Alternate strategy for mitigating risk on investment properties.

Alternate strategy for mitigating risk on investment properties.

Investor · Phoenix, AZ · Member since 2018 · 420 posts · 388 votes

I’m curious to find out if their are other BP members who have adopted this kind of strategy. I’ll caveat but saying that I have a few primary goals that are driving this strategy so bare those in mind.

Goals:

1. Be hands off. I don’t want to run C- properties that require a lot of maintenance.

2. Be hands off. I don’t want problem tenants who have issues making rent or who need to call me constantly.

3. Be hands off. My ultimate goal is to make money while I sleep, not to lose sleep in order to make money.

4. Be hands off. I don't want to flip, BRRRR, or otherwise perform value add upgrades. I value my free time.

5. Be hands off. I don’t want to spend my weekends pulling weeds at a property or mowing the lawn during vacancies.

As a new investor I was not flush with cash. I had maybe $15k and a good job. I bought my first house in a great area with good schools, lots of amenities, and nearby developments. I dumped as much cash as I could into it for 2 years. As luck would have it I’d go from 5% down to 25% equity in a matter of 2.5 years. At that point I decided to turn it into a rental. It’s near a hospital and I was lucky to find a physician starting his 4 year residency. I locked him in on a 4 year lease at just under market rate. The house does not cash flow (because I put 5% down), it breaks even but I’m 18 months into the rental now and I’ve heard from the renter exactly once. He has paid 3-7 days early every month so I’ll chalk the first one up as a win against my goals.

With that safety blanket in place purchased a condo where I currently live. This time I hoped to turn it into a VRBO for 3 months out of the year. The winters in Phoenix can easily net 2-3x my mortgage per month. I’ve locked in a renter this winter from December to April for a cool 2.5x my mortgage. I’ll soon be up against a deadline to move out so I’ve begun to look for investment property #3.

On #3 I’m looking at purchasing it as my primary and living there for a year or 2 to satisfy the loan terms. I’m targeting a new masterplanned community and would be one of the first to pull the trigger in the neighborhood so I expect some growth as construction costs continue to rise, the other phases are developed and net migration to Phoenix continues.

This whole strategy of locking in a long term, diversifying with a long term STR, and the upside of being first into a masterplanned community is not discussed much at all on BP and I have to wonder why. My purchases are primarily focused on the above five mentioned goals. The first property is targeting growth in a growing area, the second is targeting cash flow that the first does not provide, and this third prospective investment is again targeting growth 1 block from a shopping center just purchased by a billionaire RED in AZ.

Is anyone else utilizing this kind of growth, cash flow, growth, cash flow alternating strategy? I would welcome any criticism, tips, etc.

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Ned CareyPro Member
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Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
6y

@Account Closed probably not what you wanted to hear but I think you are fooling yourself. You post title says "strategy for mitigating risk" then you describe a high risk strategy.

You said "the property does not cash flow" then you said "with that safety blanket in place."  How is a negative cash flow property a "Safety Blanket"?  You don't even recognize the risk of your first property!

You say you want to be hands off but one of the properties you mention is a Short term rental. Are you even aware of the forces pushing against short term rentals? Just because a billionaire buys an existing shopping center, that does not mean anything for properties nearby.

I think you are a victim of "wishful thinking" as my dad used to say. I truly wish you the best of luck but i suggest you rethink some of your plans.

See this reply in the discussion

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  • Member since 2019 · 1k+ posts · 1k+ votes
    6y

    @Whitney Bowling

    Not having the cash to carry them in a downturn is a risk that should not be taken lightly (if at all)!

  • Investor · Phoenix, AZ · Member since 2018 · 420 posts · 388 votes
    6y

    If we put numbers to it I can better explain. @ 1800/month in rent a 3% escalation clause would yield $54 more per month after the first year. 54 becomes 109 becomes 166 becomes. That is $3,948 over the course of 4 years in missed rent escalation. Which is equal to 2.1 month vacancy or 4.5%. I think that’s a wash personally. And considering the effort, I’d play it may way all over again given the choice (goal is to be hands off after all).

    I understand your advice on the new build, but the asset won’t depreciate like a car (at least I hope not). I do however want to make sure my upgrades bring value and are targeted toward a future rental. Any advise there beyond focusing on kitchens, bathrooms and flooring?

