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Austin Fowler
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Property 8, 100% financed

Austin Fowler
  • Rental Property Investor
  • Reseda, CA
Posted Nov 13 2022, 11:45

Investment Info:

Single-family residence buy & hold investment.

Purchase price: $225,000

9509 Briarcreek Drive, Oklahoma City, OK 73162

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Steve Vaughan#1 Personal Finance Contributor
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Steve Vaughan#1 Personal Finance Contributor
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Replied Nov 28 2022, 11:42
Quote from @Austin Fowler:
Quote from @Steve Vaughan:
Quote from @Austin Fowler:

As for the language for investors, below is the 1-page summary of the 61-page PPM. No minimum hold time. 

Account Terms and Conditions

Maximum balance: $1.5M

1) The funds in the account are secured with full recourse to the worldwide assets of the borrower, no matter how indirect the ownership structure is, no exceptions.

2) Deposits and withdrawals can only be made electronically to ensure unambiguous dates of transactions and secure transfers.

3) The lender can initiate a deposit by performing an electronic transfer to the borrower's account.

4) The date of deposit will be the date of receipt of funds listed on the borrower's bank statement.

5) If the received deposit would take the lender's account balance over the maximum balance, this deposit shall be returned in full within 7 days during which no interest will accrue on these funds. Failure to do so will result in the lender's account switching to the penalty interest rate and the deposit posting to the lender's account 7 days after receipt until the excess deposit is returned.

6) The lender can initiate a withdrawal at any time by sending an email requesting funds. Interest shall continue to accrue until these funds are sent. The funds must be sent within 7 days of the email requesting withdrawal. Failure to do so will result in the lender's account switching to the penalty interest rate until the funds are sent.

7) Transactions, interest, and current balance shall be provided via an online portal.

8) There shall be no fees or transaction limits associated with the account.

9) The borrower has the right to close the account at any time by sending all owed funds.

10) Even in the event of death or incapacitation of the borrower, this contract gives the lender full recourse to the borrower's estate, even after transfer to other beneficiaries of the estate, without exception or limitation.

 Interesting.   Thank you for providing capital preservation stage accredited investors an alternative savings option.

Will we know the fund balance or be made aware when it is approaching $1.5M? The risk for us are dollars earning zero above $1.5M. 


That limit is a per account limit. As a client, you can see in your own account if you are approaching that maximum. As a business owner, the limit is determined by your personal income, essentially the maximum balance you could handle sitting in a bank account and paying out-of-pocket. With a $625k W-2, $1.5M is an appropriate balance that I can afford to keep in cash if necessary.

 Gotcha, thanks. 

I assume we'd be issued an annual 1098 or 1099 for interest reporting?

Can we be an entity?  A few of my contracts are in LLCs that owned the buildings.

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Austin Fowler
  • Rental Property Investor
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Austin Fowler
  • Rental Property Investor
  • Reseda, CA
Replied Nov 28 2022, 11:54
Quote from @Steve Vaughan:
Quote from @Austin Fowler:
Quote from @Steve Vaughan:
Quote from @Austin Fowler:

As for the language for investors, below is the 1-page summary of the 61-page PPM. No minimum hold time. 

Account Terms and Conditions

Maximum balance: $1.5M

1) The funds in the account are secured with full recourse to the worldwide assets of the borrower, no matter how indirect the ownership structure is, no exceptions.

2) Deposits and withdrawals can only be made electronically to ensure unambiguous dates of transactions and secure transfers.

3) The lender can initiate a deposit by performing an electronic transfer to the borrower's account.

4) The date of deposit will be the date of receipt of funds listed on the borrower's bank statement.

5) If the received deposit would take the lender's account balance over the maximum balance, this deposit shall be returned in full within 7 days during which no interest will accrue on these funds. Failure to do so will result in the lender's account switching to the penalty interest rate and the deposit posting to the lender's account 7 days after receipt until the excess deposit is returned.

6) The lender can initiate a withdrawal at any time by sending an email requesting funds. Interest shall continue to accrue until these funds are sent. The funds must be sent within 7 days of the email requesting withdrawal. Failure to do so will result in the lender's account switching to the penalty interest rate until the funds are sent.

7) Transactions, interest, and current balance shall be provided via an online portal.

8) There shall be no fees or transaction limits associated with the account.

9) The borrower has the right to close the account at any time by sending all owed funds.

10) Even in the event of death or incapacitation of the borrower, this contract gives the lender full recourse to the borrower's estate, even after transfer to other beneficiaries of the estate, without exception or limitation.

 Interesting.   Thank you for providing capital preservation stage accredited investors an alternative savings option.

Will we know the fund balance or be made aware when it is approaching $1.5M? The risk for us are dollars earning zero above $1.5M. 


That limit is a per account limit. As a client, you can see in your own account if you are approaching that maximum. As a business owner, the limit is determined by your personal income, essentially the maximum balance you could handle sitting in a bank account and paying out-of-pocket. With a $625k W-2, $1.5M is an appropriate balance that I can afford to keep in cash if necessary.

 Gotcha, thanks. 

I assume we'd be issued an annual 1098 or 1099 for interest reporting?

Can we be an entity?  A few of my contracts are in LLCs that owned the buildings.

 Yes, each client gets a 1099-INT each year with their interest earnings. Yes, an entity can have an account with one or two signatories.

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Steve K.#3 Multi-Family and Apartment Investing Contributor
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Steve K.#3 Multi-Family and Apartment Investing Contributor
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Replied Nov 28 2022, 15:31
Quote from @Austin Fowler:
Quote from @Jeremy H.:
Quote from @Austin Fowler:
 Fractional reserve banking is a mathematical technique, any business can make use of it. Currently I have a total client balance of $1.2M. The equity in my 33 SFR rentals as calculated using the appraisals obtained at time of purchase is $1.87M. It will have grown substantially since time of purchase. I have $150k cash in bank, $350k unused credit, and $800k in liquid stocks. Plus another $300k equity in my primary home, and all the usual incidentals such as cars etc. that are all collectively used to secure client funds. Not to mention I have a $625k W-2. Trust me, I run my business very conservatively. In comparison to my income and assets, the business is at a test stage. I have done my market research, bought 15 REI Nation properties, 12 SDIRA wealth properties, and 6 properties directly through a real estate agent. While I'm happy with the performance of the 33 properties overall, the REI Nation properties of the best performers and where I will focus expansion future.

I don't understand how you have any substantial equity in houses that are financed 100% or even 75% - there's no way to get access to this money other than sell, you can't refi and take anything out either because there is no equity there. You've been doing this with SFH for 2 years - likely everything you bought in from mid 2021 onward will sell for less today than it would have then. That was literally the peak of prices.

So you back your clients investments with your personal assets?

The thing is you are still relatively small - if this got much bigger it could get out of hand really quick. One swing in the economy OR over 20% of people want their money out and you would be getting screwed. I hope these investors don't know each other or speak to each other - if there is any kind of cohesiveness between them it can be a real problem for you. 


 I've been doing this a long time. Not every property I ever bought was bought with 100% finance. I make sure I have a solid equity buffer before raising capital and buying more assets. Regarding current values, I'd prefer to argue that with data. My experience with property tax assessments says these properties have gone up significantly since time of purchase. I have the cash flow to hold on to them indefinitely, so only really need growth over the very long-term. I'm getting an appraisal done at the end of the month and will update this thread with that data. Opinions, are great, and I appreciate yours, but where data can be obtained that should dominate the discussion.

 Did you really just say that you're using tax assessed value as a data point to determine market value? If you don't know even the most basic stuff like the difference between tax assessed value and actual market value, you shouldn't be investing other people's money IMO. This whole thing smells as fishy as Good Friday to me, sorry. 

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Steve K.#3 Multi-Family and Apartment Investing Contributor
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Steve K.#3 Multi-Family and Apartment Investing Contributor
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Replied Nov 28 2022, 15:36

"When withdrawals occur, I raise more capital to replace it."


 WHAT IS GOING ON HERE??! There are so many red flags in this thread, it's clear something is way off. Again, sorry, but this is as fishy as Sea World. Profit is magically appearing from new capital raises now? 

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V.G Jason
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Replied Nov 28 2022, 15:43
Quote from @Matthew Failor:

@Austin Fowler very creative. I don't see how the property in question cash flows even taking out the numbers questioned above.

