All Forum Posts by: Clayton Mobley

@Shakeb Syed yes, if you just inherited it in 2018 and your market hasn't jumped since then, you likely have no real tax burden to speak of. A 1031 would be a good option if there were taxes to avoid/defer, but if not it seems like selling would be the obvious answer. You'd walk away with $35k-ish in cash after paying off the note, and you could leverage that into a better cash flow property that didn't have such large expenses coming down the pike. 

One last little note I always give any new investor: never spend your last penny. If $200k is the amount of cash you have to invest, try to hold back $10k or so in reserves. It will be worth ten times over in peace of mind. If you start building a portfolio, my rule is usually $5-7k for the first prop plus $2-4k for each additional. Even though you will include maintenance and vacancy in your calcs and withhold a bit from your rents to cover those expenses, it is definitely worth it to have a little cushion in case something big comes up. It usually won't, esp if you buy truly turnkey, but if and when it does, that little cash reserve will be your saving grace.

@Albert Vega if you don't need the income now, as you stated, and you are financially able to take on the inherent risk of financing, my advice is basically always to leverage your capital. 

Buying in cash is a better move for folks who are highly risk averse and want to maximize monthly income above all else. For folks who don't need the income, the best move is typically to leverage the purchase and let tenants pay for 75-80% of your property over time. Since you don't need the income, put all your cash flow toward paying down your loan faster. The more doors you have, the faster this snowball builds.

If it were me, personally, (and assuming you financially in a position to take on risk etc) I would take that $200k and use it as down payments on five props or so. You make your minimum payments every month as usual on props 1-4, but you take allll the net cash flow from all five props and put it towards the loan on #5. Using a ballpark figure for mid-range B-class turnkey props in Birmingham (let's say $270/month in net cash flow), that's an additional $1000+ toward your loan every month! I won't go into the nitty gritty math here, but suffice to say that loan gets paid off far sooner than 30 years. Then #5 is free and clear and your cash flow goes up, you put allll your cash flow toward #4, while maintaining your normal payments on 1-3. #4 gets paid off even faster since the cash flow from #5 is so much higher. You get the picture.

This is a strategy many of our clients use to great success. Of course, the more doors you have, the quicker each loan gets paid off, but even with just a handful, it can be really powerful. You can end up with a portfolio of free and clear tenant-paid properties in 10-15 years or so, instead of paying off one in 30 yrs. Then you can pull out equity, sell and execute a 1031, or just hold them for the rental income. 

Of course, this is predicated on your market and your research. If the properties aren't really turnkey (ie they look good but will need a new HVAC in five years) then the numbers get messier. Same is true if you struggle to keep long-term tenants (TX isn't my market, I'm sure someone else will pipe in with opinions on that). But, assuming you do your due diligence and run your numbers correctly before buying, you could potentially turn your $200k into $1M+ in equity (again, using Birmingham figures here) fairly quickly by plowing your income right back into the properties. 

So the long and short of it is: I would buy more than 2 properties with $200k, provided I could find solid rentals with a strong tenant base that are recently updated (big-ticket items like roof, flooring, HVAC, water heater, etc). In Birmingham, props like that go for $80-130k, with an average of about $100k, so $200k could buy you a decent sized portfolio of B-class rentals. Your market may have different values, so the numbers won't be exactly the same, but the process works regardless.

You've got a lot of opportunity here, good luck!!

Clayton

@Adam Sandow I agree with @Russell Brazil and @Lesley Resnick  , you have a few expenses listed here that are quite high. So yes, if you are only looking at properties and service providers for which your figures are true, you cannot make it work.

That being said, you can invest in plenty of markets in the south and midwest with numbers that work.

• As Lesley said, avoid HOAs. It's a waste of money and they often have lots of little rules that can make tenanting a pain and also cause difficulty if you ever want to pull out equity.
• Also, your PM fee should be 8-10%, I don't know any solid PMs that charge 12%, that's nuts.
• Your maintenance should definitely NOT be 15%. This rate would only come about if the prop you purchase doesn't have new or newer capex items (old leaky roof, old carpet, boiler than needs repairs etc; look for a different deal), if the PM defers maintenance (fire them), or if the PM (is incentivized by fees to handle a lot of maintenance call outs (fire them again).
• Your PM should charge you two fees: a % of your gross rents (8-10%), and a leasing fee (usually one month's rent or a smaller amount for resigning the same tenant, which also takes work because tenants, like everyone else, are looking for the best deal).
• Late fees should be split between you and the PM - half for you for waiting, half for them to pay for the time it took them to chase up that payment. Believe me, PM work is a business with very narrow profit margins.

