All Forum Posts by: Clayton Mobley

@Daniel Lehman Welcome to BP! Sounds like you have a lot of the natural skills that make for a good start in REI. Of course, your main hurdle is your location. If you lived in a less inflated market, I'd say you could probably get yourself set up quite nicely with a team and do some BRRRR investing. Of course, this is still definitely doable in other markets, but the distance does complicate things. Not only are you managing people you can't look in the eye on a day-to-day basis, but you'd be buying in a market you're not as familiar with.

If you're itching to start out, I might suggest starting with something more passive to get your the portfolio started, while you learn the ropes for something more DIY / hands-on (just assuming that's what you want, given your reference to management skill). There are so many markets where your capital can go much much further than in SD, but building a team and learning a new market from a distance takes time and some serious networking. 

If you have the time, I'd suggest planning to visit a couple of your top markets (after doing quite a lot of research, of course). Ideally, you'd be able to spend some time to build a team on the ground before heading back to CA. Long-distance DIY investing is definitely a viable strategy, you just have to do the legwork of developing a solid team that you can easily manage from afar.

Of course, if your primary goal is to get into a more passive form of REI, Turnkey is likely going to be one of your best options. Don't get me wrong, there's plenty of work up front in terms of due diligence, vetting providers, etc - but once you cut the check the investment should be more or less hands-free. Turnkey multis are not nearly as common as SFRs, though they do exist in some markets. Even with SFRs, you have the capital ( and I'm guessing credit score) to build a tidy little portfolio of cash flow properties right off the bat. Hold them for 10-15 years, pour all the income back into paying off the loan if you don't need it now, then use the 1031 exchange to leapfrog into bigger/better/more doors without paying the IRS for the privilege, rinse and repeat. Keep doing that until you die (inelegant, I know) and leave the props to your heirs who receive a stepped-up tax basis (meaning you've successfully avoided all that capital gain and depreciation recapture tax). This is a common and effective strategy for long-term, generational wealth building. There are others, but this is definitely the simplest.

This would be one of the most passive options - you would give up a bit of your return in exchange for professionally rehabbed, managed props (though you still shouldn't be paying more than market for Turnkey) but you would have one company to vet per market, one team to build a relationship with, so it's a trade-off. BRRRR gives you the potential to force some equity if you find a great deal and then rehab it to appraise for more than you've put in (doesn't always shake out that way, but that's the goal), and if you self-manage then you save 8-10%, but self-managing becomes very difficult to scale and is more of a job than people think.

It's all about your goals and what you need to feel confident in your investment. Some people don't like to delegate, need to be able to see their properties day-to-day, be involved in tenanting choices, etc. Turnkey is not the right choice for those people - a more local, self-managed BRRRR method would be better suited. Others just want to create stable monthly income or want to build a portfolio in a more accessible market than the one they live in, but aren't interested in getting their hands dirty in the day-to-day. For those folks, Turnkey can be a great option. Some want to be in charge of selecting individual team members and have more control over rehab decisions, prop selection, etc. but want to invest in a market where their capital goes further, so out of state BRRRR is a better choice. Turnkey has a shorter runway - you can get started faster because there are fewer moving parts. BRRRR takes a bit more legwork and is more time consuming, but offers the potential for higher returns depending on how well you do it.

Either way, the first step is clearly outlining your goals and needs. It sounds like you would probably be good at BRRRR, but may not want to take on REI as a job. There are also other, more removed ways to invest in REI, like syndicates and notes, which I'm sure someone with more expertise will explain in more detail. Of course, you never have to choose just one strategy, and you don't have to stick exclusively to whatever strategy you employ first. Many of our clients start with Turnkey to get the ball rolling, and then start building a more DIY portfolio alongside, knowing they have a more passive, reliable income source backing them up if a deal falls through. You can pick and choose the strategies that work best for you now, and tweak your long-term plan as you learn more and build your portfolio.

Whichever direction you go, it sounds like you have the capital and skillset to get yourself set up pretty nicely.

Best of luck!

Clayton

@Nefertari McClarity One of our real estate attorneys has his own title company and is a great resource. He's been practicing RE law for decades. BP won't let me post contact info outside of the marketplace, but feel free to PM for his info ;)

@Kevin Kraver Generally speaking, you should not be paying more than market for your property. There are some exceptions, of course, but, in general, the appraisal should come in at asking or, if you're lucky, maybe a little more. On (rare) occasion even we have appraisals come in a little bit light, but not usually more than a thousand bucks or so. More often they come in a bit heavy, which is just icing on the cake for the investor.  