I like how you essentially are a case study on how a bank works and people's first thought is fraud and jail time. Note, life insurance companies do the same thing. Do you think they have 1 to 1 reserves on every policy? No! You might say what about the re-insurance companies? Neither do they! Just ask an actuary.

Insurance companies operate on a different set of rules. We all state we know how a bank works. You think proprietary investor here operates on the same set of rules as them?

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Austin Fowler
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  • Reseda, CA
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Austin Fowler
  • Rental Property Investor
  • Reseda, CA
Replied Nov 28 2022, 16:35
Quote from @Steve K.:
Quote from @Austin Fowler:
Quote from @Jeremy H.:
Quote from @Austin Fowler:
 Fractional reserve banking is a mathematical technique, any business can make use of it. Currently I have a total client balance of $1.2M. The equity in my 33 SFR rentals as calculated using the appraisals obtained at time of purchase is $1.87M. It will have grown substantially since time of purchase. I have $150k cash in bank, $350k unused credit, and $800k in liquid stocks. Plus another $300k equity in my primary home, and all the usual incidentals such as cars etc. that are all collectively used to secure client funds. Not to mention I have a $625k W-2. Trust me, I run my business very conservatively. In comparison to my income and assets, the business is at a test stage. I have done my market research, bought 15 REI Nation properties, 12 SDIRA wealth properties, and 6 properties directly through a real estate agent. While I'm happy with the performance of the 33 properties overall, the REI Nation properties of the best performers and where I will focus expansion future.

I don't understand how you have any substantial equity in houses that are financed 100% or even 75% - there's no way to get access to this money other than sell, you can't refi and take anything out either because there is no equity there. You've been doing this with SFH for 2 years - likely everything you bought in from mid 2021 onward will sell for less today than it would have then. That was literally the peak of prices.

So you back your clients investments with your personal assets?

The thing is you are still relatively small - if this got much bigger it could get out of hand really quick. One swing in the economy OR over 20% of people want their money out and you would be getting screwed. I hope these investors don't know each other or speak to each other - if there is any kind of cohesiveness between them it can be a real problem for you. 


 I've been doing this a long time. Not every property I ever bought was bought with 100% finance. I make sure I have a solid equity buffer before raising capital and buying more assets. Regarding current values, I'd prefer to argue that with data. My experience with property tax assessments says these properties have gone up significantly since time of purchase. I have the cash flow to hold on to them indefinitely, so only really need growth over the very long-term. I'm getting an appraisal done at the end of the month and will update this thread with that data. Opinions, are great, and I appreciate yours, but where data can be obtained that should dominate the discussion.

 Did you really just say that you're using tax assessed value as a data point to determine market value? If you don't know even the most basic stuff like the difference between tax assessed value and actual market value, you shouldn't be investing other people's money IMO. This whole thing smells as fishy as Good Friday to me, sorry. 

Yes, I understand the difference between tax assessed value and market value, and know how to protest the tax assessed value to help keep property taxes under control. However, when I need to protest tax assessed values as the city wants to raise them significantly, it does hint that the market value hasn't gone down.

As mentioned, I'm in the process of getting a professional assessed value of one of my properties which will at least provide an example of the capital growth. More to come.

Ultimately, I'm running my operation the same way a bank runs an operation. If it seems unusual to you, I'd suggest looking deeper into how banking is done. Raise capital, fractional reserve, rest in illiquid assets is standard practice in banking.

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Austin Fowler
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Austin Fowler
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  • Reseda, CA
Replied Nov 28 2022, 16:41
Quote from @V.G Jason:
Quote from @Matthew Failor:

@Austin Fowler very creative. I don't see how the property in question cash flows even taking out the numbers questioned above.

I like how you essentially are a case study on how a bank works and people's first thought is fraud and jail time. Note, life insurance companies do the same thing. Do you think they have 1 to 1 reserves on every policy? No! You might say what about the re-insurance companies? Neither do they! Just ask an actuary.

Insurance companies operate on a different set of rules. We all state we know how a bank works. You think proprietary investor here operates on the same set of rules as them?

 It's really not that complicated, raise capital, keep 20% in reserve, rest in illiquid assets that provide a return on the entire raised capital. Make sure the contract specifies what happens if the reserve runs dry (investor gets penalty interest). In 20 years of operation, I've never needed to pay penalty interest. The math behind fractional reserve banking is sound. Many clients, small balances, smooth operation.

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Jeremy H.
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  • Lafayette, LA
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Jeremy H.
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  • Lafayette, LA
Replied Nov 28 2022, 17:06
Quote from @Austin Fowler:
Ultimately, I'm running my operation the same way a bank runs an operation. If it seems unusual to you, I'd suggest looking deeper into how banking is done. Raise capital, fractional reserve, rest in illiquid assets is standard practice in banking.
I would argue that most banks make money in many more ways and are also regulated, but I understand the concept.  

The epitome if your business is to raise private funds from investors - use their money as the downpayment on SFH, and offer them a 8% savings account. If an investor wants to cash out you simply raise new to funds to pay them (you don't actually pay anyone interest until they cash out, so the money to pay them doesn't exist without raising new funds)  - and the idea is that no more than 20% will ever cash out at one time. This is a highly leveraged strategy and even the money that you have access to isn't liquid - so you would essentially have to raise new funds to pay investors. As the investors account balances increase (due to interest) it becomes even more risky, so you have so raise new capital or increase reserves (in order to keep their percentage of the reserves low or penalize them for having an account balance too high). You have to ensure no one's account reaches over some arbitrary percentage (5%-10%) of your reserves, or you could risk liquidity problems.  

The thing is there is absolutely no exit strategy, you literally can't exit - the houses don't substantially cashflow, the tax deductions have been taken up front, they are 80-100% financed, they can't be refinanced for many many years (because they have no equity and the interest rate will go up), they can't be sold for many years because they were bought at market price (and we are seeing the beginning of a downturn, even without a downturn it would be an L to sell). 

You say you have a solid equity buffer before buying more assets...What is the equity buffer?

See the other kicker is that there is no profit here (the only profit is 20 years out when you start getting some equity paid down and appreciation). The profit would be buying under market value, OR having substantial cashflow - neither of which I see. How do the investors make a profit? By putting their money in an account which you pay 8% on. How do you pay someone 8% when they cash out? You raise new capital because the money to pay them doesn't exist. Rinse and repeat. The only thing keeping this going is raising more capital than the amount of withdraws made. If you stopped raising new capital or couldn't raise new capital the entire thing collapses when people slowly start asking for their money (because you cannot pay them so you have to start liquidating assets, and the value of the assets isn't enough to pay back the investors...so you are back to raising new capital). The business model here is raising more private capital than capital that is withdrawn at 8%. The assets being purchased are just icing on the cake for you. 


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Austin Fowler
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Austin Fowler
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  • Reseda, CA
Replied Nov 28 2022, 17:21
Quote from @Jeremy H.:
Quote from @Austin Fowler:
Ultimately, I'm running my operation the same way a bank runs an operation. If it seems unusual to you, I'd suggest looking deeper into how banking is done. Raise capital, fractional reserve, rest in illiquid assets is standard practice in banking.
I would argue that most banks make money in many more ways and are also regulated, but I understand the concept.  

The epitome if your business is to raise private funds from investors - use their money as the downpayment on SFH, and offer them a 8% savings account. If an investor wants to cash out you simply raise new to funds to pay them (you don't actually pay anyone interest until they cash out, so the money to pay them doesn't exist without raising new funds)  - and the idea is that no more than 20% will ever cash out at one time. This is a highly leveraged strategy and even the money that you have access to isn't liquid - so you would essentially have to raise new funds to pay investors. As the investors account balances increase (due to interest) it becomes even more risky, so you have so raise new capital or increase reserves (in order to keep their percentage of the reserves low or penalize them for having an account balance too high). You have to ensure no one's account reaches over some arbitrary percentage (5%-10%) of your reserves, or you could risk liquidity problems.  

The thing is there is absolutely no exit strategy, you literally can't exit - the houses don't substantially cashflow, the tax deductions have been taken up front, they are 80-100% financed, they can't be refinanced for many many years (because they have no equity and the interest rate will go up), they can't be sold for many years because they were bought at market price (and we are seeing the beginning of a downturn, even without a downturn it would be an L to sell). 

You say you have a solid equity buffer before buying more assets...What is the equity buffer?