Basically, it looks to me as if this isn't an out of state issue, it's a 'this combination of property and service providers' issue. It's absolutely possible to get $200+ in net positive cash flow per month on a property you only have 20% in, let your tenants pay down your loan for you. That's fully rehabbed turnkey, you shouldn't be seeing any big repairs or replacements for 10+ years, and your maintenance costs should be 5% or less (though most folks use a slightly more conservative estimate, 15% is overkill).

I'm not personally familiar with FL markets, but I'm given to understand they are pretty popular, so that means someone is making it work, somewhere. First step is probably to ditch the HOA (this may require looking in another market), and then do some work on vetting PMs and providers if the numbers you're using came from someone 'in the know'. If you got 12% from an actual PM, maybe start looking at their competition. If everyone in Jacksonville charges 12%, maybe start looking at other markets where expenses are lower. If you're already going out of state, the whole country is your oyster.

If the numbers you present are just you trying to be conservative, you can back up a bit on some of them and still be wellll within the range of conservatively realistic. As @Larry Fried said, the scenario you lay out is assuming you make some bad decisions AND have some bad luck right off the bat. You can do better.

Good luck!

@Jess White How long have you had this property? I understand it's still under constructions but just wondering. There is no hard and fast rule for how long you need to hold the property for it to be eligible for a 1031 exchange, though most pros agree 12-18 months feels safe. The primary issue is your intent to hold it as a long-term investment. A 1031 can't be used for flips, for example, as those are considered business inventory for tax purposes.

In your case, it sounds like your intent is easily proven. Aside from your post here, I'm guessing you have communication documented elsewhere where you talk about holding it as a rental. If your intent to hold it for a long period as a rental is obviously and clearly documented, you could get away with a 1031.

 Again, there's no specific rule, it's all about intent. This is specifically because of situations like yours where an 'unsolicited offer' arises on a property intended to be a long-term investment, or when folks need to leave the market they're in, have financial emergencies, what have you. The IRS allows for certain unforeseen circumstances like this that result in a long-term investment being sold on more of a 'flip timeline'. That being said, if you keep having 'unforeseen circumstances' on property after property in order to execute 1031s on short-term investment props, the IRS will get wise pretty quick. But a one-off like this with obvious documentation should be ok. You'd need to speak with a Qualified Intermediary to execute a 1031, and they will make sure everything is as it should be.

If you were to execute a1031,  you would defer taxes on the gain and roll everything (total value AND total equity) into new a prop(s). If and when you sell those props down the road, the tax man comes a'callin for all that deferred gain from this prop, plus whatever you owe on the replacement props (unless you execute another 1031...).

Of course, if you think interest in the prop will remain strong, there's no reason not to follow through with holding it as a rental for a year. If it's a good money maker, keep it. If you want to cash in, the 1031 process will be even easier.

Good luck!

@Jess A. I agree with @Jonathan Taylor Smith that this depends on your goals. I also would need a lot more data about the current prop as a rental to know how to advise. $1500 is the anticiapte rent rate, where is that info from? What expenses are you including, will you self-manage, what are the taxes and insurance, do you have a mortgage on the prop, if so how much, what are your payments, how recently were the big-ticket items updated (roof, flooring, HVAC, water heater)? Those kinds of details really make or break an investment.

My other question would be: was this your primary until recently or has it always been held as a rental? If it was your primary for at least 2 of the last 5 years, you can qualify for the Sec 121 exemption for the capital gain ($250k for single, $500k for married filing jointly). If the numbers don't work out as a rental, this is your best bet for selling. You can then take that tax-free cash and use it as several downpayments on solid cash flow props. 

If it's been a rental, you might qualify for a 1031. The first step is determining if it's a viable rental property. Then you look at selling strategy if the answer is no.

Again, it depends on your goals. Are you doing a BRRRR thing, trying to buy distressed and force equity, wanting to invest in your own market? Or is your goal simply cash flow with as little time and effort as possible?

