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Debbie Palmer
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Debbie Palmer's profile image
Debbie Palmer
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Newly empty nester venturing out to see how we like it

Debbie Palmer
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Posted Oct 17 2023, 15:50

A little over 10 years ago we bought a townhouse in Logan, UT when our oldest went to college. Her reduced rent was in exchange for being the property manager. Now that my husband has retired after 24 years in the Air Force, we have decided to try our hand at both LTR and STR. We have sold the UT property and looking for a property for a 1031 exchange near us in Payson, AZ (Verde Valley was the closest option when choosing where we live) so that we can have hands on work with the properties. Excited to see what type of information I learn from here.

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  • Rental Property Investor / REALTOR® / Property Manager
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Josh Young
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Replied Oct 17 2023, 19:48

@Debbie Palmer I assume you are working with an experienced Qualified Intermediary for your 1031 exchange, it's very important that you follow the specific steps and timeline that the IRS has for the exchange.  

I have heard that Payson is not the best place for STR because you don't get many out of state visitors as most people out of state have never heard of Payson, so you get mostly just people from the Phoenix MSA, but I'm sure you can still be successful if you are a great operator with a great property. Looking on the MLS there are several furnished MTR rentals available, but hardly any LTR, so I would think that LTR could be a good opportunity.

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Debbie Palmer
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Debbie Palmer
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Replied Oct 25 2023, 17:55

We are using a QI, thank you for making sure. We are leaning toward a LTR for this 1031 exchange.  Once we get a feel for things up here we may venture into STL or MTL's also.  But you are correct - there are not many LTR's.  Inventory is a big problem up here. 

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Leslie Pappas
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Replied Oct 26 2023, 12:15

@Debbie Palmer  It appears you are on the right track for your 1031 exchange. Inventory being such a problem you may want to consider having a back up plan if you are unable to find a replacement property within the 45 day identification period. There are different real estate investments available to accredited investors that could be a good option for a back up. They provide you with hard real estate, but can also give you some diversification. Something else to possibly consider, happy to answer any questions. 

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Eric Fernwood#5 Market Trends & Data Contributor
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Eric Fernwood#5 Market Trends & Data Contributor
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Replied Oct 27 2023, 15:07

Hello @Debbie Palmer,

Welcome to Biggerpockets. I have some additional considerations for you.

Mid-Term Rentals (MTRs)

Regulations concerning STRs appear to change constantly, making the long-term viability somewhat uncertain. Also, STRs are primarily occupied by tourists, so the state of the economy can have a significant impact on occupancy. Another consideration is the overhead cost of frequent turns and ongoing maintenance costs; many tourists rent STRs for “party weekends.”

An alternative you may want to consider is MTRs. MTRs provide similar income to STRs, once you factor in STR vacancy. Also, MTRs require much less work due to longer tenant stays. And, at least in Las Vegas, because of the minimum 30-day stay, you are less likely to have problems with most HOAs.

I’ve studied the Las Vegas MTR market, and I believe the best tenant segment to target is traveling nurses. Traveling nurses get a 13-week initial contract with possible extensions.

If you are targeting traveling nurses, the location is very important. It must be within about 5 miles of one or more hospitals with trauma level 1 or 2 care. In Las Vegas, there is an area within 5 miles of two hospitals that employ a significant number of traveling nurses.

Another advantage of MTRs is that should you decide to have the property professionally managed, cost-effective management is available, at least in Las Vegas.

Financial Freedom

The goal of most real estate investors is financial freedom. Financial freedom is more than just replacing your existing income. It's about maintaining your current lifestyle for as long as you live. To achieve this, you need a passive income that meets three requirements:

  • Rents must outpace inflation: If rents do not outpace inflation, no matter how many properties you own, you cannot achieve financial freedom due to inflation continuously eroding purchasing power.
  • Income persistence: Financial freedom requires that your income lasts throughout your life.
  • Income dependability: The rental income must continue, even in bad economic times.

The city you invest in determines whether rents outpace inflation and how long the income will last (income persistence). Income dependability depends on the tenant(s), which I will not cover in this post.

What happens if you invest in a location where rents do not outpace inflation? I will show the problem with an example.