  • Multifamily Syndicator · Houston, TX · Member since 2016 · 1k+ posts · 2k+ votes
    6y

    @Account Closed

    Interesting read... 

    Personally, true hands-off REI with the exception of investing passively is for the most part hard to achieve.

  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    6y
    Originally posted by @Account Closed:

    If we put numbers to it I can better explain. @ 1800/month in rent a 3% escalation clause would yield $54 more per month after the first year. 54 becomes 109 becomes 166 becomes. That is $3,948 over the course of 4 years in missed rent escalation. Which is equal to 2.1 month vacancy or 4.5%. I think that’s a wash personally. And considering the effort, I’d play it may way all over again given the choice (goal is to be hands off after all).

    I understand your advice on the new build, but the asset won’t depreciate like a car (at least I hope not). I do however want to make sure my upgrades bring value and are targeted toward a future rental. Any advise there beyond focusing on kitchens, bathrooms and flooring?

    I understand your point about vacancy consuming rent increases, the work of tenant turn over, etc.  It is why I allow my good tenant's rent to fall a little below market rent.  What I am not convinced of is that you understand how easy it is for the tenant to terminate a lease early.  It is my assertion that the longer lease does not significantly increase the probability of the tenant staying for the 4 years.  In addition, if you really plan to sell while the lease is still active it may eliminate some percentage of buyers.  

    Also your escalation of 3% is below most escalation clauses but at least it is an escalation clause.  However, if instead of the 4 year lease you had a 1 year lease, at 1.5 years after renting the unit you would not be 15% below market rent.   This is what you should base your numbers off of because, once you have actuals.  You should use the actuals and not estimates (use estimates for unknowns and actuals for known values).   So 15% at 1.5 years plus conservatively 3% estimate per year for 2.5 years would be the calculation using your numbers.  Your rent is currently, using the 15% number, $270/month below market which if we only use the 2.5 years left is $8100 without any further market rent appreciation and not counting the 6 months after a 1 year lease would have allowed the rent increase (so with the exception of rent depreciation this is the lower bound on difference between your rent and market rent).

    As indicated, the 4 year lease ensures minimal return if there is not any market appreciation.  There is nothing that can be done now for the 4 year lease.   Unfortunately, I think the way for you to best understand what I am trying to communicate is if the tenant breaks the lease early and has received below market rent for a commitment that is not very enforceable.  I hope this does not happen. but instead you think about what the LL really gains with a long term lease.

    The new build wont depreciate like the new car in terms of percentage but in terms of dollars it is likely.  What I see in my market is the new build with no landscaping, window coverings, etc. sell for just a bit more (virtually the same) than the recently sold new construction that now has landscaping, window coverings, etc.  In terms of actual dollars this difference is likely more dollars than the car has depreciated.

    Good luck

  • Rental Property Investor · Los Angeles, CA · Member since 2019 · 34 posts · 5 votes
    6y

    Whitney, First let me mention that I forgot add a critical piece to my comment last night. Your criteria seemed very similar to mine when I first started investing. It seems you are looking to be a Turn Key investor? Which means you are looking to be hands off and let someone find, manage, and rehab your investment property. You will pay bit more versus something like the BRRRR strategy, but you will have someone be your eyes and ears, and (in some ways) your partner.

    That said, success does not come without effort in this strategy as well. As for my criteria in looking at locations for investments I look at potential growth in the market, jobs, demographics, rental income (I prefer cash on cash), age of potential renters, rent vs. own, crime, etc. I don't look into appreciation as some other investors do, but Jacksonville market has a steady rental market and good appreciation to add additional value to your investment. 

    I haven't invested this market yet, but it's certainly next on my list. Hope this helps! 

  • Investor · Phoenix, AZ · Member since 2018 · 420 posts · 388 votes
    6y

    @Dan H. I am aware that my lease is no better than any other And that the renter may walk. In that case....I can correct to market rent and absorb the vacancy like any other investor. I don’t see that as a death blow to my strategy. 

    New builds are different everywhere you go. You can’t blanket statement their growth. It’s my house...in the absolute worst case scenario, I live in it. 

