All Forum Posts by: Clayton Mobley

@Account Closed If you are looking to invest in physical real estate (direct ownership) then yes, turnkey could be a good solution (of course, I'm biased- reach out any time if you want to learn about the Birmingham AL market!). However if you are simply looking to invest in the real estate market (ie you think values will go up and you want to benefit from rental income, but don't care about owning the actual houses directly), there are many types of passive REI that allow you to invest in real estate without needing to vet deals, organize, rehab, hire a PM, etc.

The easiest of these is probably a REIT, which is like an ETF or mutual fund comprised entirely of commercial real estate investments (either direct investments (Equity REIT) or investments in the mortgages held by the owners of real estate (Mortgage REIT), or a combination of both (Hybrid REIT)). You can invest in public REITs just like you would a stock, so it's an easy and highly liquid investment type.

https://www.investopedia.com/terms/r/reit.asp

Notes, DSTs (Delaware Statutory Trusts, another way to buy interest in a portfolio of REI investments rather than owning them directly), and hard money lending (direct lending to other investors for interest, becoming the bank, basically) are all options that put you one step removed from the nitty gritty of leasing, management, rehab, maintenance etc.

https://www.investopedia.com/terms/m/mortgage-back...

https://money.usnews.com/money/blogs/the-smarter-m...

https://www.kiplinger.com/article/investing/T064-C...

You could also look into a Net Lease investment, in which you buy a commercial property and lease it back to a tenant (usually a franchise like a Starbucks or a Dollar Store). Net leases are longer and the tenant is responsible for maintenance, taxes, etc. So while you do directly own the property, you don't have to worry about management (there's typically a tenant already in place), maintenance, etc. There are different types of Net Leases (single, double, triple net - not all require the tenant to take care of everything) so you need to do your research to ensure you know what you're getting into, but Net Leases can be a way to own physical real estate without the hassle of management.

https://www.investopedia.com/terms/t/triple-net-le...

https://www.investopedia.com/ask/answers/040115/wh...

There are several options for folks who want to invest in the real estate market, but aren't in the position currently to invest in physical properties. Given that you are mostly on the road, something a little more hands-off might be the right move for now. Luckily, your REI journey doesn't have to end with the first investment you make, and you can always expand into other investment types down the road. Investing in a passive form of REI can be a great way to put your capital to work while you learn more about the types of REI that really light your fire.

Of course, I'd never want to turn someone away from turnkey if it's the right move for them (not really doing myself any favors with the post am I?), but determining what type of REI is right for you requires a lot of research and a lot of honesty. My advice to new investors is always to be brutally honest about what they can reasonably afford (in terms of money, time, and energy) right now, not what they want their portfolio to look like in 20 years. Start with where you are and then take appropriate steps toward where you want to be.

Good luck! 

Clayton

For a more detailed answer from me and others, maybe provide some of the following info:

Year of purchase:

Amount of Equity:

Est. Rent Rate:

Year of Most Recent Update:

Will you hire a PM?

What are the insurance and tax rates for this property?

What are your actual loan payments?

If the numbers don't add up and this was your primary for at least 2 out of the past five years, you could sell it and take any gain (up to $250k if you're single, $500k if married filing jointly) tax-free. If it doesn't really make sense as a rental, you may find that selling and using the proceeds to invest elsewhere would be a better solution.

@Jose J Nazario a lot more information would help the BP community really weigh in on this, but my one piece of general advice is to put the work in (and if you can do it yourself to save $$$, so much the better) to really update the place. If you've replaced flooring and roofing recently (or bought it within the last few years and those things were new), great. What about other big-ticket items? HVAC, water heater, etc. How old are they and what shape are they in? Rentals take a lot more wear and tear than primary homes because tenants are less likely to put in the labor to fix things up when they break, or to keep things maintained on their own etc - if something needs fixing, you might not hear about it for a while unless it's really an issue in the tenant's day to day life. Basically, the better shape it's in when you rent it, and more on top of maintenance calls out you are (never defer maintenance), the lower your costs will be in the long run. 