How a company deals with a light appraisal will be pretty case-by-case, of course, but if it's just slightly light (like $1000 or so) I'd think that closing a deal with a satisfied client would be worth more than that $1000 to most providers. If a company needs every penny of above-appraisal profit to make the investment worth it to them, there's probably something in their business model that needs tweaking. A $1000 price difference shouldn't make or break the deal for them if their rehab and prop selection processes are on point. I

If your appraisal is lower ($2k or more), you should definitely be seeing if the company can come down on the price - maybe not all the way, but at least to a happy meet-in-the-middle price. I agree having a tenant in place is a boon to you, but they're not guaranteed to stay, or even be a good tenant, and as others have said there could be other factors being downplayed to make the cash flow look good. If the appraisal is craxy light (like $10k plus) there should be a negotiaion and some serious convos about what backs up the higher sales price. Some TK providers do tack on a pretty big premium, and while a slightly higher price may sometimes be justifiable, a huge discrepancy is rarely a good sign. Again, I would see an unjustifiable gap that the company won't negotiate on as a sign that maybe their model isn't very efficient somewhere up the line. 

A few quick answers to your questions:

1. Any Turnkey provider (who should be full-service, do everything in-house, from scoping props to management) should provide a post-rehab inspection, but also be cool with you getting your own independent inspection. Especially for your first investment with a new provider, the couple hundred bucks you'd spend to verify what they're telling you will pay you back in peace of mind. If the appraisal comes in light, they should (generally speaking) be willing to come down a bit, and there should be a viable reason for you to be paying a higher price if it still ends up being more than $1-2k higher than appraisal. 
2. Generally, turnkey prices are pretty much fixed, but they should be willing to work with you if the appraisal is very light. Again, the lighter it is, the more flexibility they should be showing, and the more information you should be provided on why this situation arose (ex. are you looking at a townhome in an area with very few similar props so there just aren't enough comps to justify a higher appraisal figure?).
3. Your loan will depend on the appraised value, since the property is the collateral. Yes, the rehab will be reflected in the appraisal, but things like cash flow performance will not. That being said, if the appraisal comes in low, that is what the lender will use as the value, so you will only be able to secure financing for a portion of that value (say 80%, generally speaking). If your appraisal comes in much lower than your purchase price, and the provider won't negotiate on price, this could become an issue. 

For example: If the price is $150k, but the appraisal comes in at $135k, then you're unlikely to be able to get more than $108k (80% of $135k) in financing. That means that the remaining $27k (20% downpayment) of the 135k appraised value PLUS the $15k difference between appraised value and sale price would be due in cash. That means you're paying $42k in cash and financing $108k, which will bring down your COC return and mean your tenants are paying off less of your investment, which is one of the primary benefits of leverage.

Generally speaking, I would say this may be a red flag, but that depends a lot on how the provider handles it. What you should expect from them depends on how light we're talking here, but at the very least you should be getting some clear communication about why the discrepancy arose. 

Never be afraid to ask questions, and expect clear, data-backed answers. Turnkey can be a great investment, but it requires just as much legwork and due diligence as any other investment type. 

Good luck!

Clayton

@Justin Petrides Since you paid $1, I would definitely just sit it out until you meet the 2-year rule and use the Sec 121 exclusion. Otherwise, you are looking at quite the hefty tax bill. Still, you only have a to wait a bit longer to get a nice chunk of tax-free cash!

@Justin Petrides was this property gifted to you in a will? If this was passed onto you as an inheritance, you might be in a good position. If you inherit real estate, the tax basis automatically gets 'stepped up' to the fair market value on the date of the previous owner's death. So unless it has appreciated by a huge amount in the intervening year, you might be able to take most of the proceeds tax-free.

https://www.irs.gov/faqs/interest-dividends-other-...

https://www.investopedia.com/terms/s/stepupinbasis...

https://www.nolo.com/legal-encyclopedia/if-you-inh...

