All Forum Posts by: Clayton Mobley

@Steve Elling Yes, that is correct. You cannot use the CG to pay off properties you already own. In order to use the 1031, the property has to have been held as a long-term investment (ie not a flip and not your primary residence) and you must replace its value AND its Equity (ie you cannot just replace with another prop worth the same amount but mostly funded by debt in order to pull out cash). 

The rules for timing with the 1031 are as follows:

1) you must identify up to three replacement properties within 45 days of CLOSING on the sale of your current prop. 'Identify' doesn't just mean you make a list for your own notes, you have to have Qualified Intermediary in place and they need to be aware of, and properly document, your selections.

2) you must purchase your replacement property within 180 days CLOSING on the sale of your current prop.

Why am I yelling about closing? Because your clock doesn't start ticking until you sign those papers, so many folks start their replacement prop search before they're even officially on the market to give themselves a little extra time. Esp if you think your current property will sell quickly, you need to be prepared to make a move on a replacement prop asap

@Dave Halsey My advice is always to go for cash flow over appreciation - one you can manage, the other you can only hope for. I'm not super familiar with the Detroit market, other than the obvious zeitgeist knowledge that it was essentially abandoned for a while, so there is some opportunity in getting in 'at the bottom' and riding a new wave up. While I get the appeal of that, I'm a more conservative investor so I don't like making that kind of bet, personally.

The cash flow numbers you're showing aren't amazing, although, yes if you financed only 80% it looks better. But since it sounds like you'd need to pull that downpayment equity out of another property (via HELOC, refi? what are the expenses you'd be looking at to access that cash?), I'm guessing the real net number will be closer to the $115 than it is to the $200.

Also, I'd be a little concerned about where this prop sits on the value range in this area. Again, this is not my market, so take this with a grain of salt. However, you report the median price is $260k. Now, I don't really like medians so much, means/averages are a much better statistic, I find (but everyone uses medians, so here we are). If the median is $260k and this prop is below $80k but in an 'exclusive and appreciating area', then my guess is there's something about it that's making it less appealing compared to the other props in the area. It's fairly small for one thing, but I would maybe make the trip out to see this area with your own eyes, go see the property. 

If the median is $260k and this prop is going for less than 1/3 of that, and is 'turnkey', that makes me curious about why...is it just the size? Is the average price for props that small closer to the $80k mark? I get that the owner is trying to cash out to move his capital up north, but if it looks like this property is going to appreciate more, why not just let his PM handle it for a few more years and cash-in then? It's not like he needs to be hands-on. Point being, anytime you have investors looking to unload properties at (maybe) suspiciously low prices, you need to ask why. Things might look great on the outside, but what's the story on capex items? How old is the roof, the HVAC, the flooring, the water heater? It's possible this house 'needs no immediate repairs' but will be costing you a pretty penny in a couple years when you have to foot the bill for all those capex repairs/replacements. This is something of a strategy amongst some rental investors - buy all new and shiny and then sell before the big expenses kick in, pass them along to someone else. 

Of course, this could all be perfectly above board and a great deal. My point is just that you need a bit more information in order to know which way the wind is blowing.

@Jeff Wright I will second What @Jason Ridout said regarding A-class props - they are great for appreciation and for getting stable tenants, but your cash flow is likely to be minimal. It all depends on what your mortgage/insurance/taxes payments are vs your rent rate. Most often the PITI payments on high-end props make them bad rental investments from a cash flow perspective. If you'll be losing money every month renting it, I would say sell, take your $500k in tax-free capital gain, and move it into something more rental-friendly. It's also looking like we might be nearing the top of this cycle, so (especially if you are in a primary market like Seattle or SF) you'd likely do well to sell sooner rather than later.

The way I look at it, cash flow can be managed, appreciation can only be wished for. You can raise or lower rents, rehab and upgrade the property - you can do lots of things to get good stable tenants and keep them. What you can't do is force the value of a property to go up over time. If your goal is REI, rather than keeping a family home for emotional reasons, then I'd say sell it to reap the rewards of the appreciation you've already locked in (before any potential downturn chips away at it) and turn that tax-free capital into a nice portfolio of cash flowing properties in other areas or outside markets (depending on where the numbers make sense).

