Today’s question comes from Daniel. He says, Hey Marco, I’ve been considering purchasing a small portfolio of rent, ready properties from another investor, either through a wholesaler or agent, because as a package, they can be purchased at a discount. This is true. Sometimes not always.
He goes on to say, he’s looking to purchase three to five single-family homes each with ARVs, or what is known as After Repair Values between $75,000 to $125,000. Okay. Those are interesting numbers. Those are pretty good. I have a pretty good idea of where you’re buying those. So what you’re not telling me here is whether you were buying and fixing them, or if they are being purchased as rent, ready properties right out of the gate, and you have tenants in place and they are probably under management.
Regardless, your question is, is what would be my options to finance such a deal. Okay. So in summary, you’re basically buying a small portfolio of rent-ready properties. You’re looking at three to five in one shot, and you are going to purchase these with one loan. So you’re looking for financing, whether from a lender or from the seller to purchase this portfolio.
Well, your options, here are your options. Number one interesting thing about this question, by the way, is I’m actually in the process of doing exactly the same thing right now, I’m working on purchasing a five-pack of properties. So the seller is selling five properties all at one time. And although I’m not negotiating a great deal on it, the numbers are very attractive and he’s providing me some flexibility in the purchase, which gives me a little bit more leverage, but that just gets involved in seller financing, which is what you’re asking about here.
So here’s your two basic options. One is seller financing. Two is using a portfolio or private lender, or you could use a combination thereof and get a little creative. That’s going to come down to the numbers. If you’ve got the numbers, the cash flow, the ability to cover larger debt service, then you can get creative and use seller financing to put towards the purchase. In addition to the financing, you get from a private or portfolio lender. So here’s basically how it works out. Assuming that the properties, the three to five single-family homes you’re buying are coming from the same seller, you can work out or negotiate a deal with that person to have what they call seller financing or a seller carry mortgage, depending on the state that these are in, it is going to be referred to as either a contract for deed or a wraparound mortgage.
Essentially, what that means is is that the seller, assuming they have financing in place and they don’t own them free and clear right now would essentially keep the financing in place and extend to you a new loan for these properties. And it figuratively speaking wraps around the existing financing. So they’re going to keep the financing and keep paying that financing but extended financing to you under a new loan. So they’re essentially back-to-back or much like a sandwich. A contract for deed is essentially the same thing. It’s just different terminology. But with the contract for deed, they’re essentially selling you the property. In other words, giving you the deed provided that you are paying the debt, servicing the debt that they’re extending to you, but they have the right to take the properties back. Should you default so much like any other mortgage? You’ve got the penalty of losing the property.
If you stop paying your mortgage, but however you structure that it’s seller financing. Now, if they own these properties that you’re trying to buy free and clear, that makes it a lot cleaner because now the seller, if they’re willing to can just extend a loan to you for any amount, for whatever you negotiate. It could be 50% of the purchase price could be a hundred percent of the purchase price. It could be 80% of the purchase price, and you come in with 20% down. Now let’s just assume that there is no seller financing. It’s not an option. So then what do you do? Well, you’ve got these three to five properties. You’re looking to purchase their rent. Ready. Great. Hopefully, you don’t need to do any work on these properties, but if you do make sure you’re getting enough of a discount plus some profit to make it worth your time and energy and the money you’re putting in to improve those properties.
So you come out ahead, after all is said and done, regardless if you’re financing these properties, then you’re going to work with a portfolio or private lender. There’s three options here that we have on our list. There’s others. But if you working with my team or talking to an investment counselor here, they could probably refer some others to you. But one company is known as Finance of America. There’s another company out there called Angel Oak Mortgage. And then there’s a large company that does these portfolio type loans called CoreVest. And so these are three somewhat common companies. Now, there are others out there. In fact, I just got back from Lake Powell, Arizona, and I was actually working on some pretty cool stuff for you guys. I’m not going to let the cat out of the bag on one of these things, it’ll be a big announcement in the next month or so, but I think a lot of people will be very interested in what we’re working on.
But one thing that is coming out of this trip is a new lending option, which will be nationwide private financing for not just people who are capped out on conventional loans, but it also will apply to people who have, I have less than great credit scores or credit profiles as well as foreign nationals. So also you could do a purchase of one property, 2, 10, 5, 20, 50, however many you like. So it could be a portfolio purchase with one blanket mortgage. So that’s the cool thing that’s coming out of that that is not ready today, but it will be available very, very soon. So that would be the fourth option. And that might actually be at the top of the list as the number one option for you. I actually have a meeting this week with them, so we’re just trying to button down everything.
But the point of all that is whether it’s a portfolio or private lender, that’s one way to finance it as a package. Now, often they will have minimum loan amounts. It could be, let’s just say $75,000. If these properties don’t have loan amounts that meet that minimum requirement, then what often they will do is they will take the average of the three or five properties or however many it may be. And they’ll just take the total loan amount, divided by the number of properties and look at that as the minimum loan amount or the average loan amount. And as long as that’s above the minimum threshold, then you’re fine. And that’s not a hard and fast rule. They can tweak that number a little bit when they’re looking at a portfolio purchase. So anyway, Daniel, I hope that answers your question. Your question was actually pretty straight forward and simple, short and sweet. And that’s how you would finance a portfolio purchase.
All right. I hope that helps. I appreciate the question. Thank you. If anyone’s listening and they want to submit a question on investing finance or real estate, just send it over through passiverealestateinvesting.com and that is it for today. I appreciate you listening. We’ll talk to you soon.
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