@Michael Gib personally, I see that you have a lot of capital tied up in an asset with returns that primarily rely on appreciation. Past performance doesn't predict future returns, and while the appreciation thus far has been good, you say yourself the Brexit issue is making things uncertain. I prefer cash flow to appreciation potential because it's something you can create - increase rents, buy in the right areas, rehab well to minimize long-term maintenance costs, reduce expenses by self-managing if necessary, buy in areas with good property tax rates etc - you can take action in some way to improve cash flow. With appreciation, you can only hope for the best unless you are buying distressed and then rehabbing to 'force' appreciation. 

Especially since you wouldn't pay taxes on the gain if you sold, I would be asking whether that capital could be put to better use elsewhere. Your rent to value ratio isn't amazing at this point, and I know that amount of capital could be getting you much better returns elsewhere. Are you determined to invest in Gibraltar, or are you open to international investing? Since you pay a management fee already you might consider looking into moving your investments abroad to markets where your capital could go much further.

@Julie Fullmer Based on the limitations you outlined, I would second @Levi Rudder 's suggestion that you look into a more passive form of REI until you are able to be back stateside. If you are not comfortable investing in markets you don't know, and are far enough away that it would be difficult to get back and forth in a pinch, physical real estate may not be the investment for you right now. I will strongly advise you not to pull from your retirement account, especially right now when you are on limited income. Again, this may change after you're no longer overseas, but please don't gamble your future just because you're excited to get started. Real estate will still be here when you're financially ready. 

If you have capital you can invest without raiding your retirement coffers, then there are a number of ways to invest in the real estate market that don't involve dealing with management companies or contractors. The easiest of these is probably a REIT, which is like an ETF or mutual fund comprised entirely of commercial real estate investments (either direct investments (Equity REIT) or investments in the mortgages held by the owners of real estate (Mortgage REIT), or a combination of both (Hybrid REIT)). You can invest in public REITs just like you would a stock, so it's an easy and highly liquid investment type.

https://www.investopedia.com/terms/r/reit.asp

Notes, DSTs (Delaware Statutory Trusts, another way to buy interest in a portfolio of REI investments rather than owning them directly), and hard money lending (direct lending to other investors for interest) are all options that put you one step removed from the nitty gritty of leasing, management, rehab, maintenance etc.

https://www.investopedia.com/terms/m/mortgage-back...

https://money.usnews.com/money/blogs/the-smarter-m...

https://www.kiplinger.com/article/investing/T064-C...

You could also look into a Net Lease investment, in which you buy a commercial property and lease it back to a tenant (usually a franchise like a Starbucks or a Dollar Store). Leases are longer and the tenant is responsible for maintenance, taxes, etc. There are different types of Net Leases (single, double, triple net - not all require the tenant to take care of everything) so you need to do your research to ensure you know what you're getting into, but Net Leases can be a way to own physical real estate without the hassle of management.

https://www.investopedia.com/terms/t/triple-net-le...

https://www.investopedia.com/ask/answers/040115/wh...

There are several options for folks who want to invest in the real estate market, but aren't in the position currently to invest in physical properties. Given that you live abroad and are apprehensive about working with a management company, something a little more hands-off might be the right move for now. Luckily, your REI journey doesn't have to end with the first investment you make, and you can always expand into other investment types down the road. Investing in a passive form of REI can be a great way to put your capital to work while you learn more about the types of REI that really light your fire. 

My advice to new investors is always to be brutally honest about what they can reasonably afford (in terms of money, time, and energy) right now, not what they want their portfolio to look like in 20 years. Start with where you are and then take appropriate steps toward where you want to be.

Good luck! 

@Alex Saepharn , @Mike D'Arrigo hit the nail on the head: cheaper is not better. The lower you go down the asset class ladder, the more risk you're taking on. Think of it like investing in Bonds. You can get much higher coupon rates (returns) with junk bonds than you can highly-rated corp or gov bonds, and they MIGHT pay off big time. BUT the risk is astronomical (that's why they offer those sky-high rates, to compensate investors for risk). AAA bonds offer lower rates, but you're definitely getting those coupon payments every single period - the risk of default is almost zero. 