See the other kicker is that there is no profit here (the only profit is 20 years out when you start getting some equity paid down and appreciation). The profit would be buying under market value, OR having substantial cashflow - neither of which I see. How do the investors make a profit? By putting their money in an account which you pay 8% on. How do you pay someone 8% when they cash out? You raise new capital because the money to pay them doesn't exist. Rinse and repeat. The only thing keeping this going is raising more capital than the amount of withdraws made. If you stopped raising new capital or couldn't raise new capital the entire thing collapses when people slowly start asking for their money (because you cannot pay them so you have to start liquidating assets, and the value of the assets isn't enough to pay back the investors...so you are back to raising new capital). The business model here is raising more private capital than capital that is withdrawn at 8%. The assets being purchased are just icing on the cake for you. 



 This month alone I have positive cash flow of over $10k (just got another $2k of late rent) and debt paydown of over $8k. Total interest owed to all clients approximately $8k. Why would I want to exit this? Is there an exit strategy? Of course!, I can start directing my excess cash flow into paying off investor debt. I have the right to return capital and close accounts. I have an equity buffer of nearly $2M and while I'm cashflowing I'm happy to hold such assets through the coming downturn.

I'd also mention that I received a $190k tax return this year which is double the total interest owed to clients for the year, so very strongly no, I don't routinely need to replace withdrawals with explicit capital raises. I have enough depreciation banked to get the same next year, and likely the next as well. Also, please well note, that under normal operation deposits and withdrawals balance out.

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Jeremy H.
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Jeremy H.
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Replied Nov 28 2022, 18:07
Quote from @Austin Fowler:
 This month alone I have positive cash flow of over $10k (just got another $2k of late rent) and debt paydown of over $8k. Total interest owed to all clients approximately $8k. Why would I want to exit this? Is there an exit strategy? Of course!, I can start directing my excess cash flow into paying off investor debt. I have the right to return capital and close accounts. I have an equity buffer of nearly $2M and while I'm cashflowing I'm happy to hold such assets through the coming downturn.

I'd also mention that I received a $190k tax return this year which is double the total interest owed to clients for the year, so very strongly no, I don't routinely need to replace withdrawals with explicit capital raises. I have enough depreciation banked to get the same next year, and likely the next as well. Also, please well note, that under normal operation deposits and withdrawals balance out.

 A cashflow of one month does not equal cashflow over a long period of time (month to month varies to due a number of factors, more important to look at this annually, in my opinion). Debt paydown - especially for the first 5-10 years is so little I'd argue it's a moot point especially if the house is 100% financed. There's nothing you can do with that money other than sell the house to recoup it. Understood though. 

You may have the right to return capital and close accounts - but how would you do this? You don't have access to liquid money for all investors. You have access to 20%. So yea you could close a couple accounts - but then you'd have to raise new funds to pay back investors if you chose to close more than 20% of the investors balance. This is the same as if investors chose to close out their account - you'd have to raise new capital to pay them back. These houses are all so new they have no equity - so I'd argue this isn't a source of revenue - in 10+ years ok now you have so equity to liquidate if you needed to. 

The equity buffer? What is it exactly? 

The tax return and likely CSS bonus depreciation is great - the key is you can essentially never sell and you have to keep buying in order to get the depreciation. I understand it has worked so far. But with higher interest rates and your strategy to wait for them to come back down - you won't be getting the same depreciation every year. Nevertheless, I do understand this, and if you can keep it going indefinitely that's great, but you have to buy continually. 

I think your big W2 job (Mine is roughly 1/3rd-1/2 of what yours is and I wouldn't feel comfortable playing bank) gives you a big security. 

Saying withdrawls and deposits balance out under normal operation - what's the definition of normal operation? Chase bank? State Farm? You? I think this varies too widely to assume they would always balance out - hence why you need reserves - because operation is not normal. If evertyhing always went normal, we'd never run into any issues. 

This concept is still somewhat intriguing even while highly leveraged, unique to your individual finances, and full of risk. 

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V.G Jason
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Replied Nov 28 2022, 18:33
Quote from @Austin Fowler:
Quote from @V.G Jason:
Quote from @Matthew Failor:

@Austin Fowler very creative. I don't see how the property in question cash flows even taking out the numbers questioned above.

I like how you essentially are a case study on how a bank works and people's first thought is fraud and jail time. Note, life insurance companies do the same thing. Do you think they have 1 to 1 reserves on every policy? No! You might say what about the re-insurance companies? Neither do they! Just ask an actuary.

Insurance companies operate on a different set of rules. We all state we know how a bank works. You think proprietary investor here operates on the same set of rules as them?

 It's really not that complicated, raise capital, keep 20% in reserve, rest in illiquid assets that provide a return on the entire raised capital. Make sure the contract specifies what happens if the reserve runs dry (investor gets penalty interest). In 20 years of operation, I've never needed to pay penalty interest. The math behind fractional reserve banking is sound. Many clients, small balances, smooth operation.


 The concept is simple. We all already know what it is.

The execution though doesn't come at an amateur level without issues. 20 years without hiccups is great, I genuinely hope you don't falter for the sake of your investors. But the entirety of the situation doesn't add up math wise. You still hold collateral in stocks, houses that don't have equity, credit lines. That's just a bad recipe.

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Steve K.#3 Multi-Family and Apartment Investing Contributor
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Steve K.#3 Multi-Family and Apartment Investing Contributor
  • Realtor
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Replied Nov 28 2022, 19:23

Hmmm... turnkey rental properties purchased at full retail value, with 100% leverage, at the peak of the market cycle, owned remotely, under management, with no value add or upside other than potential natural appreciation, with accelerated depreciation, very little budgeted to fix anything or in case anything goes wrong... expected to somehow spin off enough profit to provide a guranteed percentage return to investors whose money is held in "savings accounts" with no bank charter or FDIC insurance, and only backed (partially) by personal funds... What could possibly go wrong here? This sounds like the same deluded justification that the iBuyers have been using over the past few years: "Too bad we lost $100k on that one property, but don't worry stockholders, we'll make up for it with scale!"

1) Tax assessed value going up from last year has no direct bearing on current market value, especially because the market turned just a few months ago but also in normal times. It's not a data point people use. 

2) Cap rate is not used for single family rentals, only multifamily.

3) Depreciation needs to be recaptured when you sell.

4) 3.7% for maintenance and repairs is unrealistic

5) 4% vacancy loss is extremely wishful thinking

6) An average tenant stays 2.5-3 years, not 6 and turnovers can easily cost $5-10k (which would take you many years to recover from with your budget, even if everything else goes perfectly)

7) Always take the operating costs given to you by the seller/ turnkey provider and double them for a more accurate estimate

 I’m not seeing enough profit here to have it be a worthwhile use of time or worth the risk for even an individual investor, and definitely not enough to share with outside investors. Hopefully these properties have wonderful appreciation and nothing ever goes wrong with them! Even if your cashflow projections were realistic (aside from whoever sold you these properties, no one believes they are), I still don't see the point. I get the banking side and the investing side, it's not complicated but just doesn't add up due to there being no profit-driver. All this just for accelerated depreciation, very nominal equity gain through principle pay-down, very nominal if any positive cashflow, and maybe enough appreciation to make it all worth the effort in 20 years? By overcomplicating things and over-leveraging yourself in the way that you have, you've opened yourself up to more personal risk than the best-case returns could ever justify. You're doing all the work and taking all the risk while relying on getting really lucky for very little, if any, potential return (maybe appreciation will save you?). 

If you want to "be the bank", you'd get better returns with less work and less risk as a private lender. Why not just do that and use your own funds to invest since you already have the capital, and avoid having to deal with the hassle and risk of combining the two? There's got to be a lot of admin, paperwork, financial reporting, legal fees, customer service/sales/ account management/ explaining, software, client portal management/IT, new lead generation/marketing and other overhead involved in this business, and there's real risk of potential lawsuits, audits, criminal charges etc. If your projections turn out to be mere wishful thinking and not actual underwriting (which my experience tells me they are), you could actually even risk being sued or facing federal criminal charges because the rosy predictions you made to investors could end up being deemed as false and misleading statements. Obtaining money from investors by means of false or fraudulent pretenses, representations, or promises is called bank fraud. Your underwriting and financial statements could easily be seen as misleading, because you keep calling them very conservative when anyone with a basic understanding of what a realistic SFR operating budget looks like will agree that's not the case. These cashflow projections are simply unrealistic. Every property has vacancy, needs repairs and maintenance, and requires capital expenditures well beyond what you have budgeted for. You will end up needing to pay investors out from your personal funds to cover operating costs in the near future, unless your plan is to continue raising new capital to cover your losses, Ponzi style. I don't see the point unless this is some sort of fund-raising pump and dump scheme, but I can't see how a savvy accredited investor would participate in this anyway. Why wouldn't they just go directly to the turnkey provider, buy the asset and reap all the benefits themselves? What value do you bring to the deal? I understand how it's a tool for them like a high interest savings account, but why settle for 8% when they could just invest directly in turnkeys themselves?

