Leverage vs. Cash buy? Novice Investor

22 Replies

My primary goal is to acquire more properties quickly from either refinance or heloc from existing properties. I have roughly 50K right now to invest and I am looking into 2 different turnkey providers, Morris Invest and PARC. I can purchase potentially 2 houses with PARC while putting down 20-25%, but will only be able to purchase 1 with Morris invest. The ROI is going to be very close either direction. Any recommendations for a newby or things I should consider? In terms of housing quality, PARC seems to have higher end properties (B class), and Morris Invest is primarily (C class).

@Justin: what market or cities are you considering?

I have no experience with those turnkey providers, but suggest you use your money and knowledge to invest locally if at all possible.  Create a solid network and leverage based on your comfort level.  The more properties, equity, and rents that you can collect; the easier it should be if you have a hiccup in your operations.  When you invest in turnkey providers, I would imagine that they are inflating the numbers on the purchase price, repairs, or management fees. 

I suggest @Justin C Huggins that you leverage your money. Go through the process of meeting with lenders you'll learn a lot...and you can do more. You'll get recommendations for insurance companies, agents, etc. 

And you can diversify...do not tie all of your money up in one deal. 

Onwards!

sjw

Originally posted by @Justin C Huggins :

My primary goal is to acquire more properties quickly from either refinance or heloc from existing properties. I have roughly 50K right now to invest and I am looking into 2 different turnkey providers, Morris Invest and PARC. I can purchase potentially 2 houses with PARC while putting down 20-25%, but will only be able to purchase 1 with Morris invest. The ROI is going to be very close either direction. Any recommendations for a newby or things I should consider? In terms of housing quality, PARC seems to have higher end properties (B class), and Morris Invest is primarily (C class).

Here is some food for thought...As a rule of thumb the further from your home you get the more risky & expensive everything is. Repairs, Tenant Placement, Legal etc.... Why because you are paying someone else to do it for you & your not as familiar with the neighborhoods.

Since you are in a market that I assume to be similarly priced to a typical "turnkey" market you may want to look into buying local & having a PM handle everything. That way you have some more knowledge & control. Also I heard Arkansas is one of the most Landlord friendly states in the entire U.S.

James Wise, Real Estate Agent in OH (#2015001161)
216-661-6633

Thanks Shawn, good suggestion.

James, very good advise. I am having trouble finding any properties that meet the ROI, that I am finding with the turn key. I would prefer to buy locally if the ROI makes sense.

Maybe I am looking in all the wrong places locally.  

Hey @Justin C Huggins - I looked up where Clinton, AR, is. You're not far from LR. Little Rock offers a ton of opportunities for class B/C investments. With the amount you mentioned to invest, you could easily get 2 class B or at least 3 class C homes (probably more, depending on how much you want to keep in reserves). It is also pretty landlord friendly here. You could come to the local REA or just contact people on here...there are several of us active in LR on the regional message board on this site, just c'mon over and introduce yourself. Lots of people invest in Conway, Cabot, Jacksonville, etc., also, if Little Rock isn't your cup of tea. The ROI in LR is pretty good though :)

If your goal is to acquire properties quickly as you mentioned then I would not suggest buying any turnkey properties. You will overpay and have your money tied up in the deals with no equity to pull from to keep buying more.

@Rachel Fazio I would be interested in going to the local REA. Where and when is it held? I will definitely look into the regional message boards as well. I have been somewhat hesitant about investing in LR due to crime, but would not be opposed to some of the lower crime areas of the city. I am just not very familiar with the city, so I have avoided it up to this point. Thanks for the information, I would prefer to invest somewhat local if the ROI makes sense.

@Brian Garrett That was actually one thing I was concerned about.  I guess I just assumed everyone had to deal with roadblocks such as that.  Sounds like I have some more learning to do.  I do currently own one turn key property that I paid all cash for.  I am planning to do a cash out refi next year on it at well to free up a little capital to reinvest.  It does tie up quite a bit of cash going the turn key route.

@Justin C Huggins most certainly you should look into LR. My biz partner owns 31 in LR and has been buying since 1997.  LR is only an hour away and like @Rachel Fazio says, you are only 1 hour away.  There are opportunities in Conway too. That is on our radar for 2018. The population in Conway keeps growing and their are opportunities around Hendrix College. As for the overpaying comment, that is subject to debate. A good TK provider will you will get more cash flow through less maintenance because the home is updated and rehabbed right.  Really, going TK, you should be buying the best house in the neighborhood, which would help with vacancy.  The equity comment is true though as it is almost impossible these days to offer equity while at the same time offering a home in retail condition with new roof, HVAC, hot water tank, etc. Equity is great if you can cash flow without getting killed by frequent maintenance, looming capital expenses and longer periods of vacancy because there are better more up to date homes for tenants to choose from. 