Post some additional details about your goals and current prop data and the BP community will be better able to advise. Feel free to tag me.

I would also quickly note that I would advise that you steer clear of condos, regardless of the market. HOA fees are a waste of returns, and they often have pretty strict rules for all kinds of things. You may find that their tenanting requirements hinder your leasing efforts. Sometimes they have weird rules about financing (refis and HELOCs) as well, so I'd say stick to SFR or whole MFR (duplex, triplex, etc).

@Sherrie Bower I have to wholeheartedly agree with @Aaron H. , you could be doing much better than 6% with $300k. If you have that much cash on hand, you could easily have a solid portfolio of cash flow properties if you're ok with taking out loans your tenants will pay down. Yes, leveraged purchases are inherently riskier than cash, but depending on how close you are to retirement and what other investments you have in your portfolio, you might consider it, since it means having tenants pay for 75-80% of your properties. If you don't need the cash right now, you'd be amazed at how quickly you can pay off those loans (happy to break down the snowball math if you're interested).

$300k is a tidy sum that could easily cover 10+ down payments on solid B/B+ cashflow turnkey (meaning you don't manage, handle rehab etc) here in Birmingham and some other southern and midwestern markets (obviously I'm biased ;)  Even if you are determined to pay cash to minimize risk, you could have 3-4 free and clear props that do nothing but cash flow $600-850 per month (general range for props between $80k - $120k). 

Unless your goal is to force equity/maximize returns by buying distressed and doing the rehab and management yourself, you may as well invest in a market (or markets) where your capital can go further. Just because a property is next door doesn't mean it's a good investment. It takes lots of homework and due diligence, but plenty of folks invest out of state with great success, so unless you're married to your home market for some reason other than returns, I'd start toying with the idea of looking further afield.

Best of luck!

@Greg Clatterbuck glad to help! Sounds like you've found yourself in a great position, happy to hear you're taking advantage of it!

@Greg Clatterbuck Personally, while your rent to value was great based on purchase price, you're now at a value where that capital could be doing more, even at $1500 after that rehab. The fact that you don't have to hunt for a buyer is HUGE. The fact that you already have a replacement prop you'd want that would cover the value and equity rules for the 1031 is even better. The fact that you're coming up on some decent-sized repairs is allll the more reason to move along and let someone else deal with that.

@Bill B. already ran through the tax numbers on a straight sale, and honestly I don't see why you'd go that route when you have a 1031 basically fall into your lap. Since the property you are looking at is $450k (and yes, you can replace debt from the old prop with out of pocket cash, you must have AT LEAST AS MUCH equity in the replacement prop, but you definitely can have more), and it sounds like you have the cash to cover that purchase without a 1031, my advice would be to:

1. Act fast to get a Qualified Intermediary working with you, because you need one in place before anything closes. If you're already moving on the replacement prop, you may need to ask to slow that process down while you execute a quick sale to your tenant, or you'll need to talk to your QI about a reverse 1031. 
2. Sell the current prop to your tenant (I assume they are not a related party, or that makes things a little complicated 1031-wise).
3. Execute the 1031, either taking out a loan for the new prop to replace the $100k debt on the current prop or replacing it with cash. For the $450 prop that would mean:
   1. $100k cash from the current prop + $100k new loan (replacing debt) + plus $250K out of pocket                   OR
   2. Pay off the $100k loan,  use $100k cash from current prop + $350k out of pocket.
4. Use your remaining cash (my math says $100-200k) as down payments on other cash flow properties (if your goals is to grow your portfolio quickly and let tenants pay off your loans, my strategy), or hang onto it until you have enough to buy another in cash (if you're more focused on maximizing per-unit income and minimizing risk, and don't' mind having capital tied up).

If you keep using the 1031 process literally until you die (and remember you can leapfrog from one to several, from small to bigger, SFR to MFR etc), then you completely avoid all taxation and pass your properties on to your heirs with a stepped-up tax basis equal to their fair market value at the time of your death. Basically, if they sold them the day after you died they would pay $0 in taxes. Hold the props and they're only responsible for whatever appreciation/depreciation occurs after they took ownership.

You're in a pretty good position, one a lot of folks would definitely envy! I'd say take the opportunity presented to you, but makes sure you get a good QI before you pull any triggers.

Good luck!