 Literally one garbage disposal going bad, not even a water heater replacement/plumbing leak/fallen tree/ driveway replacement/ sewer line collapse/ anything happening that costs more than your tiny maintenance, repairs and cap ex budget, or a single bad tenant/ eviction/ mishap that creates a few months of vacancy loss causes this model to lose money…. even a minor market correction for that matter considering you have zero equity/ zero margin for error… you’re probably underwater on these properties now with what is happening in the market. It’s unlikely you’d be able to sell them for what you paid never mind factoring in transaction costs and depreciation recapture since you're accelerating depreciation... 

Don’t quit your day job as they say. Hold on to your high-paying W2 for dear life now because you will need it to fund this money-losing endeavor. You may hit these extremely optimistic numbers in the very best year, but over time there’s no chance you’ll have positive cashflow. Sorry but I just don’t see it happening. Anyway, this model doesn’t make sense to me. Maybe for an apartment syndication or $100M development, but buying one-off turnkey rentals is an asset class that is notoriously difficult to derive profit from and impossible to scale (scaling will just magnify your losses here anyway). This seems like a lot of work and a lot of risk for not enough benefit and a potential recipe for disaster IMHO. Good luck, I hope you take this feedback as tough love and not a personal attack, and that you do well for yourself and your investors.   

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Austin Fowler
  • Rental Property Investor
  • Reseda, CA
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Austin Fowler
  • Rental Property Investor
  • Reseda, CA
Replied Nov 28 2022, 20:09
Quote from @Jeremy H.:
Quote from @Austin Fowler:
 This month alone I have positive cash flow of over $10k (just got another $2k of late rent) and debt paydown of over $8k. Total interest owed to all clients approximately $8k. Why would I want to exit this? Is there an exit strategy? Of course!, I can start directing my excess cash flow into paying off investor debt. I have the right to return capital and close accounts. I have an equity buffer of nearly $2M and while I'm cashflowing I'm happy to hold such assets through the coming downturn.

I'd also mention that I received a $190k tax return this year which is double the total interest owed to clients for the year, so very strongly no, I don't routinely need to replace withdrawals with explicit capital raises. I have enough depreciation banked to get the same next year, and likely the next as well. Also, please well note, that under normal operation deposits and withdrawals balance out.

 A cashflow of one month does not equal cashflow over a long period of time (month to month varies to due a number of factors, more important to look at this annually, in my opinion). Debt paydown - especially for the first 5-10 years is so little I'd argue it's a moot point especially if the house is 100% financed. There's nothing you can do with that money other than sell the house to recoup it. Understood though. 

You may have the right to return capital and close accounts - but how would you do this? You don't have access to liquid money for all investors. You have access to 20%. So yea you could close a couple accounts - but then you'd have to raise new funds to pay back investors if you chose to close more than 20% of the investors balance. This is the same as if investors chose to close out their account - you'd have to raise new capital to pay them back. These houses are all so new they have no equity - so I'd argue this isn't a source of revenue - in 10+ years ok now you have so equity to liquidate if you needed to. 

The equity buffer? What is it exactly? 

The tax return and likely CSS bonus depreciation is great - the key is you can essentially never sell and you have to keep buying in order to get the depreciation. I understand it has worked so far. But with higher interest rates and your strategy to wait for them to come back down - you won't be getting the same depreciation every year. Nevertheless, I do understand this, and if you can keep it going indefinitely that's great, but you have to buy continually. 

I think your big W2 job (Mine is roughly 1/3rd-1/2 of what yours is and I wouldn't feel comfortable playing bank) gives you a big security. 

Saying withdrawls and deposits balance out under normal operation - what's the definition of normal operation? Chase bank? State Farm? You? I think this varies too widely to assume they would always balance out - hence why you need reserves - because operation is not normal. If evertyhing always went normal, we'd never run into any issues. 

This concept is still somewhat intriguing even while highly leveraged, unique to your individual finances, and full of risk. 


 I used November as an example month because it was not a good month. 3 new leases, only partial payment of rent, another 3 properties vacant, no rent, two other tenants behind on rent. Averaged over the year it works out to about $10k a month or $120k per year.

Debt paydown of $8k / month is ~$100k per year. What scale do you operate on? This is certainly not negligible to me, not when all of this was achieved on just $1.2M of private capital. The debt paydown covers the interest owed to investors, the cashflow and tax benefits and long-term capital growth are mine to keep and either spend or reinvest. The $190k tax return plus cashflow could make a very significant dent in paying down outstanding debt if I wanted to. You wouldn't use the reserve.

Equity buffer just means I didn't start buying houses in this manner before having a couple of $M to my name to ensure I have the capacity to keep my investors safe.

Purchasing is currently paused. I'll wait till the Fed indicates they are happy with how high they are, not wait for them to come back down. 8% is already less than quotes I have got recently for mortgages, the plan will be to assemble capital to buy houses outright with 8% money then hold them till the rates go back down.

I've been doing this for 20 years, so normal conditions really means all conditions. I've weathered the 2008 GFC. When times are good, some people sell assets, some buy, and money moves in and out in roughly equal measures. When times are bad it's the same. Some people deposit looking for safe haven stability, some withdraw to buy assets.

When it comes to risk, I focus on the lowest risk assets I'm aware of, namely professionally managed turnkey long term SFRs. If you are aware of a lower risk asset class in real estate, please let me know. The returns on the 33 such SFRs I have are sufficient to pay investors, in the short and long term.

In my mind, learning how to buy an asset with 100% finance that grows your net worth faster than the finance eats it is and at the same time absorbs little of your time is the holy grail of investing. With sufficient capital you can scale arbitrarily. Open to ideas as to how to make the approach lower risk, but it's currently as low as I know how to make it. Appreciate the discussion!

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Austin Fowler
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Austin Fowler
  • Rental Property Investor
  • Reseda, CA
Replied Nov 28 2022, 20:14
Quote from @V.G Jason:
Quote from @Austin Fowler:
Quote from @V.G Jason:
Quote from @Matthew Failor:

@Austin Fowler very creative. I don't see how the property in question cash flows even taking out the numbers questioned above.

I like how you essentially are a case study on how a bank works and people's first thought is fraud and jail time. Note, life insurance companies do the same thing. Do you think they have 1 to 1 reserves on every policy? No! You might say what about the re-insurance companies? Neither do they! Just ask an actuary.

Insurance companies operate on a different set of rules. We all state we know how a bank works. You think proprietary investor here operates on the same set of rules as them?

 It's really not that complicated, raise capital, keep 20% in reserve, rest in illiquid assets that provide a return on the entire raised capital. Make sure the contract specifies what happens if the reserve runs dry (investor gets penalty interest). In 20 years of operation, I've never needed to pay penalty interest. The math behind fractional reserve banking is sound. Many clients, small balances, smooth operation.


 The concept is simple. We all already know what it is.

The execution though doesn't come at an amateur level without issues. 20 years without hiccups is great, I genuinely hope you don't falter for the sake of your investors. But the entirety of the situation doesn't add up math wise. You still hold collateral in stocks, houses that don't have equity, credit lines. That's just a bad recipe.



In my mind, learning how to buy an asset with 100% finance that grows your net worth faster than the finance eats it is and at the same time absorbs little of your time is the holy grail of investing. With sufficient capital you can scale arbitrarily. Open to ideas as to how to make the approach lower risk while preserving the arbitrary scalability, but it's currently as low as I know how to make it.

Note that with sufficient scale the 20% reserve mathematically becomes more and more sufficient without any additional source of liquidity. Could you please confirm we are on the same page on this? The more clients you have and the smaller each client is relative to the reserve the lower the probability of the reserve being sufficient assuming you avoid a bank run, which means keeping your investors informed every step of the way, which I do. Appreciate the discussion!

