Am I successful or am I an example of “what not to do”?

25 Replies

Am I successful or am I an example of “what not to do”? 

This was my original introduction post.

https://www.biggerpockets.com/forums/55/topics/94312-busy-noobie-would-like-to-invest---no-really-i-am-busy

I actually ended up in Knoxville, TN working at the Watts Bar Nuclear Station for the Tennessee Valley Authority (TVA). I’ve been wanting to invest in real estate for decades, I even purchased a Dave Del Dotto course after watching his infomercials. This was back in the early 90’s, I was fresh out of the Navy and was living w/ my parents in San Diego at the time. My first attempts in RE investing were a couple of strategies from Dave’s course.

I first tried to find sellers w/ assumable home loans by putting an ad in the newspaper, “Wanted: Looking for Motivated Sellers” or something to that affect. After a week nobody called. My second attempt to find investment property was to contact distressed property owners that were delinquent on property taxes. I went to the county records office, wrote down a list of about 100 home owners that owed back property taxes and sent out letters offering to help them w/ there problem of back property taxes. I received 3 phone calls, one lady called and asked “how can you help”? I said that I was willing to buy her house to save her credit – she said, “never mind” and hung up. The 2nd phone call was from the daughter of an elderly lady. The elderly lady was the owner of the property and owed about 5 years of back property taxes. The daughter in an angry tone told me to, “Leave my mother alone!” The 3rd call was from an apartment owner and said, “If you can help, I have a million dollars in equity”. Well, I got scared and said “never mind.”

Well I hadn’t done anything w/ real estate for years following my first attempts until about 2000 when I purchased my first home as a primary residence in Garden Grove, CA (near Disneyland). I sold that home for a profit and purchased a bigger home in 2004 in Oceanside, CA (North County San Diego, CA) and I didn’t do anything again with real estate for another 10 years. I had been working for Southern California Edison (SCE) since I left the Navy in 1991. I was stationed at the San Onofre Nuclear Generating Station and obtained my Reactor Operator (RO) License in late 2009.

Sometime in 2012 a coworker planted the real estate investment seed in me again and mentioned that his family invests in small multifamily properties where there were multiple renters which covered the mortgage and expenses with positive cashflow. I didn’t have any money except in my Edison 401K plan, and San Onofre was shut down due to the steam generators leaking primary coolant. Again this was 2012 and I was researching ways to invest my 401K money in real estate. This is where I discovered both the SDIRA and “Biggerpockets”.

In June of 2013 Edison announced that San Onofre will never startup again due to the economics and bad political landscape in California. I ended up being laid off and therefore started job hunting which is, long story short, how I ended up in Knoxville, TN working for TVA on December 2013. During my job transition I became a biggerpockets member. As a new member I was getting blog articles in my email and ended up reading Brendon’s following article:

http://www.biggerpockets.com/renewsblog/2012/09/23/invest-in-real-estate-find-deals-location/

This is the first time I learned about turnkey properties.

The reason I was leaning toward Turnkey properties is because I was hired on by TVA to be a Reactor Operator and that requires me to go back to licensing class. I described to my Mom (a retired RN) what it’s like getting a RO License with the following analogy – imagine the library of information a nurse is required to know, then imagine picking 75 questions at random from that library for your final exam. The exam is multiple choice, but the Nuclear Regulatory Commission requires the distractors (aka incorrect answers) to be believable and they have to approve the RO final exam. There’s a nuclear industry wide statistic that RO candidates have about a 40% to 60% failure rate first time through license class. I put in 10 hour days, including weekends the last time I went through class and TVA requires me to pass the first time through or be removed from the program (meaning potential termination). My license date is in summer of 2016, but I still wanted to invest in RE.

I ended up posting this question on the biggerpockets forums “Turnkey vs. Learning How to Fish”; here’s the link:

https://www.biggerpockets.com/forums/12/topics/116065-turnkey-vs-learning-how-to-fish

I got some good advice and support from the posters and started researching a particular RE Turnkey company. My research lead to listening to 2 different podcast interviews of a partner of the turnkey company I was looking into; this same company advertises ALL OVER the internet (they even show up on my favorite movie news website). I read 2 articles mentioning this same RE Turnkey company. I did a BBB search and found an A+ rating. I’ve read forum posts written by this partner and he seemed upfront, full disclosure and even invited a detractor to his office to see their operation. I couldn’t see any BIG negatives only positives.