  • Investor · Phoenix, AZ · Member since 2018 · 420 posts · 388 votes
    6y

    @Kris H. That’s obviously my biggest concern right now. I can carry for a while but unless I sell prop #1 I can’t handle more than 6 months with no renter in either rental. I don’t know a lot of new investors who could. With that said, what can I do to further hedge toward high cash flow to improve me reserve position that hasn’t been mentioned yet? Would welcome any tips!

  • Investor · Phoenix, AZ · Member since 2018 · 420 posts · 388 votes
    6y

    @Jay Hinrichs

    Hindsight is 20/20 right? Don’t beat yourself up too bad. It’s interesting how cash flow has become the main focus. Personally I wouldn’t get up in the morning for $100/door. I don’t need that kind of stress. I want to maximize my leverage to push my buying price higher. Ideally making it to $500k soon. Quick math there tells me that 2-3% appreciation to keep pace with inflation and $5k in principle pay down moves the needle $15-20k each year. I got my realtors license to tack another 3% on or $15k when I buy each prop. Nothing is perfect, but even at 0% appreciation that’s still $20k/yr every time I buy something at that price point. Now that’s an alarm clock!! It all hinges on putting enough from prop #1 away to create cash reserves to absorb any kind of vacancy or downturn. Part of me had even considered just cashing in on it now, taking my Queen off the table so to speak. Thoughts?

  • Investor · San Francisco, CA · Member since 2016 · 23 posts · 4 votes
    6y

    @Mary Mitchell would you mind sharing STR laws in Oregon? Especially Portland?

  • Investor · Lancaster, PA · Member since 2016 · 94 posts · 356 votes
    6y

    @Whitney Bowling

    So I have to question why you chose real estate as your investment vehicle? With all do respect , you want nothing to do with it. You want all the rewards with out any of the work... I would advise to be 100% passive and invest in syndications if you are an accredited investor.

    I started 11 years ago with only the equity in my personal home. ($60k)... my wife and I manage everything and do all the maintenance on everything... was it long days, yup, was it hard work , yup! Fast forward to today. We own Na manage 66 units with a market value of over $6,000,000. We have no partners. It’s just her and I. We have another 15 units under contract. In the last 6 months of this year we will have added $2,100,000 to our portfolio. Our gross monthly rents are $60,000 per month. I no longer have. W2 and my wife will be retiring next year. I am in total control of my schedule and future all because I went all in real estate. My thoughts were , “ I’m willing to live a few years of my life like most people won’t , so I can live the rest of my life like most people can’t” I’m now in the later part... so basically I wanted to say, real estate can and will change your life if you go all in and commit to it 100%! But you will not have free time for a while... hope this gives you something to think about. Best of luck with what ever path you choose!

  • Member since 2019 · 1k+ posts · 1k+ votes
    6y

    @Whitney Bowling

    Slowing down the initial purchases would be easiest most likely. Have you considered / do you have the option for an automatically RE-advancing mortgage/HELOC combo? I have everything set up that way. Kinda nice knowing that every dollar of principle paid off is instantly available when lightning strikes.

  • Investor · Schenectady, NY · Member since 2015 · 107 posts · 111 votes
    6y
    This is certainly a different way of looking at things. To summarize you are basically paying near market rate with maximum leverage and praying for appreciation. I have a hard time relating to this living in Upstate NY. We haven’t had the huge leaps in appreciation like you see on the west coast. What do you do if the market takes a dive? I appreciate your goal of staying hands off even though it runs counter to many of the discussions on BP
  • Investor · Phoenix, AZ · Member since 2018 · 420 posts · 388 votes
    6y

    @Carlos Medina

    Real estate is the only investment vehicle out there where you can get 20x on your upfront money. You can’t be an accredited investor until you actually have cash reserves. Real syndicators want no part of the newbies. This is my beginner strategy and by moving every other year to make it work, I’m committed.

    The work on my end is finding the growth markets, stashing the cash, moving, and researching the financing tools constantly. Just because I'm not looking to pick up a hammer doesn't mean I'm not working. Flipping and BRRR is just one strategy, it's not the only strategy.

    I'd love to turn it over to a property manager 3 years from now with $2M in properties and $140k in the bank and just let them manage it. I'm halfway there right now. Even if I'm upside down a total of $1,000 per month on PITIA + CAPEX that gives me 10 years to run before my reserves are depleted. If the investments never appreciate at all, I've made $2M on my initial investment of roughly $40k at the end of 30 years. If the apocalypse comes and they lose 50% of their value over 30 years I'm still 11x my initial investment

  • Investor · Phoenix, AZ · Member since 2018 · 420 posts · 388 votes
    6y

    @Kris H.