It's a good problem to have. Good luck!

@James Wise @Account Closed 's thread long enough! Sorry about that, hopefully this discussion has at least given folks some context around the whole A-D rating system, it's shortcomings/limitations, and how/why different people assign different classes to the same property. 

Happy weekend to all!

@Account Closed said, $20k is going to be a real rough area no matter where you are. You're going to be looking at distressed props much closer to the $50k mark that need a substantial amount of work if you're looking to be in solid B areas. Plus, you'll be competing with us for them ;) 

I'm glad to hear you are ready to do some rehab work - if you're handy that will save you money in the long run on rehab and maintenance costs - but you should try to start a little higher up the ladder. Even if you are a professional contractor, there is a certain point at which the returns on your work diminishes to zero. You could buy something at $20k and put a ton of work into it to make it B-class or better property, but the truth is that no one who could afford to live in that nice a property would choose to live in the areas where you can buy something for $20k, no matter how well you fix it up. Almost anyone would rather live in a nicer area, even if it means living in a slightly less updated property, vs living in the nicest house in a bad area.

Of course, maybe you meant you were looking to use $20-45k as a down payment! In which case I've wasted my proverbial breath since that would put you in a solid B-class property in many good cash flow markets (Birmingham included). Many many folks are in your same position with regard to a super inflated home market, so you're in the right place to get some good info from fellow investors. But, if you are, in fact, looking to purchase properties in the sub-$50k price point, I would encourage you to rethink that strategy, at least in the beginning. Some folks do make money on lower tier props (although, again, mostly they self-manage) but it's a dangerous place to start out if you don't have any experience under your belt. 

Start with a buy-and-hold portfolio of ETFs before you dabble in day trading ;)

Good luck!

Clayton

@Nova Mendoza I'm going to agree with @Tom Ott - looking for buy and holds in the $20k (what??) to $45k range either means you're finding that one suuuuper distressed property in a decent neighborhood and getting a deal basically just on the land ( a diamond in the rough, unlikely you'll find these with any consistency), or you're investing in some lower-tier areas. Especially for new investors, I would advise sticking to more B/B+ areas, and never going below $50k. 

It can be tempting for folks to try to stretch their capital into multiple doors by buying C-class or below, but you're going to be taking on a lot more work and lot more headache than the numbers imply. Lower-tier properties often look amazing on paper, but the reality is quite a bit different, even for the pros. We initially did some work in this class, but quickly decided that B-/B+ was our bread and butter - the hassles of Section 8 bureaucracy and high turnover just weren't worth it.

As tempting as the price points may be, remember that the rougher the area, the more unstable your tenant pool. Not that there will be a short supply of tenants (nothing but, actually, no one owns in those areas), but the tenants you will be renting to are folks who only live in that area there because they can't afford to live anywhere else. These people still deserve safe, secure homes, but this income level just means people are one sick kid or one fender bender away from losing jobs, missing rent. Purely from an investment perspective, you're looking at a higher rate of evictions, higher general turnover, higher move out costs, and higher vacancy. 

Especially since you'd be investing out of state, the expenses associated with lower-tier properties will likely wipe out your returns. Most folks that do well with this price point invest in their home market and self-manage their props to cut costs. If you're investing in OH (or any other state) from CA, that's not an option. Plus, when you do eventually sell, barring some truly awe-inspiring gentrification, you're stuck selling to another investor who is going to try to get the best deal possible, just like you did. Homeowners don't buy in C-class areas and below, that's landlord territory. 

@James Li I spoke with Scott yesterday and he said you two have already spoken, so happy to hear you're being taken care of. 