I contacted the RE Turnkey company and their goal is to make the RE investing process as headache free as possible, which includes top notch management. I transferred my pension and my 401K to a SD-IRA account and ordered my first property in Dallas, TX. I chose Texas because I felt TX was pro-jobs and economic growth (unlike CA); I chose to jump in because I felt 2014 was still close to the bottom of the RE market. The property closed on March 2014 and our Turnkey company already had a renter. The funny thing is that this was my first rental, with my first tenant ever and in the first month my brand new renter defaulted on the rent. The Turnkey company took care of everything and because the default happened on my first property, with my first tenant on the first month they even paid the court costs for the eviction and used the security deposit to fix up the property. It literally was headache free. Unfortunately I did not receive any rent from my new property until August 2014. I anticipated these type of problems, which is why I purchased this rental free and clear – I did not want any issues during license class.

Because of personal issues I need to early withdraw funds from my SD-IRA with the understanding of the tax and penalty issues. Because the rent from my first property won't cover what I need, I used the rest of my rollover money and purchased 2 more rentals from the same Turnkey company. I ordered the 2 new properties BEFORE I received my first rent check from the first property. The 2 newer properties closed in June of 2014 and I have been receiving consistent income from all 3 properties since about September 2013 (they take the first month's rent as a fee for finding the renters). All 3 houses are free and clear.

SO, am I a success or am I an example of what not to do? Also, a question for the moderator – can I mention the name of the Turnkey property company I am working with?

The problems I see are:

I have NO idea what the actual Dallas market is like.

I did not start small and I went “all in”.

I do not know how to screen or manage tenants.

I do not know how to manage property managers.

I’m pulling money out of my SDIRA.

Caprate is only 8% after all expenses

Positives (may be):

I have good cash reserves.

I have good cashflow (so far)

Hey Danielle, I think you did good. Now, just hang on for the ride. The only thing I might do would be to try and negotiate that full month's rent to 1/2 month. A full month is steep and they did a lousy job qualifying the tenant which is what you paid them for.

There is a learning curve and what you are doing is learning. You didn't know what you didn't know so you are learning as you go which is just fine in my book.

Next time you will want to do a little more research on your turnkey property managers.

One problem could be is they see you paid cash and can afford a vacancy so they could feel less pressure to work as hard as they might for someone who they see needs the rent to make payments.

@Daniel Cruz

You can surely mention the company if you feel like it but I would bet we can all guess who your referring to but I will leave it to you to decide. 

The fact the company took care of you right away when you had issues is huge considering many companies cant afford to do that. 

Good luck

Medium buymemphisnow stacksCurt Davis, Buy Memphis Now | [email protected] | 605‑310‑7929 | http://www.BuyMemphisNow.com | TN Agent # 00321765

Wow @Daniel Cruz  that was a long post! 

I think one thing that you could have done if you didn't already was to ask for several references of investors who've worked with this company and had both good and (if they give it to you) bad experiences over a longer period of time, say a few years.

Can you PM me with the name of this turnkey company? 

Also, do you mind posting the costs associated with investing via turnkey? Total purchase costs, their fees, their ongoing fees, your rent, and whether or not they help you budget for various expenses (vacancy, maintenance, cap ex)

Jacob Michaels, Exceptional Digs | [email protected] | 972‑861‑2334

Hee-hee, I get it Jerry ;-)

@Daniel Cruz  I wanted to point out that there is a new turnkey company review site http://turnkey-reviews.com/ that I suggest you post a review of the turnkey company in question.  As a fellow turnkey investor, I empathize with the challenges you've faced.  I have been more fortunate thus far.  

Medium dgi logo rgbLarry Fried, Do Good Investing, LLC | [email protected] | http://DoGoodInvesting.net | OR Agent # 201211636

While its always better to do something rather than nothing, here are few issues I see with your strategy.

