All Forum Posts by: Clayton Mobley

@Account Closed Unfortunately the only real answer is that you have to keep building a network until you find a great contractor in your chosen market. 

I'm a full-service turnkey provider, but I would 100% recommend steering clear of the pseudo-turnkey you're talking about. We call them 'pay to play' and they basically do the same rehab they would do anyway and let you have the 'fun' of paying as you go and the added risk of owning a property that no one can live in yet. You don't show up to give your two cents on which cabinets to use or where to put the outlets. 

As Mike said, turnkey companies have economies of scale and streamlined processes that make it possible for us to make money. Not only will you not be able to replicate those systems at this point in your career (and from a distance), but a so-called turnkey company that 'lets' you buy distressed and then foot the bill for the rehab also isn't going to change the way they do things because you're on the deed. They'll do the same job with the same people and the same products they would do if they owned it during rehab, but you're the one paying a mortgage without any rental income. 

If you're new and learning a lot, you're likely getting that itch to just GET STARTED, no matter what that means. It's very common, we've all been there. If you want to do the BRRRR method out of state, you have to start with the understanding that it's just going to be a bit harder to get going, to build a solid foundation. DIY methods like BRRRR are tough, it's the price you pay for the potentially higher returns (ie forced equity). Out of state investing is hard because you can't be there on site to manage, you don't know the market, etc. Put them together and you just have a challenge, pure and simple. Not one that is impossible to overcome by any means, lots of people do BRRRR OOS, but you have to put in the time and legwork to build your team before you start deal hunting.

Use BP as the resource it is. Reach out to folks in your chosen market. Maybe go to a local REI meet up if there's one near you to see who knows who, if anyone else is looking in the same places. Build your network. When you think you've got a good team lined up, fly out to meet them. Tour the areas you're looking, go see some of your contractor's handiwork, take a look at some of the props being managed by your PM to see if they look well maintained. Take your time and be picky about who you work with.

Best of luck!

Clayton

@Mack Owens you got the perfect answer from @Matt Castle . There are great pros and cons to both, but it really comes down to your needs and priorities when it comes to time, energy, inclination, and control. We all want the best possible return, so thats not really a question. But if you don't have the time/energy (work/family/commute) or skillset/inclination (can you do this already, do you BOTH really want to learn? Can you afford that learning curve right now?) to something more hands-on, you'll end up pretty unhappy and likely not making as much money as you thought you would. On the other hand, if you like the idea of something turnkey, but don't like the idea of not having had control over rehab choices, etc. you'll end up pulling out your hair when you find things weren't done the way you want. Everything is a time/control/return tradeoff. Get higher potential returns by doing your own rehab, but sacrifice time in a big way. Get a nice passive investment by going turnkey, keep all the time you want, but give up control over the process.

Also, I want to clarify what you mean when you say turnkey. I'm guessing since you're talking house hacking you just mean tenant-ready, not something purchased from and managed by an actual full-service turnkey company? If so, you'll have more management control than you would with a true 'capital T' Turnkey investment, but as Matt pointed out - do you want that control at the end of the day? Do you want to be a landlord? Do you have the time and inclination to climb that learning curve in exchange for the control and increased potential return (no PM fee to pay)? 

Both options can work, it's mostly about having a serious discussion about your goals, needs, and expectations. If you're already on different sides of the issue, it sounds like there some lack of clarity on one or more of these issues. Take the time to get on the exact same page and then make the decision from there.

@Sarah Cowns Welcome to BP and congrats on taking your first step! Even just putting your goals and concerns in writing is still a step, so well done.

As for your situation and questions, there are a few things to consider before anyone gives you 'first step' advice. Ok I tend to ramble on BP, so I will try to keep this concise (but, seriously, lol).

1) You have debt, but you've already made a smart move by getting it onto a 0% interest card (amazing how many folks don't know how to take advantage of that, well done there as well). How long is the term? When do you need to have this paid off by, and under your current circumstances can you hit that goal?