@Justin C Huggins 50k can go long way in Arkansas. i can suggest that you choose the location well and don't buy in towns with small populations. Stick to most good towns in Pulaski county and Conway Arkansas. 

My main favourite areas in central Arkansas are Little Rock, parts of North LR, Sherwood, Jacksonville and Conway is defiantly on my Radar. 

Some people talk highly about North West AR but for me it is to far put and i don't have network there. 

If you are looking at Turn Key and @Alex Craig is defiantly your man. their property manager is solid and this is a key factor. Turn Key is good option if you are looking for someone to hand you rent ready asset thats its ready to go with lower maintenance and no or low Capex expenses for the first few years. but remember refinancing equity out may not be possible for a while.

Im going to be visiting LR and Conway Mid February 2018 and already have some relationships with some brokers and referrals for property managers. 

Alex, As far as i now Jamie is not managing out of Pulaski.... so im working finding one in Conway. 

Conway is in Faulkner County, not Conway County. It's confusing. 

Do a search for Morris Invest here on BP, and you will find extensive threads about investor experience with them, and input.  In addition they are not really the sellers, but marketers for Ocean Pointe.

Larry Fried, Real Estate Agent in OR (#201211636)

@Larry Fried I did some searching and so far found some good information.  Not sure I am thrilled with what others have encountered.  

@Alex Craig I have a pretty tight schedule, so this is what originally attracted me to turn key.  It is more of the investment vs. side job.  Plus, I would imagine turn key providers are able to get better pricing vs. someone who does occasional rehab.  The equity is a bit of a hangup, but I would hope if these are done in the right area I could see some appreciation over the years.  Especially on B class properties.  

@Justin C Huggins the rehab is critical and you nailed it that high volume TK providers, especially those with in house property management can leverage their volume of biz and paying weekly instead of needing 30 day terms is a huge advantage. Appreciation in most Midwest cities is a bonus. The cities with the most appreciation in most cases have less cash flow then linear markets. With appreciation also comes higher property taxes. I had an client in our office last week who invests in Dallas complain his property taxes go up every year. I do not have first hand knowledge of this, but just going off what people tell me. So my apologies if that is not 100% accurate in relation to Dallas. 

@Justin C Huggins Unless a client is particularly debt-averse, I always recommend leverage. You pay 20-25% and let your tenants buy you 75-80% of a house? That's a no-brainer for me. I also strongly advise against using companies that require a cash investment - if you want to pay all cash, ok, but you should always have the option of using financing if that is the strategy that best suits your goals. I would definitely second @Larry Fried 's advice to read the thread on Morris if you haven't already. 

Regardless of provider, an all-cash investment in low-tier out of state rentals is a very risky move. If you're looking for a stable investment (and that's usually why people choose turnkey in the first place), you want a rental that will attract tenants with stable employment - sadly, many tenants in C and D housing are one sick day away from unemployment and missed rent, which makes those property classes inherently risky investments. When we first started Spartan, we dabbled in C props but quickly devoted ourselves entirely to B/B+ because the hassle was simply not worth it. The cash flow in real life is almost never the same as how it looks on paper - between high tenant turnover, section 8 red tape, and higher maintenance costs, it's just not worth it. People do succeed with C/D rentals, of course, but they are almost always DIY investors who self-manage properties in the market where they live, and have plenty of REI experience already under their belts.

I am not familiar with the other provider you mentioned, but if its between two leveraged B properties from them and one all cash C property from Morris, I would choose the former without hesitation (assuming they are a reputable provider and you've done all your due diligence).

If you're going turnkey, and out of state especially, the market isn't the linchpin, the provider is. If you've chosen these two just because you like the Indy market, I'd recommend expanding your search to other markets and focusing on reputation and customer service/PM quality. There are several high quality providers in various markets, so focus on finding the people you trust to stand by you for 10+ years and work from there.

Best of luck!

Clayton

Clayton Mobley, Property Manager
(205) 202-4118
Originally posted by :

I did some searching and so far found some good information.  Not sure I am thrilled with what others have encountered.  

Just as well, I believe they are one to avoid. As others have said, if you can you are better off at least starting your REI closer to home if it makes sense. I think there are plenty of opportunities in your state.

Larry Fried, Real Estate Agent in OR (#201211636)

@Justin C Huggins All things being equal regarding the return on investment, I would ask myself the following questions.

Which investment offers the larger cash flows?

Which investment has the opportunity for larger sales proceeds?

How long do you plan on holding the investment?  When can you expect to get your equity back?

For those of you interested in investing in Arkansas, be sure to watch the tax deed sales. The commissioner's auctions start on April 3, 2018. You can pick up some jewels, there - but as always, be sure to do your homework.

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