Long Distance Investing as a Beginner
Investor · New York City, NY · Member since 2017 · 146 posts · 56 votes
Long Distance Investing as a Beginner
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Jody SchnurrenbergerPro Member
Investor · Asheville, NC · Member since 2017 · 506 posts · 404 votesI also invest out of state--Auburn, AL. I think that even if you have a turnkey company, you'd do well to have visited the city first, and preferably the houses if you can get there fast enough. I've heard rumor that some turnkey companies aren't reputable (as in every industry) and will sell you things in a war zone type of area, jacking up the price so you don't even realize what you're getting. If you visit the area, you can map out the locations you are interested in, visit the PMs you are considering using, meet with agents if you decide to go that route, etc.
I encourage folks to invest where they have friends and/or family so when they to visit their property (which should be done at least annually, even with everything done for you), they have a free place to stay to cut down on expenses. Also, if there is a hurricane or tornado, the friend or family member can drive past the property and give a basic report much faster than the PM can as they may have hundreds of properties to check on.
When you are picking a PM, be sure to read the management agreements before making a final decision. Also, make sure they handle everything you think you might want to get into. For example, I've decided to start investigating Section 8 properties. Well, my current PM doesn't do them. Now I need to find another PM. I'd rather have everything under 1 roof, if possible. When looking for other PMs, I read one contract that specified that they charge 8% or $100, whichever is higher. If I'm renting out a low income place for $500, I'm overpaying with them. The other 2 agreements I read charge a straight 8%, no matter what the rent is. Also, the required insurance in my agreements ranged from $300k to $1M, so that might play into your decision as well. Basically, read the agreements before making a final decision.
Good luck! :-D
40 Replies
- Flipper/Rehabber · Cleveland, OH · Member since 2016 · 133 posts · 69 votes8y
@Account Closed There are a lot of people on BP who can either help you or direct you to someone who can assist you in your desired market or markets.
@Jay Hinrichs I understand what your saying. I guess I just didn't expect that some TK providers would remove the unknowns and show an incomplete picture.
- 8yClayton MobleyPro MemberBirmingham, AL · Member since 2014 · 875 posts · 947 votes
@Matt B. and @Jay Hinrichs, thanks for the detailed discussion, and I apologize for the delay in my reply. In addition to regular holiday craziness, I wanted to look at the math myself before responding.
So, firstly, Matt - you are absolutely correct. I ran this math myself just now for both monthly and annual numbers and our website is just plain wrong. This definitely isn't by design, but that doesn't make this mistake any less significant.
Now, while we 100% own up to this mistake and will be fixing it (actually, the whole site is going to be revamped soon now that we have a new web guy after our last one just sort of...disappeared on us a few months back), I will point out a couple salient points to this discussion.
While our website is, obviously, one of our biggest client-facing informational resources (though arguably BP may be even more important), it is definitely not the end-all-be-all of the information we provide to prospective clients. As Jay has rightly pointed out, there is a lot of variability in turnkey with regard to what expenses are shown in the 'at-a-glance' numbers. In the past, though I personally find incomplete data to be pretty annoying (being a stat analysis guy), we had decided that our at-a-glance figures should include the same info as most other companies did at the time (ie skip the maintenance and vacancy) because if we include allll the data, we will automatically look less profitable and often lose the chance to explain that everyone incurs those expenses, but don't discuss them upfront (for various reasons, as Jay mentioned). Having seen this discussion and checked this math myself, perhaps it is time we rethink that strategy - the turnkey industry is evolving, and even new investors are becoming more and more savvy. If potential clients are able to look closely at the numbers and dissect that data - understanding that perhaps our net figures would be lower because we're including expenses that everyone incurs, but not everyone discloses - then we might be better served by a full-disclosure policy on our website, even if it means the math won't look so simple and pretty.
However, while the site doesn't currently reflect all our expenses, that doesn't mean we don't disclose them to potential clients. On the contrary, our actual property jackets have three pages of data, including maintenance and vacancy (using rounded figures based on our actual data for the past 52-week rolling period), and amortization schedules for both 15 and 30 year notes. Whenever anyone contacts me, or anyone on our team, we always offer them a selection of sample jackets for properties in our portfolio so they can take a look at real world numbers, check our ranges of prices and rents, and play around with the figures. When a client selects a property that interests them, we provide them with the same data for that specific property.
These ROI spreadsheets aren't PDFs, they're interactive, which allows people to plug in their own numbers (some people like to use very conservative back-of-the-napkin expenses rather than our data-based figures, and this way they can use whatever figures they like) and see how different expenses and changes over time might impact the bottom line. You can ask anyone on BP that has contacted me for info, these ROI sheets are usually the first thing I bring up, because - despite this rather embarrassing website error - we actually do want educated clients who know what they're buying. It makes an easier transaction and a much happier, healthier long-term relationship all around. If you, Matt, or anyone else, would like to take a look, feel free to send me a PM any time.