1. You don't really know the market you are investing in. With the reputable  TK operator you may have dodged a bullet but it could have turned out much worse.

2. 8% Cap rate with an all cash purchase is a low return for the assumed risk, especially in a low appreciation market like Texas, With leverage you could double that COC return and then it may be interesting

3. You used a SD IRA. So you cannot claim any tax benefits of depreciation or other expenses.Its waste of an IRA account in a sense. And there are a lot of ways to get 8% in an IRA without the hassle or risk of owning a rental. Plus you are restricted heavily in funds in and out etc.

Can you save some money, refinance the houses and pay back the IRA? I don't even know if this is possible or not.

Whether this is a good investment or not, only time can tell. Less than an year is not enough time to judge.

@Jacob Michaels  

Rough averages are $110,000 purchase. Rents = $1100. Property Taxes 2.5% of 100% (Texas is EXPENSIVE!). Management = 10%. Insurance = $100 per month.

@Larry Fried  

Well darn it I wish I knew about turnkey reviews before I started investing. But as Anish mentioned, it's too early to tell if I'm toast or not and if I pulled money out I'd get a better return.

Originally posted by @Anish Tolia :

While its always better to do something rather than nothing, here are few issues I see with your strategy.

1. You don't really know the market you are investing in. With the reputable  TK operator you may have dodged a bullet but it could have turned out much worse.

I SO totally agree. I don't know if the neighbor hood is class B or D. I looked at google maps and I can't tell how the neighborhood looks. I wish I knew about turnkey-reviews before doing this.

2. 8% Cap rate with an all cash purchase is a low return for the assumed risk, especially in a low appreciation market like Texas, With leverage you could double that COC return and then it may be interesting

I do plan on pulling money out, but after I finish class. I NEED to minimize the headaches I have already (I am being figuratively "sucking from a fire hose" pretty much on a daily basis). I the money I want to pull out will be used to diversify.

3. You used a SD IRA. So you cannot claim any tax benefits of depreciation or other expenses.Its waste of an IRA account in a sense. And there are a lot of ways to get 8% in an IRA without the hassle or risk of owning a rental. Plus you are restricted heavily in funds in and out etc.

I NOW understand the penalty of not getting depreciation. At first I assumed that it was no big deal because all income was in the IRA. But I forgot applying it toward my W-2 income. When I start to borrow money I think I can apply deppreciation to the taxes I will have to pay (UDIP?).

@Anish Tolia  

About being too early, yup I agree again. I wanted to wait (plus I have been busy) for a steady stream of rents from ALL properties before writing any review.

Originally posted by @Jeff S. :

Hey Danielle, I think you did good. Now, just hang on for the ride. The only thing I might do would be to try and negotiate that full month's rent to 1/2 month. A full month is steep and they did a lousy job qualifying the tenant which is what you paid them for.

There is a learning curve and what you are doing is learning. You didn't know what you didn't know so you are learning as you go which is just fine in my book.

Next time you will want to do a little more research on your turnkey property managers.

One problem could be is they see you paid cash and can afford a vacancy so they could feel less pressure to work as hard as they might for someone who they see needs the rent to make payments.

 Thanks Jeff. I wish I knew about turnkey-reviews before doing this.

I highly doubt the mgnt company did a lousy job qualifying the tenant. Most solid ones have a set standard of criteria and it has happened before where someone does meet all the criteria to be able to move in and then something happens where they default.  The fact that they were there to  take care of you like they did is very impressive.  They didn't have any guarantees they offered you but still decided to do the right thing. 

Medium buymemphisnow stacksCurt Davis, Buy Memphis Now | [email protected] | 605‑310‑7929 | http://www.BuyMemphisNow.com | TN Agent # 00321765

@Daniel Cruz   - It's easy to look back and question every step you made but the way I rate my past performance is by asking if I did the best I could with what I had and what I knew at the time of the decision. 

I've found that no matter where my decisions led me, I could have done better and I could have done worse! 