Low tier props in the sub $50k range are not going to be better than C class in any market. This means that, even if you rehab that bad boy like crazy, it will still just be the nicest house in a not-so-nice area, and anyone that can afford the rent you'd need to charge to compensate for all that rehab work would almost definitely prefer living in a more modest prop in a nicer area. By definition, lower income areas are higher risk because, as unfortunate as it might be, folks with low income are just one sick kid or one flat tire away from missing work and missing rent. They still deserve safe, stable housing (obviously) but from the investor's perspective, they are simply a higher risk tenant pool.

Here in Bham, you can get a solid B- / rural B prop for $75k or so. Just a bit more than your $60k estimate, but with a much more stable tenant pool. Believe me, the extra $15-20k you'll pay for a B prop will come back to you ten-fold in lower turnover, lower move out costs, lack of Section 8 red tape, and general peace of mind. The exit strategy for B props is also much better than for C/D. With the latter, you'll only be selling to other investors who are going to wheel and deal just like you did. With B props, there's a greater chance of selling to an owner occupant who is more likely to pay market or higher because OOs buy based on emotion, not on data analysis. 

I'd say you should raise your sights a bit, crunch some B-class numbers, and then make a plan to visit your top 1-2 markets/teams where those numbers make the most sense. good luck!

Thanks @Caleb Heimsoth !  @Mo Takhim (sorry tagging feature not working today I guess) feel free to reach out any time if you have questions about the Bham market, turnkey in general, or what we do at Spartan. 

And I 100% agree with @James Wise , getting your own inspection is one of the easiest ways to mitigate your risk. If a turnkey provider has a problem with that, you'll have a problem with them, simple as that. 

Good luck!

@Julie S. The property you are considering selling (that's free and clear): How long have you owned it? How long have you lived in it? If the answer to these question is 'more than 2 years out of the last 5' and you didn't acquire it in a 1031 exchange (ie it wasn't an investment prop that you converted into your primary), then I would sell that bad boy and take the tax-free cash! Under the Sec 121 exemption, if you have owned it and lived in a property for at least 24 out of the past 60 months (and they don't have to be the same 24-month periods, and the months don't have to be consecutive) then you can take up to $250k of capital gain (ie value above your tax-basis) tax-free, or $500k if you're married and file jointly. You can only do this once every 2 years, so if you took advantage of this perk in the last 24 months (sounds unlikely if you just moved) then you'd have to wait a bit.

I'd need to know the specific numbers for the rental option (ie how much rent are we talking here per month? what are your expenses? how old are your capex items?) in order to really weigh in on that. But, generally speaking, it looks like we're nearing the top of this cycle and, if you've already seen a lot of appreciation, I'd say sell it, take the cash, and reinvest elsewhere - or pay off your current mortgage if that's more of a focus for you. Especially if you owned this property for a while and haven't done any major updates recently, you're likely going to be looking at some larger expenses sooner rather than later (ie when did you last replace the roof, the flooring, the HVAC, the water heater, etc). Better to let the next guy take on those expenses. 

Also, since it sounds like this prop is probably a pretty nice home and in a more owner-occupied area, you're likely to get an owner-occupant buyer, which means someone who will buy based on emotion, not cash flow calcs. If you have the opportunity to cash-in tax-free, I'd take it unless the rent numbers are simply amazing and all your big-ticket items have a lot of life left in them.

If your goal (as stated under option 3) is to pay off your new primary asap, I'd say take that option and then use the HELOC or a refi down the road if you really need the cash.

It's not a bad position to be in, congrats!

@Alex Saepharn, @Ali Boone laid it out for you in terms of options - you can go DIY or turnkey. Both have pros and cons, and everything in REI is a tradeoff (usually time for return, or passivity for control).

What I would say is that, regardless of which route you go, you should do the legwork to determine your top one or two markets and teams, and then go visit them. So if you go DIY, that means figuring out some solid options for agents, contractors, PMs, in a few markets where the numbers work. If you go turnkey, this means vetting providers (and their numbers) until you find something that adds up, has a good reputation, good references. Then, go ahead and take the trip out to see them. 