2) If you can easily hit that goal with your current income and have some income left over, then start saving for a downpayment. If paying this off before the 0% period is over is going to be a struggle, for any reason, I'll be the conservative investment advisor here and say just pay that sucker off asap and put off investing until it's done. I pretty much always advise getting rid of credit card debt before investing, the only reason you have wiggle room is because it's already at 0%. 

3) One thing to consider (though don't take this as a gospel recommendation) is that you could continue to move that debt around onto another balance transfer card when this period is up IF IF IF IF you can do so with no fees. Again, I very much recommend that you try to bust through this debt asap, but if you think that will be a struggle for any reason (and again I think investing should be the secondary priority here), at least come up with a plan for what you will do if you can't kill that debt before your current 0% period elapses.  Two solid cards for this are the Citi Simplicity and the Chase Slate, but of course, check on terms and conditions etc before you pull any triggers. I have a friend that is very credit card savvy (travel hacking etc) so these are recs that I've heard from her and I know have been used successfully by many folks in those circles. Always do your own research, the point here is that you need a plan for this debt if you can't kill it before the 0% period is over.

4) So your debt is one thing you need to tackle, of course. I'd say that you should use the time you have while you do that to do some more thinking about what kind of REI you want to get into. You've said rentals, does that mean you want to find properties, analyze deals, handle rehab, find tenants, and then manage them? Or do you want to build a team (agent, contractor, PM) that does those things, and you manage that team? Do you have the time and energy or skillset to do those things? Do you want to be a landlord? There are a lot of ways to do real estate investing, but they aren't all right for every person or every lifestyle. You need to be very specific about your needs and goals with regard to time, energy, budget, and control. Hone in your expectations and requirements and you'll help yourself avoid long-term headache.

5) Re: your timeline. The end of the years is well and truly nigh, so I would advise you to maybe back off on that. It is 100% understandable that now that you and your husband are on the same page, you're both itching to get started. Everyone's been there. But don't pull the trigger on something just so you feel like you've 'done' something. Taking the time to really strategize and clarify your goals and needs is going to be worth the potential few months of lost income. Plus, you can pay off your debt in the interim. 

It sounds like you may be psyching yourself out a bit, but at the same time, very few people have been happy having jumped into something they didn't understand just because they felt like they shouldn't wait any longer. Yes, the advice is always to 'just take the first step', but what those people mean is that, once you know the basics of how to analyze a deal and know exactly what kind of investment you want, don't get mired in analysis paralysis waiting for the absolute perfect deal. If you're not yet to the point where you can confidently run numbers to assess a potential investment, don't understand ROI or equity or how to estimate expenses, you're not ready for that so-called 'first step'. When people get successful enough to start running seminars, it's easy for them to gloss over this part of the process and just say 'read everything, then jump in'. There's a lot of homework that goes into successful REI, so don't cheat yourself out of a solid foundation because someone who's already millionaire dared you to.

Oh and, re: seminars, I personally don't think folks should waste a ton of money on things like that. REI meet ups in your area or free webinars, heck yes, learn all you can! But don't spend $$$ to have someone tell you what you can learn here. You're a nurse, so I'm guessing you've got the brain to figure this stuff out on your own if given the time and resources. Luckily, you have both.

You're not yet at a point in your REI journey where you'll be using 'systems' or 'lead generators', you're still learning the basics. You can learn that here, and you'll find most folks on BP are extremely helpful and won't make you pay $1000 for the privilege of listening to them talk ;) That money could be put to better use paying off debt, and then building your downpayment savings.

You maybe don't have a leg up the way some folks do when they start REI, but you aren't in a bad position, just a transitional one. Take the time to get that solid foundation. Pay off your debt. Solidify your goals. Ask questions. You'll be glad you took the time to do it right.

Good luck!

