s likely the units you do not view during your inspections need more work than the ones you do view. So make sure to add in a larger contingency for repairs in such cases.
Keep in mind that there are not as many portfolio buyers on the market as buyers of individual properties. Most investors look for just a single house and big portfolio investors look for 100 plus in good neighborhoods. In many cases, this gives you a bit of an upper hand in the negotiating, especially if the seller is motivated. It’s unlikely they have a lot of other options. So seller financing is often something they will consider and, if needed, something you should ask for.
Since every house is on a separate parcel you may be able to use the lending option more creatively. For example, you could get a blanket loan on all of them with a bank, or just some of them while buying the rest for cash or with private lenders. Or you could split the closings up (if the seller allows) and close in two or three closings to make the financing easier.
It’s not very often that these portfolios come around, so portfolio investing shouldn’t be the only thing you do. But when you can find a quality portfolio, it is a great way to jumpstart your real estate business. Therefore, it’s definitely something to look for and be ready for when it comes around.
Justin Malonson is the Founder of LyfeLoop a 16+ year tech innovator, investigative media researcher and host of the Freedom Not Control Podcast live on Voice America. Justin is a highly sought-after tech entrepreneur, industry speaker and winner of the coveted Business Achievement Awards “Top Digital Marketer” award. With 16+ years of demanding experience, Justin has worked with over 3,000 businesses including amazing clients such as Blue Cross Blue Shield Association, Sotheby’s International Realty, Duke University, White House Black Market,Tiffin Motorhomes, Bass Pro Shops and Beazer Homes USA.