All that being said, it doesn't change the fact that this error doesn't look great, and actually we really appreciate you taking the time to run the numbers so we know there is something that needs fixing. In the end, any investor doing even the basic due diligence would find that the real net income for a property would be lower than what is shown, anyway, because vacancy and maintenance are crucial expenses to include. Plus, as soon as they got in touch, we would be providing them with the full suite of data points anyway.
While I certainly won't try to pass the buck here, Jay is correct that each investor is responsible for doing their own homework, and if someone buys a property after seeing such cursory numbers on a website, they aren't doing themselves any favors, regardless of what provider they choose. Our website listings are meant to serve as a sampling of the types of properties we invest in, and what kind of general back-of-the-napkin figures to expect. As you definitely prove, smart investors are going to dig deeper. Anyone seriously interested in us will get in touch, and be provided with detailed data (maybe more than they want actually, I tend to be pretty liberal with the attachments).
In the end, this discussion has certainly highlighted a need, on our end, to reconsider how we showcase our data and performance on the site. I've mentioned this issue to Maureen and the team, so we will be looking at how we represent our numbers as we move toward a re-imagined website.
Thanks again for the heads-up on this, and best of luck in your REI journey.
All the best,
Clayton
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Clayton Mobley yup its all marketing perception.
I remember a few years back I was in B ham with my vendor there.. we were at that brew pub by his office... ( it was the first one in B ham and really good beer).
he was regaling me in a story about this investor from Australia who came to visit she looks at his nice B stuff there in B ham.. and says why would I buy this it only has Gross yields of 15 to 18% when I can get GROSS yields in Detroit that are 30% or better... LOL
Well my guy says Gross yields mean nothing in the US.... its all about net yields in our neck of the woods.. So maybe you best run up to Detroit...
So its just buyer perception.. and your dead on right.. when buyers compare websites they tend to focus on the bottom line number and not really dig into anything else.
So you has a vendor who is going to be full disclosure trying to compete with a vendor that is excluding the variable expenses and human nature is the buyer focus's on the larger return and thinks those are better deals.
Now I have never been a turn key company but I have owned hundreds of these assets in pretty much every market in the mid west from IL to FLA and everywhere in between.. MS TN OH MO PA SC NC GA and of course very active in AL .. there Is one constant running expenses are 40 to 50% of gross on any rents under 1200 bucks.. I will bet the farm on that one.. LOL so when I see vendors putting out
25% that maybe true for those expenses but they don't capture the entire picture. and of course since these are new in service your really won't know what the numbers are until you own it 3 to 5 years and can do an income average on them.. one year can be stellar .. one bad turn over and it could be a bummer .. one reason I always say if you going into this you need to find a way to get to 5 to 10 doors so you can average them all out then know in your mind your in for the long haul.. this keeps neighborhoods stable and gives you a fair shot at long term cash flow and you can see what your averaging.
- 8yClayton MobleyPro MemberBirmingham, AL · Member since 2014 · 875 posts · 947 votes
@Jay Hinrichs totally spot on - for many investors just getting to Door 1 is a struggle (and the first one is always the hardest) but you need a portfolio before you can really start to see progress. One bad tenant, one nightmare move out, can wreck your whole year if you only have one. Like having your whole retirement account in a single stock - you'd be watching that ticker every minute of every day.
But we all have to crawl before we can run - for many people, getting a whole portfolio going right of the bat just isn't feasible, which is why that first door is so high-pressure, it's make or break. The second door takes forever to get to, the third a little quicker, things pick up speed, and by the time you have 10-20 you can barely remember that first property and all the panic of choosing an investment that will produce, of having all your eggs in one basket. I wouldn't go back to being a first-time investor for the world, and I started early and aggressively. For people who start later and haven't been breathing REI for most of their lives, its a stressful start.
- Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes8yIf you’re going the TK route always do your own due diligence and add your own capex and maintaince costs. You should be able to get estimates of some of these numbers from the company (for their portfolio on average). For capex if it’s a truly quality rehab it should be minimal for your first 5 or so years of ownership. The first property I bought was turnkey and it’s been extremely well so far, but hasn’t been long enough to truly see how it will perform. Another important thing to remember that wasn’t mentioned yet is if you buy turnkey you have to hold it long term, and likely can’t sell it without incurring a loss, since it’s close to market value. I think TK gets a bad rap sometimes on BP, but if done right with the right provider I think it can provide long term returns in the 8-10 percent range.