Clayton

Also, re: price point. I second Schecky again. If you want to get your hands dirty and buy distressed/rehab, stick to props over $50k (distressed price, not after rehab market value). Especially if you're going out of state, you're not going to have the networks or know-how to get the numbers turnkey providers and other pros put up, you won't have the systems in place.  Plenty of folks make good money on lower tier props, but they are practiced pros who have built it into a business (economies of scale, networks) or self-manage in their own market (cutting down expenses). For a new OOS investor, stick to B/B+ props where you have more wiggle room. Once you've got the market knowledge and connections to take things to the next level, you can move into C/C+ props if you think that's the right direction for you.

@Adrian Kar I'll second the advice you've gotten so far from @Michael Thompson and @Jeff Schechter , while this model is possible, it's often not what you think.

On the worst end of the spectrum, you have a Morris Invest situation, where they sold the idea of buying sub $50k props that the investor then pays to rehab under the direction of Morris. But what happened was....well a nightmare. Read some threads about that whole situation to get an idea of where it can go.

Of course, not everyone is Morris, but both Michael and Schecky made some important points to keep in mind. Firstly, turnkey companies make money by doing the rehab, using economies of scale and great networks to force equity, and then selling at market value. We are almost always able to get a better value and better work done, and make a bigger profit, on a property than the average retail investor, for a lot of reasons. So why would a company want to give you the benefit of that equity? 

The answer is that they aren't. We call this 'pay to play', but really you're just paying to take on risk you wouldn't have if you went straight turnkey, and to give up control you would have if you just DIY'd the whole thing. You pay for the rehab, but they control what happens. You don't show up on site everyday and give your two cents, there's not really any hands-on learning. 

What you do have is all the vacancy risk of having an extended rehab. You own the prop, but no one can live in it, so where's the benefit to you? The company isn't beholden to you for getting your monthly income flow started from day 1 the way a full-service TK outfit is, so there's plenty of benefit to them in terms of letting you take on the risk of rehab. You're not there to see what's actually being done, so it's easy for a company to do less than stellar work without you knowing, or allow delays to drag (which means more time without cash flow) because it's doesn't much matter to them. 

Of course, this makes it sounds like it's all a scam. And while there definitely are some scammers out there, it really comes down to how the turnkey model operates, and that model not really being conducive to individual investors taking the reigns of rehab. Any turnkey company that operates successfully for any length of time has their rehab processes 'dialed in' as Schecky said - we have streamlined processes and wholesale vendors, we get wholesale discounts and we do the same thing for every property, so we can get things done efficiently and maintain a consistently high standard across inventory. A turnkey company that lets you pay to play isn't going to give up those savings to do a custom job on every property, it would be a massive waste of money for everyone involved. So they're going to do the same job they would do anyway, but you get to pay as you go AND shoulder the risk of long-term vacancy, unexpected rehab issues, etc. Even a company that does great work consistently, and you end up with a solid rehabbed property, isn't really giving you any real world rehab experience, they're just letting you come along for a ride they were already taking, you won't even get to choose the music.

If you want to get your hands dirty, you're better off building a team in the market of your choice, flying over to meet and greet, see their work and look them in the eye, then manage that team from afar. If you want to minimize risk and just have a cash flow property that's rehabbed and tenant-ready, start looking into solid full-service turnkey providers in markets with numbers you like, fly out to mee them and see their work/inventory, and then let them do the work. 

What you're looking for does exist, but it's not the route I'd recommend.

@Jedd Storoshenko I think you've gotten all the right advice from @Richard Sherman (promise I'm not BP stalking you today lol) and @Dave Foster , although the option to combine the Sec 121 exemption and the 1031 does still exist if you convert to a rental and sell within three years.

However, I think Dave's question about the condition of the prop is still the most important one here. You have rental numbers based on...what? Has it been a rental before, have you looked at comps? What would your expenses be and would you be self-managing or hiring a PM? Is this a brand new(ish) prop or would you need to put work in to rent it out for those numbers? Richard is spot on, most folks think their primaries would make great rentals because we love them, that's home, who wouldn't want to live there? But when you start looking at all the nitty-gritty details that are easy to overlook as a homeowner, but really turn tenants off, you start to see bills adding up. How old are your capex items (water heater, flooring, roof, appliances)? Do they need to be replaced or repaired, what about five years from now? Look at your property as you would if you were looking to move there for the first time, it may open your eyes.

