Hi I'm an accidental investor... sort of.

5 Replies

Hello everyone, short time lurker, but long-time listener to the BP podcast.  Figured I would introduce myself and my situation as a case study to solicit advice.  I'm an accidental investor, in the sense that it was never my goal to have tenants, and I have almost no actual investment experience in real estate: everything I've done has revolved around my primary residence(s) that I've generally just gotten lucky on up to this point.

About me:  

  • Job: Active duty military, 11 years in, planning to do 20
  • Location: Eastern North Carolina.  
  • Family: I'm 35 and married with a kid.  
  • Finances: Net worth including equity in two homes is about $745,000.  No debt other than mortgages.  Making about $115,000 annually after taxes from two full-time incomes, and saving/investing between 30-40%.  We have about $60,000 in cash we can tap into right now. 

Primary Residence: Greenville, North Carolina.  Purchased 2018 for $192,000 at 4.25%.  Owe about $179,000.

Rental Property: Oceanside, CA. Purchased 2013 with VA loan (zero down) for $353,000 at 3.25%. Owe about $300,000. Rented out with a management company for $2,350 and have been able to consistently raise rents about 2-5% annually. Would most likely sell for around $510,000 - $520,000 if listed today.

The California House

We've kept the house in CA due to the chance of being re-stationed there at some point.  Having a foot in the door with a low payment from 2013 rates has been a nice fallback -- military housing allowance has gone up dramatically to match market housing costs, so if we moved back into that house we would pocket about $1,000 monthly of extra tax-free housing allowance, give or take.

Unfortunately, after taking vacancy, capex, maintenance, etc. into account, the house is not currently cash flowing.  In fact, looking at the numbers unemotionally, we're probably losing $500-$600 monthly on it: PITI ~ $1,986 / Landscaping and maintenance ~ $70 / Mgmt, capex, maintenance, vacancy ~ $893. Factoring in paydown of the loan, we're still probably up around $2,000-$3,000 annually though.

Some have called the California house my "retirement plan" on other forums, and told me I'd be crazy to sell it with a locked in 3.25% rate. I'd also take a significant tax hit on a sale, and lose the long-term equity accumulation potential.

Eastern NC

There are only about 350 active listings in our current area right now. Most are priced at about market value, making them not great candidates for flips. Low income, stagnant rent, and a lot of Section 8 housing makes BRRRR challenging as well, and make it difficult to find properties that would yield cash-on-cash returns and cap rates over 5%. I know those unicorn deals pop up now and again, just haven't had any luck so far.

Plan of Attack

I'd really like to try out BRRRR, flipping, or just finding a good solid cash-flowing property. More than that, I'd like to do what's best with my money in my other house. I don't like having a bunch of untouched equity that could otherwise be earning me more money, and after reading up on BP, I definitely don't like the idea that I'm actually NOT cash flowing on that property the way I thought I was. Month-to-month everything's great, but as I've seen first hand on several occasions, those one-off expenses really cut into the bottom line.

Curious what other peoples' thoughts are on this.  I can provide more info if needed, but it was already getting pretty long-winded and wordy.  

If I have the means of obtaining capital elsewhere, would you suggest I hold on to the negative cash-flowing CA house due to its long term potential and "overall profitability?"

Or would you tap into its equity with a refi or HELOC in order to buy more properties?

Or would you sell to take profits and use the cash elsewhere?

If you read this far, thanks!  Appreciate what a great resource this is, and look forward to learning more!

Wow what a background! Welcome (officially) to BP. I guess I'd be curious if there is any creative tweaking you could do on the CA property in order to stop or slow that financial draining you have month to month and help return it to a break even point? 

It sounds like it has great potential with the details you provided, and I am not sure I would decide to sell it just yet unless you can't stop losing money month to month with your expenses. Have you done any research on 1031 exchanges? That may be an avenue to discuss with your lawyer and/or CPA. That is the only thing that came to mind and I know they discuss it on the podcast when scaling up or laterally in the business. 

Best of luck to you!

@Elliot Fuller , with regard to your CA house, why are your maintenance, vacacancy, cap ex, and mgmt costs so high. I would think that they would run about 25% of your rental income which is $587.50. That is over $300 less than you have budgeted.

Have you considered using your property manager for tenant placement only and then self managing from a distance? That might get you to the break even or even slightly positive cashflow.

Consider this! If you can break even cash-flow wise on this property, you are still making money paying down the mortgage, perhaps the value continues to increase, you're holding a property you really want to keep, and you are getting a LOT of depreciation on your taxes.

The depreciation is somewhat of a key. If you might be getting $10k per year in depreciation. If it isn't used to offset earnings on that property, it can offset the earning on other properties you acquire and rent out. So, that can save you a good amount on taxes.