    Now this is why I’m wrote the post in the first place! I do not have that kind of setup and I absolutely should. I will definitely look into it.

    Thank you!

  • Investor · Phoenix, AZ · Member since 2018 · 420 posts · 388 votes
    6y

    @Ted L.

    The goal is to sell prop #1 here shortly to be able to absorb the market taking a dive. In reality my hold period is so long (I’m 35) that with $100k+ in cash reserves I should be able to wait on the market to return, all the while having the renter pay down the original mortgage. I can’t predict appreciation with any certainty so my investment strategy hinges on max leverage with max cash reserves.

  • Member since 2019 · 1k+ posts · 1k+ votes
    6y

    @Whitney Bowling

    Not sure if it works the same down south there but here in Canada we generally can't leverage beyond 80% for an investment property. Following your path I would need to find a lender to do the HELOC to say... 90% on my principle and essentially leave it like that when I purchased a new principle res in a couple/ few years. At that time, if using the same lender they may or may not allow it to remain in place. They may just reduce it to 80% overall capacity. Additionally, here a HELOC can technically be recalled at anytime. Very little notice (think weeks, not months). So proceed with caution. ie: make sure you have a plan to pay down the HELOC (cashflow) not just leverage it. Don't put yourself in a position where you've got a few revolving portions all leveraged to the max and the market downturn makes lenders start recalling them a year later to reduce their exposure... that would be bad new blues my friend.

    In short, CAUTIOUSLY leverage. My definition of that: Max 80%, but less than 55-60% if sfh is inefficient use of equity.

  • Investor · Phoenix, AZ · Member since 2018 · 420 posts · 388 votes
    6y

    @Account Closed 80% is the standard here as well, though I know there are lenders that will go to 90%. I think my comfort level will always be relative to my cash unleveraged cash reserve. Curious though, is the combo you mentioned partially unsecured? 

  • Member since 2019 · 1k+ posts · 1k+ votes
    6y

    @Whitney Bowling

    It is all secured. Several lenders here offer “all in one” type products that set the overall leverage limit at 80% (sometimes less, client depending) where as you pay principle it simply transfers to the revolving (interest only payments requires ) portion. The nicest thing about it, although they technically can recall the revolving portion, you never have to ask to use it. If it’s set up from day 1, it simply becomes your reserve fund that continuously accrues as you pay down your mortgage.

  • Investor · Phoenix, AZ · Member since 2018 · 420 posts · 388 votes
    6y

    @Kris H. I’ve done a bit of research. It looks like the official term is readvanceable mortgage. Best I can tell, this product is only available in Canada. Sounds like a business waiting to happen here in the states.

  • Member since 2019 · 1k+ posts · 1k+ votes
    6y

    @Whitney Bowling

    Yes that's what it's called. Other option is adding a technically separate product as a secured LOC. Likely easiest if you use the same lender. Made more difficult if the equity you could use for it is a small number. Some lenders don't like to do paperwork below $50,000 or similar.

  • Investor · Phoenix, AZ · Member since 2018 · 420 posts · 388 votes
    6y

    @Carlos Medina

    @Jay Hinrichs

    My strategy here has evolved. I’m likely now going to take the $10k in profit I’ll have from the VRBO in the next 3 months and stash it as a reserve. I’m going to turn the condo over into a full time rental with a property manager and pay the fees out of this stash. The condo has an on-site property management company I’ve connected with.

    It’s crazy how bouncing ideas and stating your goals and processes out loud can lead to such better results. I appreciate your inputs along the way. Being tested on my thought process has only served to make my strategy more durable! Cheers, and happy holidays!

  • Investor · Phoenix, AZ · Member since 2018 · 420 posts · 388 votes
    6y

    @Jay Hinrichs

    @Carlos Medina

    @Kris H.

    @Ted L.

    I’m cracking up today reading the transcript of podcast #364. This girl straight up highjacked my idea and they put her on the show! 😂 Jk, but seriously, I love the strategy she has put to work and I’m copying it 💯

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