Suppose you have a property and the monthly rent is $1,000, the rent growth rate is 2%, and inflation is 4%. What will be the rent's present value (purchasing power) at 1, 5, 10, and 15 years?

First, I will calculate rents at 2% rent growth.

  • Year 1: $1,000
  • Year 5: $1,000 x (1 + 2%)^5 ≈ $1,104
  • Year 10: $1,000 x (1 + 2%)^10 ≈ $1,219
  • Year 15: $1,000 x (1 + 2%)^15 ≈ $1,346

Next, I will calculate the future rent's inflation-adjusted value (buying power), including 4% inflation.

  • Year 1: $1,000
  • Year 5: $1,000 x (1 + 2%)^5 / (1 + 4%)^5 ≈ $907
  • Year 10: $1,000 x (1 + 2%)^10 / (1 + 4%)^10 ≈ $824
  • Year 15: $1,000 x (1 + 2%)^15 / (1 + 4%)^15 ≈ $747

So, in the 10th year, the rent is expected to be $1,219, but inflation reduced its purchasing power to what you can buy today for $824. This is the long-term financial trap of buying properties in locations where rents do not outpace inflation.

If rents do not outpace inflation, no matter how many properties you own, you cannot achieve financial freedom.

Investment Team

You need to work with an experienced local investment team, no matter if your investments are local or across the country. Why?

Podcasts, books, seminars, and websites only provide general information. You will purchase a specific property in a specific city with specific local conditions and regulations. Only an experienced local investment team has the local knowledge, processes, resources, and skills you need to be successful. I would consider another city if there is no existing investment team.

Also, working with an investment team usually does not cost more. For instance, we have delivered over 490 investment properties and charged our clients a fee on only four or five, which were exceptional circumstances. In all other cases, our fees were paid by the seller's listing agent, not by our client.

Summary

Financial freedom depends on investing in locations where prices and rents outpace inflation. If you invest anywhere else, no matter how many properties you own, you will be forced to look for a job sooner or later.

Debbie, I hope this helps. Reach out if I can help, or you can find more investing insights, methodology, and processes in my (free) weekly blog: ericfernwood.substack.com

...Eric

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Replied Oct 27 2023, 20:59
Quote from @Debbie Palmer:

A little over 10 years ago we bought a townhouse in Logan, UT when our oldest went to college. Her reduced rent was in exchange for being the property manager. Now that my husband has retired after 24 years in the Air Force, we have decided to try our hand at both LTR and STR. We have sold the UT property and looking for a property for a 1031 exchange near us in Payson, AZ (Verde Valley was the closest option when choosing where we live) so that we can have hands on work with the properties. Excited to see what type of information I learn from here.

24 years in the Air Force stationed at the Payson International airport. Very cool. ;-0

Make sure you hire a 1031 exchange intermediary before you sell or buy. The other challenge is timing your properties so that the right property is selected during the allotted time and you are not scrambling to make things happen at the last moment. You likely have some VA home loan benefit amount and some can actually buy two houses with that based on the benefit and on the cost of the houses.

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Replied Oct 30 2023, 15:17

Thank you Ken for those thoughts. 

We're just in Payson, but not stationed at the airport.  Finally living civilian life in a small mountain town. 

Our VA is actually at max capacity between our house we're trying to sell in Alaska and the one we bought for ourselves here in Payson. But I will keep that in mind when we sell the AK property and start looking on how much we actually want to keep buying.

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Replied Jan 4 2024, 17:58
Quote from @Debbie Palmer:

Thank you Ken for those thoughts. 

We're just in Payson, but not stationed at the airport.  Finally living civilian life in a small mountain town. 

Our VA is actually at max capacity between our house we're trying to sell in Alaska and the one we bought for ourselves here in Payson. But I will keep that in mind when we sell the AK property and start looking on how much we actually want to keep buying.

@Debbie PalmerSo, what did you end up doing?
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Replied Jan 4 2024, 22:05

Hello @Debbie Palmer , it's great to have you here!

Find and connect with other BP members that are in your area: https://www.biggerpockets.com/search/users

Good luck on everything!