[Kind of]Starting Out: Need Advice and Self Introduction

22 Replies

Hi BP family,

I am a software engineer from SF Bay Area. Working at one of the top companies in the world, I love my job, earn a very good salary and have no plan to quit.

My buddy (also software eng) and I have quite a bit of cash and will like to buy and hold a few properties with equity and good cash flow.

I've been in touch with quite a few members on the BP and yet to find any property with good rental income and equity. Some prices offered are even higher than the MLS. Granted I will be out of state and am willing to pay a little bit of premium for turnkey, but the price and/or income ratio are just not making sense.

Are there good suggestions for equity and cash flow? Or should I hold my cash and wait for the next collapse. Please advise. Any input is welcome.

Hey Harry! Nooo, don't wait on the next collapse! You'll miss out on way too much money in the meantime. And very cool on the software engineering... I was an aerospace engineer and gained a huge appreciation for the software engineers working around me, mostly because I'm fairly computer-stupid and bugged them constantly to help me :)

I live down in LA, so I only buy out-of-states as well, and almost all of my properties are turnkey. When you say you aren't finding numbers that work-- what numbers are you looking for and what numbers are you finding? How much are you looking for in cash flow and how much in equity?

Thanks for taking the time to reply @Ali Boone . I've been reading your posts.

I am interested in SFH up to 4-plex. Obviously I am not experience with out-of-state investing, but my goal is:

  • Cash flow: I know 2% is hard to find now, but I'd like to have at least 1.2% or so.
  • Equity: I am shooting for 15% under market value. Is that impossible?

There are definitely some 1.2% properties out there right now (always be cautious using % rules though because they don't always equate to positive cash flow, but in the case of the turnkeys I know of, it works). 

As far as the equity, standby for a more solid answer on that as I'm reaching out to my folks to see who, if anyone, has any equity available in their properties. I'll let you know as soon as I hear back. But in general, turnkeys typically don't come with equity upfront. The exception to that is oftentimes when a market is brand new for turnkeys (at least brand new in terms of being known) and you are willing to jump in quick. Once everyone gets on the bandwagon though, the prices rise due to influx and the equity goes away and then you are looking at prices closer to market value. The other option for finding as much equity as possible in a turnkey is to buying in markets that are at the infancy stage of the growth cycle...again with the buying quick as soon as a {growing} market becomes known. If you wait too long into the expansion cycle, appreciation potential will be minimized. 

An example of that would be Atlanta now (and arguably Memphis, but I know the Atlanta market first-hand so will can speak to it more definitively). Oh, and Phoenix was probably the craziest and best example of this happened. When I bought my properties in Atlanta in 2011-2012, especially the 2011 properties, it was the very beginning of the market. All of those properties have gained around $40k of equity since I bought them. It's because I bought early and fast. Now if you buy in Atlanta, the appreciation rush has already happened so any appreciation you see now will be a lot slower (but still there). So choosing your market is the key to experiencing the most appreciation/equity you can with turnkeys. And of course do NOT buy in declining markets (which seems obvious but in seeing the markets so many people are buying in, apparently it's not that obvious).

So best bets for equity in a turnkey:

1. Buy very early when equity at time of purchase still exists (doesn't happen with all markets, but it does happen)

2. Buy at the most infant stage of a market's expansion cycle to maximize appreciation quickly.

Standby for word on current equity options on turnkeys...

@Harry Zhou

All the buy and hold rentals I have were bought turnkey.  As Ali says there are markets/providers that are offering turnkey rentals for 1.2% or better, but in many cases the quality of home and neighborhoods offer a riskier investment, especially if you move much above that level toward 2%.  Built in equity from a turnkey company is not only more difficult to achieve in the current climate, but it is even more difficult to determine if the claim for built in equity from a company is accurate.  I've seen really poor comp information to justify such claims.  I suggest that you consider either that you need to be more active investor, (ie: turn away from turnkey) or drop the built-in equity part of your investment criteria, especially if you want the 1.2% or better rent/price ratio.  Then you are focused on cash flow, and should figure on holding onto the property for at least 5 years to gain some equity in it.