With regard to BRRRR houses, look for vacant uninhabitable properties in C class areas. That is bread and butter for BRRRR because buying distressed properties gives enough room for a rehab to increase the value enough. Plus C class areas are usually strong rental markets in terms of demand if not rental price.

In my area a distressed property might cost $20k, need a $20-25k rehab, ARV at $75k, and rent at $850-900. A typical BRRRR deal might look different in your area.

@Nathan Norway : The home out there is pretty minimal already as far as what we feel we can trim down.  We have a contracted lawn/landscape maintainer who I've thought about nixing in favor of requiring the tenant to perform the upkeep, however I've found some benefit in having the landscaper there a couple times a month to point out things and keep an unofficial eye on the house for me.  That cost is only $70 a month on average, with occasional added repair costs.

The month-to-month drain isn't felt in the month-to-month operation of that rental.  Where I get hit is during tenant turnover (which is rare, so far), and with the usual upkeep and occasional disaster (slab leaks, broken appliances, irrigation/sprinkler issues, etc.).

@Kevin Sobilo : I have thought about losing the management company as well, but I think they have been well worth the expense up to this point.  They've seamlessly managed a couple large repairs/disasters, and I truly have peace of mind knowing they're on top of things -- managing that kind of stuff myself with the 2 to 3 hour time difference wouldn't be practical in my opinion.

For your info, I budget 8% to management, 10% to maintenance, 10% to capex, and 8% vacancy.  8% vacancy is probably a stretch and actually much lower most likely.  But that's where I came up with the dollar figure above.

I hadn't really factored in depreciation into the figures, so that's a good point.

Your description of the ideal BRRRR seems like what I generally hear. Maybe I just haven't been looking long enough.

The C class properties here all seem to list and sell for around $45,000; anything under that is likely storm damaged from Hurricane Florence from 2018 still (major flood, mold, rot, etc.) and the repair estimates would exceed the ARV of the house -- i.e. new roof, gutting entire interior, mold mitigation, new windows, new floors throughout, beautified kitchens and bathrooms (not necessarily upgraded)... in other words, the ones I've found in the $20k range usually need to be rebuilt as new houses. I wouldn't want to spend $20k on the house, $50k on the repairs, and still have a ARV of $50k because the entire neighborhood is around $50k.

And after all that, good luck getting $800 rent... closer to $450 or $500 if you're lucky.

How do you tackle that situation? If all the houses in that class C neighborhood are $50k and the only places listed for less require more money in repair than the house will list for ARV? Just find a new neighborhood or what?

If you're curious, I'm looking around Greenville, North Carolina, which is home to a decent sized university and a popular hospital.  It's about 90 minutes from a major Marine base as well.

@Elliot Fuller , I think more typical expenses would be 8% property mgmt, 5% cap ex, 5% maintenance, and 5% vacancy. If its a BRRRR property you might even be able to go lower on maintenance because you just rehabbed it and took care of any deferred maintenance.

With regard to your BRRRR aspirations, I would look more deeply at the numbers. Go and do some careful analysis on a some houses.

First off, VERY few houses need to be gutted. I bought a house for $4,250 a few years ago and did not gut it. I would look to see if I could reasonable work with what is there as much as possible. Get someone to help you with estimates who has experience in your area.

Also, I suggest you figure out where you intend to add value in the process. Unless you are going to partner with someone who will be the active partner while you are the silent partner, you need to have a role in the venture where you will add value. It might be project management, accounting, general contractor, real estate agent, handyman work, etc, but know your role and where you will add value.

If houses are typically $50k in your area, that likely represents something like a house that hasn't been remodeled for 30-40 years. A newly rehabbed house might be worth $75k. Get an agent and see if you can substantiate that. See if there are recent comparable sales of houses in better condition. Those are the ones most like your rehabbed house, not the "average" ones.

Last, don't be afraid to lose money. You will 100% NOT get rich on one deal! The value you get from the experience is worth MUCH more than what you will make from it even if it goes to plan. So, even if things don't go well and you break even with a rehab compared to the ARV, who cares. The experience you gained will help you make more money on every deal you do in the future.

@Kevin Sobilo - thanks man!  All good advice.

A trend I've noticed here (example): House lists for $91,000. ARV about $120,000 based on comps. Needs 100% new floors, 100% new paint, new roof, termite treatment, all new kitchen, 2 all new bathrooms, all new windows, electrical work rerouting, crawlspace work due to plumbing leaks in bathrooms, among some other things. I'd guess $30k-$50k at least, and that's without upgrades... just to get it marketable and livable again. House sells for $91,000 in probably less than 15-20 days.

I'm tracking a few of them to see how much they list for a few months from now... maybe that'll help me understand how people are making money on these types of homes. I don't know how well the place would sell if they suddenly created a home with $170k-$180k ARV in a $120k neighborhood, but maybe that's what their end goal is.

Thanks again for the detailed responses and for putting some time and thought into it.

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