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Austin Fowler
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Austin Fowler
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Replied Nov 28 2022, 20:39
Quote from @Steve K.:

Hmmm... turnkey rental properties purchased at full retail value, with 100% leverage, at the peak of the market cycle, owned remotely, under management, with no value add or upside other than potential natural appreciation, with accelerated depreciation, very little budgeted to fix anything or in case anything goes wrong... expected to somehow spin off enough profit to provide a guranteed percentage return to investors whose money is held in "savings accounts" with no bank charter or FDIC insurance, and only backed (partially) by personal funds... What could possibly go wrong here? This sounds like the same deluded justification that the iBuyers have been using over the past few years: "Too bad we lost $100k on that one property, but don't worry stockholders, we'll make up for it with scale!"

1) Tax assessed value going up from last year has no direct bearing on current market value, especially because the market turned just a few months ago but also in normal times. It's not a data point people use. 

2) Cap rate is not used for single family rentals, only multifamily.

3) Depreciation needs to be recaptured when you sell.

4) 3.7% for maintenance and repairs is unrealistic

5) 4% vacancy loss is extremely wishful thinking

6) An average tenant stays 2.5-3 years, not 6 and turnovers can easily cost $5-10k (which would take you many years to recover from with your budget, even if everything else goes perfectly)

7) Always take the operating costs given to you by the seller/ turnkey provider and double them for a more accurate estimate

 I’m not seeing enough profit here to have it be a worthwhile use of time or worth the risk for even an individual investor, and definitely not enough to share with outside investors. Hopefully these properties have wonderful appreciation and nothing ever goes wrong with them! Even if your cashflow projections were realistic (aside from whoever sold you these properties, no one believes they are), I still don't see the point. I get the banking side and the investing side, it's not complicated but just doesn't add up due to there being no profit-driver. All this just for accelerated depreciation, very nominal equity gain through principle pay-down, very nominal if any positive cashflow, and maybe enough appreciation to make it all worth the effort in 20 years? By overcomplicating things and over-leveraging yourself in the way that you have, you've opened yourself up to more personal risk than the best-case returns could ever justify. You're doing all the work and taking all the risk while relying on getting really lucky for very little, if any, potential return (maybe appreciation will save you?). 

If you want to "be the bank", you'd get better returns with less work and less risk as a private lender. Why not just do that and use your own funds to invest since you already have the capital, and avoid having to deal with the hassle and risk of combining the two? There's got to be a lot of admin, paperwork, financial reporting, legal fees, customer service/sales/ account management/ explaining, software, client portal management/IT, new lead generation/marketing and other overhead involved in this business, and there's real risk of potential lawsuits, audits, criminal charges etc. If your projections turn out to be mere wishful thinking and not actual underwriting (which my experience tells me they are), you could actually even risk being sued or facing federal criminal charges because the rosy predictions you made to investors could end up being deemed as false and misleading statements. Obtaining money from investors by means of false or fraudulent pretenses, representations, or promises is called bank fraud. Your underwriting and financial statements could easily be seen as misleading, because you keep calling them very conservative when anyone with a basic understanding of what a realistic SFR operating budget looks like will agree that's not the case. These cashflow projections are simply unrealistic. Every property has vacancy, needs repairs and maintenance, and requires capital expenditures well beyond what you have budgeted for. You will end up needing to pay investors out from your personal funds to cover operating costs in the near future, unless your plan is to continue raising new capital to cover your losses, Ponzi style. I don't see the point unless this is some sort of fund-raising pump and dump scheme, but I can't see how a savvy accredited investor would participate in this anyway. Why wouldn't they just go directly to the turnkey provider, buy the asset and reap all the benefits themselves? What value do you bring to the deal? I understand how it's a tool for them like a high interest savings account, but why settle for 8% when they could just invest directly in turnkeys themselves?

 Literally one garbage disposal going bad, not even a water heater replacement/plumbing leak/fallen tree/ driveway replacement/ sewer line collapse/ anything happening that costs more than your tiny maintenance, repairs and cap ex budget, or a single bad tenant/ eviction/ mishap that creates a few months of vacancy loss causes this model to lose money…. even a minor market correction for that matter considering you have zero equity/ zero margin for error… you’re probably underwater on these properties now with what is happening in the market. It’s unlikely you’d be able to sell them for what you paid never mind factoring in transaction costs and depreciation recapture since you're accelerating depreciation... 

Don’t quit your day job as they say. Hold on to your high-paying W2 for dear life now because you will need it to fund this money-losing endeavor. You may hit these extremely optimistic numbers in the very best year, but over time there’s no chance you’ll have positive cashflow. Sorry but I just don’t see it happening. Anyway, this model doesn’t make sense to me. Maybe for an apartment syndication or $100M development, but buying one-off turnkey rentals is an asset class that is notoriously difficult to derive profit from and impossible to scale (scaling will just magnify your losses here anyway). This seems like a lot of work and a lot of risk for not enough benefit and a potential recipe for disaster IMHO. Good luck, I hope you take this feedback as tough love and not a personal attack, and that you do well for yourself and your investors.   

Hi Steve,

Thanks for the detailed post, I appreciate it. To start, with a $625k W-2 and just $1.2M in private capital, meaning $96k in interest, I have deep pockets to look after my investors, which is always  top priority. I think we'll have to agree to disagree on appreciation of these assets until I have appraisals back. In any case, this is a long term play and that's ok with me.

I have a net worth 2x total investor funds, so I have substantial and growing resources to cover investors. Indeed between vesting stock and cashflow and tax returns my liquid reserves go up an average of $35k a month.

I think you are looking at all of this the wrong way. Let's assume you are a super investor and have much better ideas on how to make money safely grow than professionally managed longterm turnkey SFRs specifically from REI Nation (I've tried another turnkey provider and REI is incomparably better), then I'm telling you you can run a fractional reserve investment business legally (I have a Reg D 506c). This effectively gives you the ability to borrow money at 8% with indefinite capitalization and buy assets with 100% finance and 100% ownership. This is not a fantasy, this is what I'm doing. A great question for you is then what would you do with a loan on such terms? How would *you* invest it? The question is not rhetorical, it's precisely the discussion I'm trying to stimulate.

I do *not* claim that turnkey is better than other things, just what I have found works for me while testing this business model. I'm very interested in hearing what works for you, and how you could take my starting point and make it better.

Best,
Austin.

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Austin Fowler
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Austin Fowler
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Replied Nov 28 2022, 21:26

Dear all,

Do people trust a redfin property value estimate as a reasonable ball park? If yes, then I'd be happy to post purchase prices and redfin value estimates of all 33 of my SFRs to address the persistent question of whether or not I bought these at the top of the market.

Best,

Austin.

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Nicholas L.
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Nicholas L.
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Replied Nov 29 2022, 04:41

@Austin Fowler

setting aside the overall business concept for a second, two comments on your SFR portfolio:

-assuming you've been buying over the last several years (what year did you start?), I suspect the portfolio is worth a lot more than you paid for it, and

-I still can't tell from the information you provided whether it cash flows or not.  one month's collections doesn't mean it does or doesn't.

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Jeremy H.
  • Rental Property Investor
  • Lafayette, LA
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Jeremy H.
  • Rental Property Investor
  • Lafayette, LA
Replied Nov 29 2022, 05:15
Quote from @Austin Fowler:
Hi Steve,
Thanks for the detailed post, I appreciate it. To start, with a $625k W-2 and just $1.2M in private capital, meaning $96k in interest, I have deep pockets to look after my investors, which is always  top priority. I think we'll have to agree to disagree on appreciation of these assets until I have appraisals back. In any case, this is a long term play and that's ok with me.

I have a net worth 2x total investor funds, so I have substantial and growing resources to cover investors. Indeed between vesting stock and cashflow and tax returns my liquid reserves go up an average of $35k a month.

I think you are looking at all of this the wrong way. Let's assume you are a super investor and have much better ideas on how to make money safely grow than professionally managed longterm turnkey SFRs specifically from REI Nation (I've tried another turnkey provider and REI is incomparably better), then I'm telling you you can run a fractional reserve investment business legally (I have a Reg D 506c). This effectively gives you the ability to borrow money at 8% with indefinite capitalization and buy assets with 100% finance and 100% ownership. This is not a fantasy, this is what I'm doing. A great question for you is then what would you do with a loan on such terms? How would *you* invest it? The question is not rhetorical, it's precisely the discussion I'm trying to stimulate.