Larry Fried, Real Estate Agent in OR (#201211636)

@Harry Zhou

Disclosure: I work for a turnkey provider

>1.2% and >10% equity is possible, but difficult. The hard part is comparing apples to apples. Often in good ROI rental markets foreclosures bring down the values and in many places suitable for turnkey rentals the house prices are often less than the rehab costs. This results in wildly varying values on the same block. The MLS is not always going to be clear about the condition of the comps. In other words, it takes a lot more work to get an accurate valuation comparing a well done rehabbed home to inexpensive places next door that need updates. Good luck on your research!

@Larry Fried, thanks for your post. I love numbers (engineer mindset) and will not blindly take any "claimed" equity without research. If I get you right, you are saying it's almost impossible to achieve what I wanted with the turnkey providers on BP. Can you think of any alternatives? We can chat privately.

 @Ali Boone -Great info there. Certainly hope I can learn more from you. Just PM you.

@Harry Zhou You live in a wonderful market, so you might want to explore the local one a bit more before going out of state...

In general, the markets are a bit overheated and I'm not sure how many good deals are left out there... You most likely will pay a premium investing out of state, especially going turnkey. I really don't see the point in rushing into any investments at this time, and I'm sitting on cash myself for now.

Markets are cyclical; what goes up always comes back down. Patience will be rewarded.

@Jay 

@Jay Y. undefined

 Do you mean I should hold my cash and wait for another crash? I've been exploring local for a while. 

@Harry Zhou Well, to do well out of state (in general), will require you to build a sound team out there and you'll need to accumulate a good number of units... otherwise, why bother?

From your profile, I can tell you're very ambitious (20 properties in 5 years) and from what you already said above, you are plenty cash strong.

The Bay Area is usually not an option for those with a capital problem, but that doesn't apply to you. There's no barrier to entry you have to overcome, so why not just invest in your own backyard (doesn't have to be right this instant, but markets are cyclical so there will always be opportunities).

Cash flow may not be as readily apparent on Day 1, but there's almost nothing capital can't fix! Your capital will go a long ways here and help you win/renovate value add opportunities (forced appreciation). Buy a junker, fix it up, and raise rents to make the cash flow "numbers" work...

DRIP cash flow out of state can work, sure, but it won't build wealth like Bay Area appreciation; both in terms of property value and rent... Within a few years, your cash flow locally will easily trump what you're getting out of state as well since rents are mostly STATIC in turnkey markets.

Unless you can work the grounds out there like a TRUE local, you will be paying a premium every step of the way (acquisition, rehab, PM, etc)...

I guess what I'm saying is don't take for granted what you've got going for you in your own backyard. Bay Area real estate has made a countless number of people very successful and wealthy; it can probably do the same for you.

Harry,

If you consider investing out of state for cashflow, reach out to your fellow software engineer

@Ezra Nugroho . He's doing quite well the last time we talked, which was over dinner yesterday. LOL!!!  If you want to invest locally for cashflow and equity, you and your friend should consider teaming up with J. M.'s advice seriously since he has done both.  Feel free to use the local guys as your sounding board whenever you need a second opinion.

Best of luck.

Hi Harry,

If you are willing to spend the time and effort, you can find both cash flow and equity. It all depends on how much you want from each, how much down payment you have, how much time you can spend on real estate and how much risk you're willing to take. The only way to buy with equity these days is either as an off market transaction, at auction, buying a lien and foreclosing on the owner, or finding neglected properties on the MLS in my opinion. Lots of turnkey providers out there focus on great cash flowing areas but appreciation may only follow inflation and you are right that there will be no equity in the deal. Be wary of financials that have incorrect property taxes, no vacancy expense or reserve expense, and low expenses in general as that pushes the yield on the property much higher than in reality.