Esp if you would need to put work into the prop to rent it at the top of the market, or if you have a lot of appreciation built up, I would strongly consider selling, taking the 121 exemption on that profit and then deploying it elsewhere. If your mortgage is still at $300k AND you have some equity/appreciation already built up, you could definitely be putting that capital to work elsewhere. 

Just as an example based on numbers I know first hand, assuming you have just $100k in equity but are willing to maintain some amount of debt in future investments, You could take that $100k and put 20% down payments on 5 B/B+ cash flow props in Birmingham that rent for $995 on average. Gross income is just under $5k, running those figures through our ROI spreadsheet to account for expenses, you net over $1350 per month plus you have a more diversified portfolio that your tenants are paying for.

The point is that you appear to have a lot of capital (debt and equity) tied up in a single property, when you could get the same or better returns from a more diversified portfolio in other markets (Birmingham and others in the south and midwest). And those are turnkey numbers, so if you wanted to be more hands-on and DIY distressed props, you could potentially see higher returns. 

Unless your property is really top of the line, tenant-ready, I think your best bet is to take the tax-free profit and deploy it elsewhere. If you're really attached to the idea of holding it as a rental and you think it will do well, convert it, rent it for 12-18 months and see how it goes. If it's a great money maker, awesome, hold it until you don't want to anymore and then 1031 into bigger/better/more doors. If it doesn't perform and you've rented it for more than 1 year but less than 3, you can still take the profit tax-free under Sec 121 and then use the 1031 exchange to move the rest of the value tax-free into other investments. 

Of course, always always always talk to a CPA and/or Qualified Intermediary before pulling the trigger on either option. Dave Foster is a great resource for 1031 details. 

Best of luck!

Again, these are turnkey SFR numbers in Birmingham AL, so everything is subject to change depending on the strategy and the market you choose. But the strategy and its results remain solid regardless. Plus, if you're ok with taking a bit longer to pay off, say, Loans 1-5, you can use this strategy to pay off 6-10 quickly, then pull that equity out and use it to invest in additional doors. Add those loans to the overall strategy and keep plugging away. If props stop performing or you think your money can be put to better use elsewhere, use a 1031 exchange to leapfrog into bigger and better.

The point is that, with the income and credit score you currently have, you can move pretty quickly into a good sized portfolio and then let your tenants buy you those properties at a much faster rate than if you had just one or two doors. You won't get to $1m in cash by next year, but you could easily have $1m in value, and expand to much much more in subsequent years. 

Of course, there are definitely tons of different ways to do REI, so I'm speaking only from my personal and professional experience. Other folks on here have had great success with other types of investments, and hopefully some of them will pipe in with their two cents. The truth is that REI is like any other investment - anyone that says they can turn your $10k into $1m in a single year is either lying or selling you an investment with a hefty risk attached to it. You're in a good position. Be clear about your goals outside of just how much money you'd like to have. Take the time to save up enough to make smart moves in stable markets. Be patient enough to wait for the right investments that will help you 1) preserve wealth, 2) generate income (which you can use to pay off debt faster), and 3) offer appreciation potential; in that order.

You have the opportunity to set yourself and your family up for life if you use the assets you have and make smart moves based on mitigating risk where possible and growing your wealth over time, not trying to stretch $10k to buy 4 doors in the slums or jumping into something risky because it offers unbelievable returns (if it's unbelievable, don't believe it). You're in the best place to learn, so keep up the good work!

Best of luck!

Clayton

Ok, so with $220/month per prop, your total cash flow for the portfolio is more than $2k, which isn't nothing, but you don't really need that income right now. What could you be doing to further you REI goal? Put alllll that cash towards one loan at a time and pay those bad boys off asap. It sounds sort of simple, but when you look at the actual math it's actually a really powerful strategy.