I do *not* claim that turnkey is better than other things, just what I have found works for me while testing this business model. I'm very interested in hearing what works for you, and how you could take my starting point and make it better.

Best,
Austin.
1) Your house selling for the appraisal value is the absolute best case option, especially right now. My latest house appraised for almost 200k, I bought for 130k and put ~35k into in (and this is my personal house). Appraisals can be pretty meaningless - comps are pretty meaningless right now too since interest rates have increased dramatically in the last 6mo-1year. Just to make sure I'm understanding right - you believe that your particular houses have appreciated dramatically while the rest of the country (and definitely in markets you have bought in) is essentially depreciating? This is literally the reason the zillow ibuying program failed - buying at market prices. Think it can only happen to zillow?

2) Extrapolating your "bad" month over a year is inaccurate. What makes you think it's a bad month? You've been buying houses for 2 years. Looks like a fairly normal month to me. What until you have repairs, have to turn a unit over, have to replace a roof/countertops/plumbing leak/appliances etc, tenants will destroy things and you'll have to cover it. 

3) There is no equity buffer buying at market rate - there is no built in equity. You having a personal savings buffer is not the same thing as an equity buffer. Yea I too have lots of brokerage funds, cash funds, money outside of RE - I would not consider these personal funds an equity buffer. Buying under market value is the equity buffer. The business needs to be profitable without use or guarantee of my personal funds. Borrowing personal money to fund a bleeding business is literally the definition of having an unprofitable business. 

4) SFR CAN be a low risk asset when bought correctly. REI Nation is not in the business of making you money - they're in the business of making themselves money (just look at the estimates they use - it's your job to underwrite more realistically). They make money every step of the way - I'm sure you've heard the saying "You make money when you buy". I would ask how you would answer the question?

5) If I had an essentially unlimited 8% loan - there is a lot I would buy before I bought 100% financed, market priced SFRs. If you want the cashflow and tax deductions, why not buy a mobile home park? Apartment complex would be a lot more stable? At the minimum buy something under-market value - this is the key to being an investor - buying a good deal that you can add value to. Undervalued stocks - yes. Undervalued RE - yes. I would buy a business - health/life/group insurance (which is what I run in addition to my W2 and RE), a carwash business. If I was stuck on doing SFRs, I'd be making sure I bought properties I could add value too. With big funds, I'd buy bigger more stable places - not SFHs.

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Doug Spence
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Doug Spence
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Replied Nov 29 2022, 08:16

@Austin Fowler Have you considered using your capital to invest in larger JV deals? That's what we're looking to do next year. I like the JV model over the syndication model because you can structure them however you want and you can pull money back out via refinancing while keeping ownership (which you can't really do in most syndications), and you can benefit from economies of scale that you find in the commercial real estate space with experience operators.

Thanks for sharing your journey so far and good luck on your future endeavors!
 

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Steve K.#3 Multi-Family and Apartment Investing Contributor
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Steve K.#3 Multi-Family and Apartment Investing Contributor
  • Realtor
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Replied Nov 29 2022, 10:14
Quote from @Austin Fowler:

Dear all,

Do people trust a redfin property value estimate as a reasonable ball park? If yes, then I'd be happy to post purchase prices and redfin value estimates of all 33 of my SFRs to address the persistent question of whether or not I bought these at the top of the market.

Best,

Austin.


 No, Redfin (or any of the online estimating tools) are not known to be very accurate and can often be way off. I think Redfin claims 3% margin of error for on market properties and 9% for off market. I've seen quite a few in my market that are off by several hundred thousand. You need a good local Realtor to pull comps from within the past few months and adjust them accordingly. Comps (and also appraisals for that matter) have been really tricky this year because the market has been so dynamic and inconsistent. Certain properties are sitting on the market without getting any offers while others are still getting multiple offers well above-ask in the first weekend. So pricing right now absolutely requires in-depth local market knowledge on a not only a block by block but a house by house level. If you want an accurate idea of what your properties are worth in today's market, ask a local Realtor with recent sales in the immediate area for their opinion. There's no way a robot can do what a local Realtor can because the data by itself does not have enough information on what is a real comp and what isn't (mainly property condition/level of updating and finishes which can make a big difference but also hyper-location for example the algo might consider a comp right next door a perfect comp but if it's across the tracks in a different neighborhood or in a different school district that is less desirable, the estimate will be off while a human/Realtor would see that difference due to knowing the area and be able to adjust that accordingly).   

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Steve K.#3 Multi-Family and Apartment Investing Contributor
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Steve K.#3 Multi-Family and Apartment Investing Contributor
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Replied Nov 29 2022, 11:27
Quote from @Austin Fowler:
Quote from @Steve K.:

Hmmm... turnkey rental properties purchased at full retail value, with 100% leverage, at the peak of the market cycle, owned remotely, under management, with no value add or upside other than potential natural appreciation, with accelerated depreciation, very little budgeted to fix anything or in case anything goes wrong... expected to somehow spin off enough profit to provide a guranteed percentage return to investors whose money is held in "savings accounts" with no bank charter or FDIC insurance, and only backed (partially) by personal funds... What could possibly go wrong here? This sounds like the same deluded justification that the iBuyers have been using over the past few years: "Too bad we lost $100k on that one property, but don't worry stockholders, we'll make up for it with scale!"

1) Tax assessed value going up from last year has no direct bearing on current market value, especially because the market turned just a few months ago but also in normal times. It's not a data point people use. 

2) Cap rate is not used for single family rentals, only multifamily.

3) Depreciation needs to be recaptured when you sell.

4) 3.7% for maintenance and repairs is unrealistic

5) 4% vacancy loss is extremely wishful thinking

6) An average tenant stays 2.5-3 years, not 6 and turnovers can easily cost $5-10k (which would take you many years to recover from with your budget, even if everything else goes perfectly)

7) Always take the operating costs given to you by the seller/ turnkey provider and double them for a more accurate estimate

 I’m not seeing enough profit here to have it be a worthwhile use of time or worth the risk for even an individual investor, and definitely not enough to share with outside investors. Hopefully these properties have wonderful appreciation and nothing ever goes wrong with them! Even if your cashflow projections were realistic (aside from whoever sold you these properties, no one believes they are), I still don't see the point. I get the banking side and the investing side, it's not complicated but just doesn't add up due to there being no profit-driver. All this just for accelerated depreciation, very nominal equity gain through principle pay-down, very nominal if any positive cashflow, and maybe enough appreciation to make it all worth the effort in 20 years? By overcomplicating things and over-leveraging yourself in the way that you have, you've opened yourself up to more personal risk than the best-case returns could ever justify. You're doing all the work and taking all the risk while relying on getting really lucky for very little, if any, potential return (maybe appreciation will save you?). 

If you want to "be the bank", you'd get better returns with less work and less risk as a private lender. Why not just do that and use your own funds to invest since you already have the capital, and avoid having to deal with the hassle and risk of combining the two? There's got to be a lot of admin, paperwork, financial reporting, legal fees, customer service/sales/ account management/ explaining, software, client portal management/IT, new lead generation/marketing and other overhead involved in this business, and there's real risk of potential lawsuits, audits, criminal charges etc. If your projections turn out to be mere wishful thinking and not actual underwriting (which my experience tells me they are), you could actually even risk being sued or facing federal criminal charges because the rosy predictions you made to investors could end up being deemed as false and misleading statements. Obtaining money from investors by means of false or fraudulent pretenses, representations, or promises is called bank fraud. Your underwriting and financial statements could easily be seen as misleading, because you keep calling them very conservative when anyone with a basic understanding of what a realistic SFR operating budget looks like will agree that's not the case. These cashflow projections are simply unrealistic. Every property has vacancy, needs repairs and maintenance, and requires capital expenditures well beyond what you have budgeted for. You will end up needing to pay investors out from your personal funds to cover operating costs in the near future, unless your plan is to continue raising new capital to cover your losses, Ponzi style. I don't see the point unless this is some sort of fund-raising pump and dump scheme, but I can't see how a savvy accredited investor would participate in this anyway. Why wouldn't they just go directly to the turnkey provider, buy the asset and reap all the benefits themselves? What value do you bring to the deal? I understand how it's a tool for them like a high interest savings account, but why settle for 8% when they could just invest directly in turnkeys themselves?