In addition, keep in mind that buying real estate always has trade offs. If you buy a newer home, your yield would be less versus an older home of similar size as more people like to buy newer homes and there should be less maintenance issues. If you buy in a rough area, you may have very high cash flow on paper, but you may end up with tenant headaches and less income as expected. Always do your own due diligence.

If you want to stay local, I really like Turlock for the CSU there and Tracy where I have 35 unit building under contract. For a mix of both cash flow and appreciation, I really like the Portland and Seattle areas. I don't own in these cities yet but I really like their economies, and the lifestyles both cities have to offer. I was just in Bellevue over the weekend for a wedding, visited some awesome parks and drove around some beautiful neighborhoods and all I could think was I need to buy something out there as I can see many more people moving up, especially from Silicon Valley as you can own so much more for less money with a great lifestyle. You won't get high cash flow like the midwest and you wont get super high appreciation like what the bay area just had, but I think an investor can receive a bit of both with a stable economy.

Thanks for the shout out @Minh Le , I'm not use to people quoting me at all!

This post is just my two cents, good luck out there Harry. Almost everyone wants to sell you something in real estate. Find some people you trust, find an area that you feel good about investing in, learn about the area and property values as much as possible, and it will be easy to pull the trigger once the right property comes up.

Hey @Harry Zhou ,

Welcome aboard.  I see you're from Walnut Creek.  Nice area.  I just completed a rehab there and am starting another in about a week.  

You're a wise man for considering investing in real estate.  Can't beat it.  But timing is everything.  I will echo what others have said here regarding your desired returns out of state.  All real estate is local and various parts of the country are in different parts of their cycles but that built-in equity your looking for from a TK provider will be hard to come by. If you're going totally passive like that don't expect a whole lot of built in equity.  

Your 1.2% rent ratio is more realistic, but the devil is in the details.  I have buy and hold properties in two out of state markets (Dallas-Fort Worth, and Atlanta Metro).  A rent ratio of 0.8% in GA gets you about the same cash flow at 1.2% in TX because the insurance will cost double in TX and property taxes will be 5-times higher.  So do your due diligence.  If you really want that built-in equity you'll need to do the heavy lifting and build a team out of state.    

You can also invest for cash flow locally but again, you'll have to do some heavy lifting.  For effortless, built in equity and cash flow you'll need a time machine to the days of blood in the streets and fear that Bay Area real estate was dead "for real this time".  

Happy hunting and have a fantastic Memorial Day weekend!

Cheers, Jeff 

Originally posted by @Johnson H. :

 I was just in Bellevue over the weekend for a wedding, visited some awesome parks and drove around some beautiful neighborhoods and all I could think was I need to buy something out there as I can see many more people moving up, especially from Silicon Valley as you can own so much more for less money with a great lifestyle. You won't get high cash flow like the midwest and you wont get super high appreciation like what the bay area just had, but I think an investor can receive a bit of both with a stable economy. 

Johnson!  You were in my neck of the woods and didn't let me know?!?  Man, it would've been great to see you and catch up!  Seattle is in the same real estate cycle that the bay area is in, but yes, prices are cheaper (for now!) but rents aren't catching up.  The city of Seattle is working on enacting rent control, which could escalate prices quickly.

@Minh Le thanks for the shout out! I feel that you are setting for me a larger stage that I feel I am entitled to perform on.

@Harry Zhou

I am an odd ball West Coast investor who invest in Harrisburg Metro, Central Pennsylvania. I am not that experienced, but I've been really putting the time for it. This March, I just closed a 4-unit building with 12% equity per the appraisal. The gross cash flow is 1.6%, but I am paying water and sewer for the units, let's just say it's equivalent with 1.3% if I were not paying any utilities. On top of this, you gotta add your PM, Cap-ex, vacancies, taxes, etc. 