If I were in your shoes, I'd probably let the dust settle on these purchases and make sure they are stable.  In the meantime, start researching markets, both the one you are currently in and other ones you are interested in and decide if you want to continue buying in your current market. 

Since you bought cash, you might look at getting a mortgage to pull 50% of your money back out if the monthly numbers will allow.  This money won't be taxed and you can use it for your next purchases.

Bottom line is you have a decent foundation so far, do what you need to do to shore up those investments and then keep building!

Best of luck Daniel!

Mike

Are you "successful"?  Gosh, I don't know.  That's really a question of whether the outcome you got is better than the alternatives YOU had at the time.

Sure, you likely would have made more by just buying the SP500 on your IRA. Sure, your return would be higher if you leveraged and used cheap financing to buy the properties. Sure, you had headaches you probably wish you could have avoided.

But, did you come out with your capital in tact?  Has the experience opened new opportunities you wouldn't have otherwise? Do you have new skills you can apply to do more, bigger, better things?

I would have slapped anyone who told me this when I was first starting, but it really is a 9 inning game - it makes it easier if you score in the first inning, but it's not necessary.

@Daniel Cruz , I'm of the opinion that you live in a good rental market, and I've even heard you can buy tk here but I don't have any first-hand knowledge. Maybe consider buying closer to home next time?

Hey, @Daniel Cruz I'm also in the nuclear industry. Isn't it just a great way to jump start your real estate investing?! I'm an I&C First line at the power plant in Iowa. I did 6 years in the navy as an RO.

Sounds like you're doing well!

Originally posted by @Curt Davis :

I highly doubt the mgnt company did a lousy job qualifying the tenant. Most solid ones have a set standard of criteria and it has happened before where someone does meet all the criteria to be able to move in and then something happens where they default.  The fact that they were there to  take care of you like they did is very impressive.  They didn't have any guarantees they offered you but still decided to do the right thing. 

 Curt, I've got no complaints about their customer service. I just thought it was funny that my first tenant, of my first property, in the first month defaulted. What stinks is I was already nervous. I know this stuff happens, but geez...

@Michael Olesky  

EVERYTHING you wrote I plan on doing. I just have to wait to finish class, then I plan on doing MORE cool things, but next time it will be locally here in Knoxville. I'm pretty happy w/ what is going on so far. I posted my story to try to get a critique from the smart people here on BP

@Justin R.  

Thanks Justin for the kind words. I'm definitely trying to overcome, move forward and learn. I am definitely in this for the long haul

Originally posted by @Daniel Cruz :

@Jacob Michaels  

Rough averages are $110,000 purchase. Rents = $1100. Property Taxes 2.5% of 100% (Texas is EXPENSIVE!). Management = 10%. Insurance = $100 per month.

Oh man that's not good at all.  Should have came to Michigan.  I could have bought you 3 houses for 110 total and that would bring in 2400.  Insurance would have been about 60 each.  Taxes about 120 each a month

It will take forever for those to work out for you.

So 330,000 cash to bring in 3300 in rents.  300 total for insurance, and 7500 a year in taxes?

I would sell those suckers asap and get out from that disaster.  Also you bought it in March and a "turnkey" took till august for you to get a check?

Hey @Account Closed  

Nuke Power has been VERY good to me, I just need to build for retirement. I wish I start as young as you.

Hello @Daniel Cruz , your thread has been very interesting to me as I am considering turnkey as a new investor. How has your progress been to date?

Best to you.

@Tyisha G.

So far so good, I purchased another property in Ohio (last fall), but unfortunately it is still not rented. Hopefully by spring the Ohio property will be rented. After the Ohio property gets rented and I get around 3 months of steady rent I will write another review.

My properties in TX are doing fine. PM me if you want to know who these turnkey operators are.

Tyisha, the reason I went with turnkey property is because I am in a very intense training program for my job and will be unable to focus on my local RE market for another 7 to 8 months. I see you live on Long Island, aren't there more affordable markets in upstate NY? Read "The Millionaire RE Investor" and "The ABCs of RE Investing", it would better to buy houses wholesale instead of retail like I did (better ROI)

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