You don't need to fly all over the country right off the bat - you can do most everything online or on the phone. But, I do encourage investors (new ones, especially) to invest in their investment by taking the time to go meet the folks they're considering working with. If you go DIY, this means meeting with agents, having them show you some properties; meeting with contractors and looking at their handiwork; meeting with PMs and maybe driving by props they manage to see if they are maintained etc. It also means driving around the areas you're considering during the day (are folks just sort of wandering around or out on the porch in the middle of the day?) and at night (do you feel safe?). If you go turnkey, the company should be doing everything in-house, so it would be a one-stop tour of all those things (except the night drive, that one's all you ;) .

It might be a bit of cash upfront, depending on how many markets you decide to visit (I think you should narrow it down to one or two) and the time of year, etc, but it honestly will pay you back in peace of mind. Looking folks in the eye is still the best way to gut-check your decisions, and often just asking to come for a visit will tell you a lot about how someone views customer service. If you ask to schedule a tour or a meeting and they can't accommodate you in a reasonable way, cancel over and over, or just stop responding, well now you know you've dodged a bullet. 

Investing out of state is very common (esp for CA residents) and it definitely can be a great way to make the most of your capital. But whether your property is 100 miles away or 1,000, if it's not in your backyard you're trusting someone else to make your investment work, and it's worth your time (and money) to meet that person face to face.

Good luck!

Now, as for the value - you can technically buy a replacement prop worth less than your current property, or buy another one but use mostly debt in order to pull out some equity, but any cash (equity) or debt-paydown that you net at the end of the transaction is taxable (called 'boot'). So if you have a $400k house and it's all equity, you need to put all $400k into the new prop to avoid CG. You can buy another house worth $200k and keep $200k, but you'll pay taxes on it. You could buy a prop worth $400k but finance $300k of it, but you'll pay taxes on that $300k since you're keeping the cash from the sale and replacing it with debt.

Also, bear in mind that you're not just deferring CG taxes, you're also deferring your depreciation recapture, which is taxed at 25%. So if you've had this property a good long while and have held it as a rental (I assume if you're looking at the 1031 and it's free and clear), then you may have a big tax bill coming just from the depreciation side. Remember, it doesn't matter whether or not you actually take the depreciation deductions on your taxes. The IRS only cares that you could have taken them (so always take them!). 

Using the $400k prop example above, if you've held it, let's say, 15 years (to pay off a 15-year note), your depreciation deductions amount to a little more than $218k ($400k/27.5 depreciation schedule for real prop * 15 years held as a rental). Of course, the real math will be more complicated since the valuation of your prop has changed over time, but let's keep it simple. Taxed at 25%, that comes out to $54,545, a pretty hefty price tag even without considering the CG. 

Maybe you've not had it as long, it's not worth as much, etc, so your bill will be lower, but the point remains - you have more than CG taxes to worry about, so even if it would be nice to have that equity in cash, it's better to roll it all into a new prop than to give that much away to Uncle Sam. 

Bright side is, you can keep executing 1031s until you die (ie never sell your investment props outside of a 1031), leave your final props to your heirs (who receive a stepped-up tax basis equal to the prop value at the time of your death) and actually completely avoid those CG and DR taxes entirely - for you and your heirs (a little strategy I like to call '1031, 1031, Die').

So long-story not-so-short, you are correct in your summation. In order to completely defer taxation you need to purchase a replacement prop (or props if you have a lot of value to use) of equal or, greater value (with equal or greater equity, as well), within six months of CLOSING on your current prop (but you must identify your three options within 45 days of closing). You also MUST have a qualified intermediary working with you before you sell your current prop. If you don't have a QI working on the exchange to make sure everything is documented correctly (and most importantly that none of the proceeds from the sale land in your bank account), the 1031 is void.

Sounds like you're in a good position with an appreciated property. If you can make it work, the 1031 is a really powerful option. I'd say research QIs here on BP and talk to a pro to make sure all your ducks are in a row.

Good luck!