Otherwise, if you live in it for another few months you could potentially qualify for the Sec 121 exclusion mentioned above ($250k single/ $500k married filing jointly). As long as you've owned and lived in it for 24 out of the past 60 months you should qualify: https://www.irs.gov/taxtopics/tc701

@Dillon Dinglasan as others have said here, going OOS (out of state) for your first investment is definitely doable, and for many investors, necessary. Here are some basic pros and cons:

Pros:

• Your capital often goes much much further in other markets, esp if you live in CA, NY, HI, or the Seattle/Tacoma area
• Getting comfortable with OOS investing really opens you up to greater diversification of your REI portfolio as you build it. If one market takes a turn, your other properties are unlikely to suffer in tandem. Barring a nationwide plunge like in 2009, diversification across markets is a good risk-mitigation tool
• If you are looking for a more passive investment, going the Turnkey route on an OOS property sort of forces you to actually be pretty passive. Many first-time investors say they want passivity, but are actually too stressed about taking the leap to truly let go of the reigns. When you have an OOS property with a reputable Turnkey provider (or a truly solid, reputable PM, if you go the DIY route and assemble your own team) it cuts out the possibility of driving by, checking on tenants, etc. The passivity is sort of forced upon you, which some new investors sort of need, especially if they have full-time jobs/families, etc. The first investment is always the scariest regardless of where you buy, so having someone you trust to take care of a prop that is 'out of sight, out of mind (sort of)' can help with the transition.

Cons

• The flipside of the above coin is that you can't just drive by and see your property. So if you have the time, energy, and inclination to be more hands-on, OOS investing becomes a bit trickier. If you're wanting to self-manage to save money or just to get experience, investing in your area is generally the better bet. 
• The obvious downside: it's a little scary to invest in a market you don't know as well as your own. Not necessarily riskier, but definitely a little nervewracking. Of course, you shouldn't be investing until you've established a team or selected a Turnkey provider that is transparent and reputable. I suggest flying over to meet the people you're entrusting with your investment before cutting any checks, as looking someone in the eye (and seeing some of their handiwork) is still one of the best ways to suss out the scammers.

Most of our clients are from OOS or even out of country, so we know from experience that it is a doable, viable strategy. But before you make that decision, you need to have a serious come to jesus about what your goals, needs, and deal breakers are with regard to:

Time - how much time can you reasonably afford to spend on the investment once it's made, on an ongoing basis 

Control - are you willing to sacrifice a bit of your return for someone else to handle tenanting, maintenance, and turnover, or do you want maximum control regardless of your experience level

Resolve - if you're inclined to be very hands-on, do you honestly know that you will be able to maintain the level of involvement long-term? Do your job, family, or other commitments mean you'll be spreading yourself thin after six months? This is especially important if your decision to be hands-on (ie self-manage, handle maintenance repairs yourself) is motivated by the desire to increase returns by cutting out the middle-men. Some people love managing their properties and do so happily, but if that decision is not motivated by a strong desire to learn by doing, you may find your stamina waning sooner than you think, so just be honest with yourself.

Going OOS can be done a couple ways, as mentioned by other commenters. You can DIY, which means build your own team of agent, contractors, PM, etc. Or you can go the Turnkey route where one company does everything from finding homes, rehabbing, marketing and managing. Obviously, the latter is the easier route, ideal for those who really want or need a more passive solution. DIY can also work well, especially if you know people in the market you choose, have connections to reliable contractors etc - your network really makes or breaks this kind of investment because you have to manage all the moving pieces from afar, but it also gives you little more control and could potentially result in higher returns if you get the numbers right. Either way, you'll be doing tons of homework long before you ever start looking at properties. Vetting Turnkey companies or individual team members, asking for references, scouring BP for reviews and info - even Turnkey isn't truly passive, there's a ton of legwork that happens up front.

OOS investing is popular and viable, you just have to do the hard work of figuring out what you want and need out of your investment and the best route for obtaining it. Then you hit the books.

Best of luck

Clayton

@Tyler Smith I recommend flying out to meet the team. If you can schedule that visit so that you're actually looking at the property, great, but most things move a little too quickly for that to be feasible. In most cases, you'll be flying out to meet the team, see the town/areas they invest in, tour some properties. Unless you have the cash to fly out last minute to see properties as they come available, it's unlikely you'll have time to go see a specific prop before it gets snapped up. That being said, you should be able to get a clear picture of the provider and their workmanship during a tour. You should be able to see and ask questions about different neighborhoods, see some of their rehab work, and shake hands with the people you'd be trusting with your investment. It really comes down to a gut check, and meeting people, looking them in the eye, still is the best way to suss out a true partner vs a scam artist in most cases.