 Literally one garbage disposal going bad, not even a water heater replacement/plumbing leak/fallen tree/ driveway replacement/ sewer line collapse/ anything happening that costs more than your tiny maintenance, repairs and cap ex budget, or a single bad tenant/ eviction/ mishap that creates a few months of vacancy loss causes this model to lose money…. even a minor market correction for that matter considering you have zero equity/ zero margin for error… you’re probably underwater on these properties now with what is happening in the market. It’s unlikely you’d be able to sell them for what you paid never mind factoring in transaction costs and depreciation recapture since you're accelerating depreciation... 

Don’t quit your day job as they say. Hold on to your high-paying W2 for dear life now because you will need it to fund this money-losing endeavor. You may hit these extremely optimistic numbers in the very best year, but over time there’s no chance you’ll have positive cashflow. Sorry but I just don’t see it happening. Anyway, this model doesn’t make sense to me. Maybe for an apartment syndication or $100M development, but buying one-off turnkey rentals is an asset class that is notoriously difficult to derive profit from and impossible to scale (scaling will just magnify your losses here anyway). This seems like a lot of work and a lot of risk for not enough benefit and a potential recipe for disaster IMHO. Good luck, I hope you take this feedback as tough love and not a personal attack, and that you do well for yourself and your investors.   

Hi Steve,

Thanks for the detailed post, I appreciate it. To start, with a $625k W-2 and just $1.2M in private capital, meaning $96k in interest, I have deep pockets to look after my investors, which is always  top priority. I think we'll have to agree to disagree on appreciation of these assets until I have appraisals back. In any case, this is a long term play and that's ok with me.

I have a net worth 2x total investor funds, so I have substantial and growing resources to cover investors. Indeed between vesting stock and cashflow and tax returns my liquid reserves go up an average of $35k a month.

I think you are looking at all of this the wrong way. Let's assume you are a super investor and have much better ideas on how to make money safely grow than professionally managed longterm turnkey SFRs specifically from REI Nation (I've tried another turnkey provider and REI is incomparably better), then I'm telling you you can run a fractional reserve investment business legally (I have a Reg D 506c). This effectively gives you the ability to borrow money at 8% with indefinite capitalization and buy assets with 100% finance and 100% ownership. This is not a fantasy, this is what I'm doing. A great question for you is then what would you do with a loan on such terms? How would *you* invest it? The question is not rhetorical, it's precisely the discussion I'm trying to stimulate.

I do *not* claim that turnkey is better than other things, just what I have found works for me while testing this business model. I'm very interested in hearing what works for you, and how you could take my starting point and make it better.

Best,
Austin.

 I appreciate your reply and your ability to accept constructive criticism/"tough love". To address your question above, I would invest in what has worked for me in my market (value-add multifamily), but that will not be the same for everyone in every market. I always recommend that investors leverage their own personal strengths or whatever gives them an unfair advantage over the competition. The ability to do that is what sets real estate above other investment vehicles IMO. I have had success in finding off-market small multifamily buildings that are in distressed condition, buying them at a discount and forcing appreciation quickly by fixing them up and raising rents which works well because multifamily property value is based on cap rate more-so than comps, whereas single family is always based on comps not cap rate so it's harder to force appreciation. If an investor is good at sourcing off-market deals, then that is their advantage which they should leverage. Another may be good at rehabbing efficiently and so flipping becomes their forte. Another may excel at something else and they will do best focusing on that. Almost all successful investors that I know have an unfair advantage. Most also stay local to one area or just a few areas that they have intimate market knowledge of, literally house by house and they have many personal connections in the market (PM's, trades, agents, title companies, lenders, birddogs/wholesalers, etc.). Without that, the risk increases substantially. 

For your business model, it seems that you're good at raising capital, deal structuring, and you have a neat banking-style approach to acquiring assets. I think buying larger assets with more cash flow may be a better fit for you than turnkey SFRs. I'd reach out to some commercial brokers in favorable locations (strong fundamentals, recession-proof markets considering where we are in the market cycle and the economic forecast calling for recession) and see about getting into the multifamily space. I have no problem with turnkey for certain investors, but it doesn't seem to fit your model IMO. I'd be concerned primarily about the lack of positive cashflow given your projections. From what I know about REI Nation is that they are very well-regarded and considered the leaders in the space. However the way that they project cashflow has been discussed and debated at length in these forums and what you should know is the 4% number comes from the assumption that owners only hold these assets for a few years and don't do anything major to them (the owner has discussed his justification for the lower-than normal operating cost projections on here, not to put words in his mouth but my understanding from reading his comments is that because they rehab the properties well before sale, and because most of their clients only hold a few years, the assumption is they won't have the normal expenses involved with maintaining properties over time). That's fine and I get it, but what this essentially means is that the projections only work under the assumption that investors will only hold for a limited time, won't ever need to do anything major to the properties, and will basically kick the can down the road for the next owner in regards to repairs, maintenance, and capex. My issue with that is in my experience capex issues don't follow a schedule. They come up for me randomly and often at the most inconvenient times. Also if you plan to hold more than the average REI Nation client, then you need to adjust the operating expenses to a normal estimate. I don't like using percentages personally, because they're derived from a somewhat arbitrary number. I like to total up everything I think the property will need during my hold period and divide that by the number of months in my intended hold period to get a more accurate operating budget, in order to have adequate reserves and predict overall cash flow beyond a single perfect month or year. For example if the roof is 15 years old, has a life expectancy of 20 years, and my intended hold period is 20 years, I can extrapolate from that how to budget for the new roof. I do this with all the major expenses: mechanicals, appliances, roof, finishes, driveway, sewer line, landscaping, etc. This is a much more accurate way to come up with a budget but obviously more time consuming and requires real expertise and construction experience/ knowing what all these things cost. I pad these numbers out for unknown expenses of which there are always, always a few. I would consider this actual conservative underwriting and using a percentage-based approach as more of a "back of the napkin" type starting point to see if it's worth doing a deeper dive, and nothing more. Creating an actual budget for an individual property almost always comes out to a lot more than what one might expect (which is why so many investors in low-rent SFR's fail), so I only invest in properties with high rent and minimum $300 monthly positive cash flow that can cover all the expensive things that properties need over time. So I'd recommend using more accurate budgeting as if you're planning to hold the properties long enough to incur some of the actual expenses related to operating a rental over time. Of course in order for turnkey investments to be attractive for investor clients, running the numbers in a way that shows them cash flowing positively is a must and so we end up with a woefully inadequate repair budget that only works when the investor will not own the property long enough to have any repairs. Also a large portfolio of SFRs is less liquid than a few larger assets. Your worst case scenario is a run on the bank coming at the same time as several big-ticket capital expenses, tenant issues or a market downturn/transition to a buyers market, preventing you from being able to sell quickly if needed and cash out investors as necessary. Owning fewer, larger assets would give you economy of scale which creates more cashflow, less legwork on acquisition and management, more liquidity, etc.

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Austin Fowler
  • Rental Property Investor
  • Reseda, CA
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Austin Fowler
  • Rental Property Investor
  • Reseda, CA
Replied Nov 29 2022, 12:27
Quote from @Nicholas L.:

@Austin Fowler

setting aside the overall business concept for a second, two comments on your SFR portfolio:

-assuming you've been buying over the last several years (what year did you start?), I suspect the portfolio is worth a lot more than you paid for it, and

-I still can't tell from the information you provided whether it cash flows or not.  one month's collections doesn't mean it does or doesn't.


Thanks Nicholas, yes, my impression is also that these SFRs are worth a lot more, not a lot less as some people seem to be insisting. As mentioned, I'm in the process of getting a formal appraisal done on one of them since data is always better than opinion. These SFRs were bought in 18 months from late 2020 to early 2022. These are not the first properties I have ever owned. Bought my first in Canada in 2006. Have done land development in Australia, experimented with the same in Los Angeles. The SFR portfolio is just the evolution of my investing to something more hands-off.

In 2021, as reported on my tax return, the net cash flow after all expenses, and I mean everything, repairs, mortgages, management, taxes, insurance, everything, was $69,979.86. I am on track to double that this year. Again, I stress that is after all expenses, and yes I have had to replace a roof, replace a furnace, multiple AC units, and I've had plenty of tenant turnover and repairs, and many more adventures along the way. The implication that these properties don't cash flow is just plain false, it's a great portfolio in my mind. The rock solid performers have been the REI Nation properties. Nowhere near the vacancy and maintenance cost of the others, and that is where I intend to expand. It is simply not true that you can't have a great experience and profit in turnkey, you just need to choose your turnkey provider with care.

