A scenario for Summer 2018- your advice is requested

4 Replies

BP Community,

I have enjoyed the education gained by reading the forums and now it’s my time to jump in. I would be interested in hearing your opinion on my situation.

I intend to sell a property in summer of 2018 when the current tenants’ lease is up. The house has never really been a great investment. I picked it up while stationed in the area with the Navy. I have offered to sell it to the tenants but they don’t qualify. I expect to realize about $75K from the sale after commissions, etc.

I will be retiring from the Navy next year and my intermediate-term goal is to invest in cash flow properties so that my post-retirement paycheck is supplemented to its pre-retirement levels. My longer-term goals are undefined at this point but presumably, once I get going, I will set the bar even higher.

My plan is to use a 1031 exchange to get into a property or properties that provide a better positive cash flow than the current property. I live in San Diego and fully accept that I will be an out of state investor due to the high cost of entry here.

I am soliciting your sage wisdom on the following questions:

How do I narrow down my search of the various markets? Which ones to pursue?

Do I approach turnkey providers or is there a way to learn about markets and assemble a team from a distance in these markets on my own?

Should I try to get into one B property or 2 C properties or some variation on this concept? What is the mix?

Once I acquire the property or properties in question, what is the next rung in the ladder? Should I specialize in the market I have gotten into or do I diversify into other markets?

I always appreciate the practical and creative advice I see in the forums and I look forward to seeing what the Community does with my situation.

Many thanks,

Dan

For me, this is how I approached it:
1) May your budget be your guide, sure plenty of great places to invest, but if you can't afford to it's a mute point.

2) Knowledge. Now this might be easier for you being Navy.... where have you been, what areas outside of your current location do you know?
Now, hopefully there's some overlap and if your lucky there's a place you know (well) or want to get to know well and it fits your budget. Some places (like KC) are easy to research online while others (insert most midwest cities here) are slightly to extremely difficult to dig info up with. Then you have the areas that are likely already picked over (Chicago, ATL, Dallas etc).

Now let's pretend you have your budget and area picked out... what's the next step? Figure out where in the city you're investing. What's your niche, what's your focus, why are people going to rent your property? Now that you got that picked out we need to find the property. This is easy, you have a budget, you know the area, you know what you need, but most important you know the value. You know the rents, you know the average prices, you know what renters would pay extra for and what they could care less about. 

So goes the hunt, you network with realtors, PMs, lenders.... figure out who fits well in your goals/attitudes and move forward. When they ask what you're looking for you know exactly what to tell them. You know if you talk to TK company you can spot check their numbers, do they mesh with what your thinking, is it a good value etc.

The deal doesn't have to be perfect, but it does have to make sense. The house won't be in perfect shape, maybe the price little more than you want etc, but wait and a deal will come. Let the budget guide you, but the best quality asset you can being OOS. Don't fall for the cheap warzone house with "great" returns, it won't happen in real life. 

I always suggest investors invest local until they have a lot of experience. I understand issues with price of entry but retiring from the military gives you options that you have earned (VA loan) that make the cost of entry much less.

If I were you I would look at starting by house hacking (owner occupy a unit) a detached duplex financed via a VA loan in an area you and your family would enjoy (does not necessarily have to be San Diego). The cost of the area really is of less concern due to the low money down purchases offered by the VA loan. I suspect 3.5% of a San Diego property will cost you less to enter than 20% OOS property (non owner occupied) that would be a good investment (note the real cheap OOS properties cannot be financed and therefore cost 100%).

BTW San Diego financed buy and hold has historically produced better returns than any of those much cheaper OOS options.  All you need to do to realize this is realize the return just via San Diego property appreciation.  Realize rent appreciation typically has some tight correlation with the property appreciation (it lags behind but when property appreciates rents also appreciate).  Imagine what the appreciation does for an RE investment leveraged via a 3.5% down payment.  3.5% appreciation in the year of purchase provides 100% return (not including closing costs).  The lowest appreciation in San Diego in the last 5 years was on the order of 7% (different sources have slightly different numbers).  The highest San Diego appreciation in the last 5 years was on the order of 20%.  Imagine the return on a 3.5% down RE that appreciates 20%.  Remember as the property appreciates so does the rent.

I realize I am not answering your question but I hope I am giving you something to consider.  We have invested in San Diego RE and OOS RE.  Our OOS investments did not do nearly as good as our San Diego investments but not because of the usual reasons of having no appreciation and higher expenses than TK estimate and newby investors anticipate (Our lack of success was a combination of mother nature and unfriendly taxation). Seeing that I have not been successful OOS, I will leave your questions to those with more OOS investment success than I have.

If you have questions about duplex purchases that cash flow in San Diego and their potential return you can PM me.  I am closing on a duplex today.  If you PM requesting the numbers I will respond.  If you want success stories on San Diego RE purchases PM me (Ask for my best San Diego returns or worse, they all are good).  I have bought at near market highs (twice: 1993 and 2004) but today most people would be very happy with those purchase's returns.  I mostly have not done the large scale forced equity; our forced equity has been via rehabs, etc. (but I am always looking for that large forced equity opportunity that I feel confident that we are qualified to be successful with).

I am not an expert on VA loans but there are people on this site who can provide you references to experts. Regardless of if you decide to invest OOS (non-owner occupied) you really should look into how to best leverage this benefit (the VA loan) that you have earned.

Good luck

@Dan Raphael The general challenge I see is that owning just a rental or two pretty much sucks - it's not enough money to change your financial options, and it's just enough headache to wonder why you're even doing it in the first place.

To make an impact on your income, you'll need multiple profitable properties for the long term, and to have multiple profitable properties for the long term, you need to get good at something - good at finding deals, good at raising capital, good at managing people, good at controlling property expenses....  You have to be competent at all of them, but only need to be really good at 1 or 2.

If you buy 1 or 2 turnkey properties next year, what will you be good at when it comes to properties 3-8?  What advantage will you build over the other Joe Beginner Investor?

I'm sorry I'm not answering your specific questions ... I just don't have answers I'm confident enough on for you.  Personally, if I wasn't building an advantage, I would try to just invest the money in someone else's project and take the returns from that (tough to do with a 1031, though).

Good ideas to think about. Matt K- your advice gives me a good jumping off point as far as where to start. Much appreciated.

Justin R- I don’t disagree that I should endeavor to become really proficient in a certain area of investing or perhaps in a specific market or type of home. I have also seen counter-arguments that advocate jumping in to some degree because that is where you start to learn what it is that you are good at or want to specialize in. Regardless, you have given me good advice to contemplate.

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