He also mentioned that we were able to get your tenant to move out on their own instead of having to wait for a full eviction process, so that's actually some good news (inasmuch as losing a tenant can be). Previously there was an issue with the Sherrif's office being backlogged due to being short-staffed over the summer, and it was causing evictions to take much much longer than normal. So being able to get things moving this quickly is actually a huge win, eviction-wise.

Also, just to be clear, the issue with the tenant was not an issue of mold, since our rehab and turnover processes check for that kind of thing. The tenant moved in and simply did not pay (hence the eviction), so my guess is that they were claiming mold as a 'reason' to not pay. Your property was vacated last Friday and we're covering your turnover costs (as you mentioned earlier). Our average move-out time (from vacancy to back on the market) is just about 5 days, so we're working hard to make sure the property is pristine and make on the market asap. I believe Scott will be in touch with you again soon to check-in and make sure you're up to date.

Thanks to @Jared Friedman for the encouraging words - always nice to see our long-term clients supporting the new folks :) 

Stick in there, James! We're working hard to put this behind us and look forward to many years of bringing you positive cash flow you're looking for.

All the best,

Clayton

@Bryant G. I agree with @Robert Leonard that while your capex is high, your vacancy is likely low. When you say 'rough area' are we talking C-class? D? Warzone? I'm guessing it's most likely a D-class if it's $45k in ture tunrkey condition. That means whoever bought it and fixed it up got it closer to $25-30k....and you know where those props are. Based on the price and what it tells me about the type of area it's in, I would double check that rental figure as well.

The lower down the property ladder you go, the less it matters how turnkey the place is - remember that the tenant pool in 'rough areas' is comprised 100% of people who simply can't afford to live elsewhere, which means you're looking at a higher-risk investment. Lower income people absolutely deserve safe, secure homes, but from an investor's perspective, the risk of non-payment, eviction, squatting, and general turnover is simply higher with a lower-income tenant pool. Folks that can afford to live in the fanciest place in the bad area will almost always prefer to stay in a slightly older place in a nicer neighborhood. 

If this is a Section 8 property, you also need to familiarize yourself with what that process looks like, how it works, what the turnover and wait times are, how much inspections cost. Many lower tier props look amazing on paper, but end up being a lot more headache in the long run with bureaucratic red tape and high turnover. If it's turnkey, your general maintenance might be low, but your turnover costs in a lower-tier neighborhood are almost always higher, and more frequent, so if you're not including those in your maintenance numbers, consider that issue as well.

Regardless of numbers, I pretty much always recommend that new investor stick to B-class props or higher - more stable tenant pool with more reliable income, no section 8 red tape, lower turnover, generally lower expenses. Esp if you're not looking to self-manage, a lower-tier prop will most likely not produce the net returns you're expecting. Most folks that do really well with C-class and lower have tons of doors and self manage to cut costs.

@James Li  Apologies for my late reply here, and for your wait on some communication from our team. We did just move into a new office over the holidays, and have a few new hires in training as well. 2019 is going to be a big year, but, of course, that means big effort is required. 

However, that by no means excuses our delayed communication to you (but I know it's always nice to at least know the reason), and I will pass along all your comments to our team to make sure they are aware. Especially for our new folks, we need to make sure everyone knows that Spartan's reputation depends, at least in part, on our ability to communicate to our clients, even when the news isn't great.

As @Jay Hinrichs has said, the holidays are just a bad time for renting (no one likes to move right when school starts or during the holidays, in any market), so the unfortunate situation with the previous tenant and the 'mold' was badly timed. That being said we're heading out of the holidays and into Spring, which is typically a much better time to secure tenants. Rest assured our leasing team is working hard to get a solid, reliable tenant in place as soon as possible and will keep you updated with any news.

If you have any questions, please feel free to reach out to the team, as you have already, or to me here (though my BP presence is sporadic, so they will likely be a better bet). We're working on getting your investments performing as soon as possible, but we definitely understand your frustration. However, given that our average tenancy is 38 months, we trust the this will become just a small blip on the rearview mirror over the coming years.

Thank you for your trust and patience,

Clayton