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Austin Fowler
  • Rental Property Investor
  • Reseda, CA
61
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129
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Austin Fowler
  • Rental Property Investor
  • Reseda, CA
Replied Nov 29 2022, 12:43
Quote from @Jeremy H.:
Quote from @Austin Fowler:
Hi Steve,
Thanks for the detailed post, I appreciate it. To start, with a $625k W-2 and just $1.2M in private capital, meaning $96k in interest, I have deep pockets to look after my investors, which is always  top priority. I think we'll have to agree to disagree on appreciation of these assets until I have appraisals back. In any case, this is a long term play and that's ok with me.

I have a net worth 2x total investor funds, so I have substantial and growing resources to cover investors. Indeed between vesting stock and cashflow and tax returns my liquid reserves go up an average of $35k a month.

I think you are looking at all of this the wrong way. Let's assume you are a super investor and have much better ideas on how to make money safely grow than professionally managed longterm turnkey SFRs specifically from REI Nation (I've tried another turnkey provider and REI is incomparably better), then I'm telling you you can run a fractional reserve investment business legally (I have a Reg D 506c). This effectively gives you the ability to borrow money at 8% with indefinite capitalization and buy assets with 100% finance and 100% ownership. This is not a fantasy, this is what I'm doing. A great question for you is then what would you do with a loan on such terms? How would *you* invest it? The question is not rhetorical, it's precisely the discussion I'm trying to stimulate.

I do *not* claim that turnkey is better than other things, just what I have found works for me while testing this business model. I'm very interested in hearing what works for you, and how you could take my starting point and make it better.

Best,
Austin.
1) Your house selling for the appraisal value is the absolute best case option, especially right now. My latest house appraised for almost 200k, I bought for 130k and put ~35k into in (and this is my personal house). Appraisals can be pretty meaningless - comps are pretty meaningless right now too since interest rates have increased dramatically in the last 6mo-1year. Just to make sure I'm understanding right - you believe that your particular houses have appreciated dramatically while the rest of the country (and definitely in markets you have bought in) is essentially depreciating? This is literally the reason the zillow ibuying program failed - buying at market prices. Think it can only happen to zillow?

2) Extrapolating your "bad" month over a year is inaccurate. What makes you think it's a bad month? You've been buying houses for 2 years. Looks like a fairly normal month to me. What until you have repairs, have to turn a unit over, have to replace a roof/countertops/plumbing leak/appliances etc, tenants will destroy things and you'll have to cover it. 

3) There is no equity buffer buying at market rate - there is no built in equity. You having a personal savings buffer is not the same thing as an equity buffer. Yea I too have lots of brokerage funds, cash funds, money outside of RE - I would not consider these personal funds an equity buffer. Buying under market value is the equity buffer. The business needs to be profitable without use or guarantee of my personal funds. Borrowing personal money to fund a bleeding business is literally the definition of having an unprofitable business. 

4) SFR CAN be a low risk asset when bought correctly. REI Nation is not in the business of making you money - they're in the business of making themselves money (just look at the estimates they use - it's your job to underwrite more realistically). They make money every step of the way - I'm sure you've heard the saying "You make money when you buy". I would ask how you would answer the question?

5) If I had an essentially unlimited 8% loan - there is a lot I would buy before I bought 100% financed, market priced SFRs. If you want the cashflow and tax deductions, why not buy a mobile home park? Apartment complex would be a lot more stable? At the minimum buy something under-market value - this is the key to being an investor - buying a good deal that you can add value to. Undervalued stocks - yes. Undervalued RE - yes. I would buy a business - health/life/group insurance (which is what I run in addition to my W2 and RE), a carwash business. If I was stuck on doing SFRs, I'd be making sure I bought properties I could add value too. With big funds, I'd buy bigger more stable places - not SFHs.


 1) Agree to disagree. I have property in AL, AR, IL, MO, MS, OK, TN, TX. Solid, cashflowing property. 2021 net cashflow ~$70k, on track to double that in 2022. I do not agree that the value of solid cash flowing property has gone down significantly. Even if it had, I can afford to hold onto all of these properties indefinitely.

2) See above, I hope that is sufficient to clarify that this is a cash flowing portfolio.

3) I buy for cash flow and long-term appreciation, I disagree that it is essential to buy under market. It is of course desirable, and I applaud you if you can do this, but I am primarily a hands-off investor, so I buy the best product I can with the time I have. I am a research scientist, first and foremost. That's where my time goes. If I'm going to be involved in real estate, it has to be hands-off. I am happy with the numbers my portfolio generate.

4) Yes, of course REI Nation is a business that is designed to make a profit, but it does not follow from that statement that they do not provide a product will help you make profit as well. On the contrary, with 7500 properties under management and 3000 investors, it is illogical to conclude that all of these people have had bad experiences. I am a repeat buyer, I bought one initially just to see how it went, then another 4, and then I steadily added more until I now have 15 with them. I wouldn't have done so if I wasn't getting good performance from each purchase.

5) If you are serious, message me and let me help you raise such finance. An 8% savings coupled with real estate education is something everyone in the country needs. Plus the ability to graduate through real estate education to running your own accounts for others. I believe in this product, whether you are 3 years old or 93 years old, have a small business or a very large business, you could benefit from such a savings account and real estate education. If you think you can help bring this to more people, message me.

User Stats

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Austin Fowler
  • Rental Property Investor
  • Reseda, CA
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129
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Austin Fowler
  • Rental Property Investor
  • Reseda, CA
Replied Nov 29 2022, 12:46
Quote from @Doug Spence:

@Austin Fowler Have you considered using your capital to invest in larger JV deals? That's what we're looking to do next year. I like the JV model over the syndication model because you can structure them however you want and you can pull money back out via refinancing while keeping ownership (which you can't really do in most syndications), and you can benefit from economies of scale that you find in the commercial real estate space with experience operators.

Thanks for sharing your journey so far and good luck on your future endeavors!
 


 Message me, and let's talk hard numbers.

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Austin Fowler
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Austin Fowler
  • Rental Property Investor
  • Reseda, CA
Replied Nov 29 2022, 12:54
Quote from @Steve K.:
Quote from @Austin Fowler:

Dear all,

Do people trust a redfin property value estimate as a reasonable ball park? If yes, then I'd be happy to post purchase prices and redfin value estimates of all 33 of my SFRs to address the persistent question of whether or not I bought these at the top of the market.

Best,

Austin.


 No, Redfin (or any of the online estimating tools) are not known to be very accurate and can often be way off. I think Redfin claims 3% margin of error for on market properties and 9% for off market. I've seen quite a few in my market that are off by several hundred thousand. You need a good local Realtor to pull comps from within the past few months and adjust them accordingly. Comps (and also appraisals for that matter) have been really tricky this year because the market has been so dynamic and inconsistent. Certain properties are sitting on the market without getting any offers while others are still getting multiple offers well above-ask in the first weekend. So pricing right now absolutely requires in-depth local market knowledge on a not only a block by block but a house by house level. If you want an accurate idea of what your properties are worth in today's market, ask a local Realtor with recent sales in the immediate area for their opinion. There's no way a robot can do what a local Realtor can because the data by itself does not have enough information on what is a real comp and what isn't (mainly property condition/level of updating and finishes which can make a big difference but also hyper-location for example the algo might consider a comp right next door a perfect comp but if it's across the tracks in a different neighborhood or in a different school district that is less desirable, the estimate will be off while a human/Realtor would see that difference due to knowing the area and be able to adjust that accordingly).   


 Understood, asking multiple realtors across 8 states to give me their opinion of the current value of my properties would in my mind be a little disrespectful of their time, but thanks for your post. My business model works even if I have no appreciation over a 20 year timeframe. Is there anyone on this thread that thinks this is likely? I have enough cash flow to hold on indefinitely, I would like to think that I will get an average of at least 2% appreciation over the long haul, and that is good enough for me to be happy. Again, is there anyone on this thread that thinks this is unlikely over a 20 to 30 year timeframe?

My focus is safety and scale. If you have ideas on assets that are readily available and hands-off that are safe and scalable, let me know. REI Nation is my go to for such assets, but if you truly think that there is a clear and repeatable supply of safer hands-off assets, message me. Let's compare numbers.