One more thing worth noting (or not, you decide I guess):

@David Clinton III made a good point, which is a stumbling block for some people when getting into turnkey - the difference between what I call 'Capital T Turnkey' and 'lower-case t turnkey'. 

Capital T Turnkey is what we call full-service turnkey - one company finds the props, rehabs, markets, tenants, manages, all in-house. Lower-case t turnkey is more of an adjective meaning 'rent ready'. So a turnkey property can be sold to you by a Turnkey company, a marketer, or the guy down the block. Many marketers especially call themselves Turnkey Companies, but what they really mean is that they market rent-ready rehabbed properties owned by other companies or individuals. Some of them might be owned by an actual Turnkey provider, some might be for sale by owner - either way you have to make sure you're getting what you pay for. It can be a rude awakening if you think you're buying a full-service Turnkey product, complete with PM, only to be handed off to a third party manager you haven't had a chance to vet. Not to say marketers never sell solid properties, they often do, but you need to do the work to verify what you're buying, from whom, and what kind of post-sale services you can expect.

@Tyler Smith out of state turnkey is certainly a viable option, but of course the people you work with are the linchpin. I'm sure you've seen some horror stories here on BP - due diligence and thorough vetting are the name of the game when it comes to turnkey.

That being said, many people are in your same situation - expensive home market, looking to put their capital to better use further afield. As @Jay Hinrichs said, many markets in the south and midwest are pretty interchangeable numbers-wise (though of course I'm biased toward Birmingham ;)  so the people you work with really are the crucial aspect of those types of turnkey investment. A good investment with a solid PM is always going to be better than an amazing property managed by someone who drops the ball. 

And, as @Larry Fried mentioned, you need to be looking to hold a turnkey for at least 10 years, realistically. There's no point in buying a rental and selling right away, as your tenants haven't had any time to build up your equity. You'll also need to be ready for some sort of market correction in the next few years if you go into a big primary market. But, just like stocks, if you hold on through the ups and downs you're more likely to end up on top - turnkey is buy-and-hold, so be prepared for market fluctuations. Secondary and tertiary markets won't have the same volatility, so for more stable values you should consider looking outside major metros. 

As for returns, you can certainly get 9% or better. If you buy in cash, of course, your ROI will be lower (usually 7-10% for us) but you'll have greater cash flow per month. I generally advise investors to use leverage, put down 20-25% and let the tenants buy you the remaining75-80%. Our returns in the first year for leveraged properties are generally in the 17-22% range, which increases as the loan paydown accelerates over time. Some of that is equity, of course, but equity your tenants have paid for. If you don't need maximum cash flow right now, this is the best way to go, IMO.

You'll find many many people on BP who have made their REI careers on OOS Turnkey investments, but it takes a lot of work upfront - it's certainly not the 100% passive investment many people make it out to be. Before you ever cut a check, you should be doing plenty of homework, vetting providers and asking questions. It's after the investment is made that you should be able to be relatively hands-off.

Luckily you're in the best place to get the info you need, trusted referrals, and plenty of specific advice from those who have gone before you. Use it for all its worth!

Best of luck!

Clayton

@Shevon Coorey others here have said it, but it always bears repeating: the people you work with on an out of state investment should be your top priority, even before market. Yes, numbers need to add up, but there are several markets around the country that provide solid cash flow and decent appreciation potential, without the wild highs and lows of primary markets. However, a bad PM can still take an amazing investment and turn it into a money pit. Everybody has bad days, bad tenants, bad deals on one occasion or another, but working with a team that has a track record of happy clients and good returns is going to be worth its weight in gold. 

Whether you go turnkey (where one company handles everything, including property management) or you build your own team and select your own PM, the people you choose to take care of your investment long-term are the single most important factor in any rental investment. A good investment in a stable secondary market with a great PM is always going to be a better performer than an amazing deal in a primary market with a PM who drops the ball. 

Focus on people first, market second. Use BP for all its worth to learn about the good, the bad, and the ugly, and come up with a concrete list of questions you need answers to (and there should be plenty of them) for a turnkey provider or independent PM to be on your shortlist. Of course, if you go turnkey, you have one list of many many questions, since they handle it all, top to bottom. If you decide to go the DIY team route, you'll need to vet each partner individually, but your PM is still going to be the piece of the puzzle that is most incentivized to keep you happy long-term, so finding a team you can trust is paramount.

Best of luck!

Clayton