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Caleb Heimsoth I concur with your thought process.. one thing most folks don't think about with rental property no matter where it is.. is the exit..
when you have max leverage and if your selling your asset that basically never went up in value say 7 to 10 years down the track.. unless your doing a 1031 ( which for many can be tough with SFRs) you will have a thing called recapture.. so depending on your tax situation ( and most people don't ask this up front) you could sell and even break even but still have a pretty big tax bite that would be taxed at ordinary income rates ( I think ) .. so one really needs to think landlording through in detail.. no one mentions this I have been on BP now for almost 4 years and I have never heard one person talk about the exit and what is all involved. this is why appreciation is important you need that to offset recapture.
or you need to sell when you have loss's or low income years.. other wise you are going to have a little surprise when you file your tax's.
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Caleb Heimsoth and based on your tax situation and the potential exit on your rental you may choose not to depreciate so you don't have to deal with recapture.
- Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes8y
@Jay Hinrichs yes you give an interesting point. Personally (unless something changes dramatically). I don’t plan on selling, ever, as I want to form the basis of something for my kids to take over 30 plus years from now. I probably will end up selling some things occasionally but it won’t be most of what I buy. I like to adhere to the buffet approach and never sell.
Great points though as always.
- Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes8y
Originally posted by @Paula Pettit:
Hi Daniel,
Do you have to be in business in order to write of the hotel and flight? Thank you
I am not an accountant so maybe one of them can chime in on this question. My understanding is that until you actually are in business, all expenses are lumped into "start up costs"; start up costs are amortized over seven years once you are in business, so you deduct one seventh per year for the first seven years (if business tanks and is shut down sooner than that you write off the balance in the final year of course). Seek advice from a competent professional before making any mistakes doing this sort of write off.
- Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes8y
Originally posted by @Jay Hinrichs:
@Caleb Heimsoth and based on your tax situation and the potential exit on your rental you may choose not to depreciate so you don't have to deal with recapture.
I am not a tax professional, and Jay usually gives good advice, but in this case IMO the quoted post is not good advice. The IRS assumes you took the depreciation when you are allowed to, and will try to recapture it even if you failed to take the depreciation deduction when you were allowed too. Consult with a tax professional to get proper advice for your situation.
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Steve Babiak I wondered how that worked.. and I appreciate you straightening me out on that one.
the reason this came to the front of my brain is I had a meeting with my accountant this week.
as you know I am selling off all my rentals and going to cash.. these were Go zone purchases so the strategy at the time was tax savings when I bought them which worked..
but it looks like I am going to have to recognize over 100k in recapture... and be taxed on that.. and because the homes did not go up in value and I had minimum downs.. and you deduct sales cost there just was not enough cash coming out of these to marry to a 1031 that would replace a million bucks in debt... so your kind of stuck..
Its funny how no one talks about exiting and folks talk about owning these their entire life.. which basically does not happen 95% of the time in the real world of life...
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Steve Babiak the other reasons I thought it could be elective is I took massive depreation on our airplanes.. LOL.. luckily I sold those when I had massive loss carry forwards in 2010 to off set them.
now I know why guys that get into aircraft keep buying bigger and better jets.. recapture would kill them. and since you can buy a plane with as little at 5 to 10% down and finance at bank rates 4 to 5% for 20 to 30 years ( like a boat or RV) popping for that 5 or 7 million dollar jet is just 300k down and 20k a month :)
- Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes8y
Originally posted by @Jay Hinrichs:
@Steve Babiak the other reasons I thought it could be elective is I took massive depreation on our airplanes.. LOL.. luckily I sold those when I had massive loss carry forwards in 2010 to off set them.
now I know why guys that get into aircraft keep buying bigger and better jets.. recapture would kill them. and since you can buy a plane with as little at 5 to 10% down and finance at bank rates 4 to 5% for 20 to 30 years ( like a boat or RV) popping for that 5 or 7 million dollar jet is just 300k down and 20k a month :)
It's my understanding that it is quite possible to not be able to take the depreciation deduction, so it is a "carry forward" thing that can be taken when earnings and other deductions permit - I am not a tax expert, just stating what my understanding is. So you might have carried forward some of these and at sale you won't get the hit - but only your tax preparer professional would know that for certain.
Maybe @Dave Toelkes can offer his opinion - he has gone through the tax code with a fine tooth comb it seems ;)
- Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes8y
@Account Closed Having invested out of state with varying experiences I would just tell you these two things to save you some time and money:
1. The manager/turnkey company that manages your portfolio will have more of a say in the success or failure of your investment then you will hundreds of miles away. Do as much research into them as you can.
2. Buy out of state rentals in minimally a solid B class neighborhood. Just like in any market most of the property managers that are managing in C/D class neighborhoods are not the kinds you want overseeing your investments. Good areas attract good tenants and in turn good managers. Even if you have to pay a little bit more and sacrifice a little cash flow to get into a better area it is worth it in the long run.
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