So let's say you pay your $600 min on loans 1-9, leaving you with that $220 in flow left over. You also make the same $600 payment on Loan 10, except you also put all your cash flow toward the principal (you do should make sure the bank knows explicitly that extra payments go toward princ, not future interest, they're tricky sometimes). So you're paying off 9 loans at the normal rate, but your putting a whole extra $2200 toward Loan 10 every month. At that rate, you'll pay off that property by mid 2021. Then you put all your cash flow (which is increased now since Prop 10 no longer carries a P/I payment) towards Loan 9, pay it off by early 2023. As you increase the number of free and clear props you have (which are paid for by your tenants), you pay off each subsequent loan much faster. 

Of course, you'd need to ensure your financing doesn't carry any 'early payoff penalties' but in some cases, it may be worth it anyway. If the penalty is 3% of the loan value, you'd pay $2400 on a $80,000 loan to save literally $85,000 in interest payments over the course of a 30 year loan. 

(here are the calcs I used if you want to check numbers: 

https://www.calculator.net/mortgage-payoff-calcula... (mort payments) 

https://www.daveramsey.com/mortgage-payoff-calcula... (payoff)

Let's say for simplicity's sake that you wait until you have a little more than $200k in cash to deploy. I can only speak for my market, so I'll use our average numbers - bear in mind that specifics will be different depending on where you invest. We're a turnkey outfit, so I'm using turnkey numbers. 

[[If you want to do more DIY, BRRRR style investing you'll need to put in a lot more ongoing legwork, but you will ideally be able to force appreciation and get more equity more quickly. That's another consideration you need to cover - do you have the time/energy/inclination to do it all yourself in or to maximize potential profits, or would you rather buy market-price (even turnkey shouldn't be over market price, remember that) for a rehabbed tenant-ready prop that's managed for you? Both are can be viable and lucrative strategies, but the right move depends on your needs re the time/energy/control tradeoff.]]

Ok, so let's say you invest $200k in a portfolio of 'average' props. Our average value for a B/B+ cash flow prop is about $100k. So at 20% down, you're looking at 10 props give or take. 

Now, since you don't need the income right now, you have the opportunity to accelerate your loan pay down in a pretty powerful way. This is a strategy a lot of our clients use, and while I'm using our numbers and our market data, this is a strategy that can work anywhere. Of course, the more props you have, the faster it snowballs, so investing in a market where your capital goes further definitely helps.

Anyway, with an $80k loan at an assumed rate of let's say 6% (we're heading up that way anyway with recent hikes, and it always pays to be conservative), your PITI payment on each prop (using average tax and insurance costs for our props) is about $600. I plugged in these average numbers, along with our average rent ($995) into our ROI spreadsheet to check on average returns after accounting for all expenses (vacancy, maintenance, PM fee, etc). After all's said and done, your cash flow for each prop is a little more than $220.

Like Richard, I am a buy and hold guy and I invest in SFRs (both professionally and personally) so this will be a biased example, but should give you some idea of what you can do to achieve your goal.

Since you have good income and credit, I assume obtaining financing isn't an issue for you. If your goal is to get to $1m in equity/cash, let's assume you need 20% of that as down payments, so $200,000. The best way to grow your portfolio is to let tenants buy your properties for you, which mean temporarily being in a debt position. If you're determined to buy everything in cash, you'll move much slower but have lower risk, so that's another consideration you need to cover before moving forward. Let's assume you use leverage to make the most of your capital.

So how do you get to $200k in cash? You have $10k, can you take a HELOC or refi your current prop to pull out cash? How close will that get you? How much can you reasonably save from your income in the next year? Develop an aggressive plan to save up your nest egg as quickly as you can. This is the frustrating part for every new investor, you'll have to do some grinding before you make any big moves.

Now, you could wait until you have all $200k to get into a portfolio all at once, or you can do it piecemeal, whatever works for you, but the strategy you employ once you have that little portfolio is crucial.