Although I invest out of state, I am with @Jay Y, I tend to advise people to invest locally. 

If you want to invest out of state, how much time or effort are you willing to spend on it? Not just managing the managers, but in getting to know that market? 

My advice is this: Invest locally, even if it is out-of-state. You gotta make that market to be your local market. You be willing to spend the time to learn it's specific niche!

For example, in 4-season states, no one wants to rent in the winter, so you gotta do what you can for leases not to expire in cold months. Do you know the local good school districts and the local getho? What's the unemployment in that area? What's the driving forces for the economies there? etc.

Identify your market, and start networking with the experts in that area.

By the way, Minh, Johnson, Jay, Troy and I know each other in real life, although some better than the other. We frequent the local BP meetup that take place once a month. Keep an eye for the next one, it would be a great opportunity to network.

Cheers, and have a great long weekend!

Originally posted by @Troy Fisher :

Johnson!  You were in my neck of the woods and didn't let me know?!?  Man, it would've been great to see you and catch up!  Seattle is in the same real estate cycle that the bay area is in, but yes, prices are cheaper (for now!) but rents aren't catching up.  The city of Seattle is working on enacting rent control, which could escalate prices quickly.

Sorry Troy, I was just there for a night with my girlfriend as we both had tough work scheduled to work around. I did not get the chance to play real estate while I was there. I'll definitely let you know the next time I do fly up. I can really see myself owning in either city in the future. 

I can't believe how many great advice I received in this post. Thank you! Actually, a little too much info to digest :)

Any path in these advice could take a while to learn and plan out. I also know planning without execution means nothing...

@Harry Zhou You have several options.  If you have cash you might consider investing in performing notes, you can get a decent return without all the drama of managing out of state property.  

Baring that your strategy of buying turnkey can work as well but offers a little more drama.

feel free to PM or call me if you would like any info on notes as that is our main business.  Not trying to sell you anything, just willing to offer advice if you are interested.  We also have several OOS rental properties so I can give you some insight as to how that is working for us.

@Harry Zhou ,

"Cash flow: I know 2% is hard to find now, but I'd like to have at least 1.2% or so.

Equity: I am shooting for 15% under market value. Is that impossible?"

I've done what you are shooting for several times now in the Bay Area, and you can see how, where I got the deals and the numbers on a link on the first post of this forum link.

Having said that, I don't think you will be able to do the same at this part of the cycle in the Bay, unless you contribute a significant amount of time, effort, and maybe money on marketing. Did last deal in August of last year.. Go to @Johnson H. 's meetup in San Jose with guys like @Ezra Nugroho and @Jay Y. that have experience out of state. Then drop in to my meetup in SF and talk to some of the out of state and local investors. And thanks for the shout out @Minh Le

I'm shooting for 2 great deals this year, but you never really know which frog will become a prince, or when.. ;)

Whether or not you should just buy now, or wait for a downturn.. Hard to say! I'm not stretching my parameters to make it work. For example, I turned down a deal in an area of Richmond I'm familiar with and OK with that had about 1.3%+ monthly rent/price. But there would be no equity in it after rehab. I still like to have 15-25% equity in it after rehab, especially for lower-end areas, in case the market terms. I was scratching my head about going forward with it anyway... But just put my foot down. I can probably help you out on a bunch of stuff not to buy! lol

Not sure if you're ever working from home or out in WC during the day or early evening - but I'll be working out there for the next few weeks during the day time. If you want to grab lunch or a drink and chat RE, or if you want to commute down to @Jeff Pollack 's meetup on Wed in San Jose, with awesome guest Sean O'Toole, I'm heading down there also.. He's the CEO of Property Radar and always has good insights on the market..

I was actually thinking about having a meetup out in Walnut Creek in the next few weeks, since I'll be out there a bit.. We'll see..

Anyway, there are more ways to make money in RE than there is seconds in a day.. Chat with lots of others and see what might work well for you..

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