All Forum Posts by: Clayton Mobley

@Jason Aurelius Sawicki I second those here who are skeptical about taking the loan. Remember that you will need to repay that loan within five years, using 'substantially equal' payments, at least quarterly. So let's assume your interest rate is around 4.25%, that means you'd need to be able to make quarterly payments of about $2649 in order to satisfy the terms of the loan. If you don't repay the loan in five years or less, it becomes a deemed distribution for which you will be taxed. So to even consider this option, you'd need to be absolutely sure, without a shadow of doubt, that you could make those payments without any problems. 

Of course, even if you could handle the payments, I generally advise new investors never to take money from retirement to fund their investments. Any investment is a gamble - not as risky as the craps table, but never guaranteed - and you shouldn't be gambling with your future. Plus, unless you're taking way way less than the allowable amount as a loan, you're cutting your retirement savings in half (the maximum amount you can take, or $50k, whichever is greater). 

I'd say wait until you sell the property, save up the quarterly payments you would be making to pay off your loan anyway (so in a year, about $10,600). Then you can leverage that money (approx $50k) to purchase solid properties with financing. You could get 2 solid B/B+ cash flow rentals in Birmingham with 20% down and have some cash left over as reserves. 

What i definitely would not advise doing is using the money to go all-in on a lower tier, sub-50k property just because that's what you can afford in cash. New investors are well-advised to steer clear of C/D properties - the turnover, evictions, and Section 8 red tape are a hassle even for more experienced investors and the returns are rarely as good in real life as they look on paper, especially if you have to pay for a PM to manage an out of state investment. This advice is doubly true if you're using your retirement savings to fund the investment. 

You're definitely not alone in feeling the itch to get started right now, but be patient, preserve your retirement savings, and use your money to purchase reliable investments in solid areas with a great PM/turnkey provider.

Best of luck!

Clayton

One more thing that I always want to tell new investors:

I strongly suggest focusing more on people than market. Numbers need to add up, of course, but your PM is the factor that can make or break your investment. A good investment with a solid PM will always be a better performer than an excellent investment with someone who drops the ball. Once you've narrowed your choice down to your top one or two, go visit them if you can. It's not always necessary (esp if you keep building a portfolio with the same provider) but for your first investment, this is another move that will pay massive dividends in peace of mind. 

Plus, when it comes to weeding out scammers, simply asking to schedule a visit can really help put a spotlight on how a provider truly views customer service. Just like getting solid answers to your questions, if a provider can't find time to do a tour, or communication mysteriously dwindles,  you have your answer.

@Marc S. Welcome to BP! I love the pro-active attitude, and BP is definitely the best place to be for new investors. Of course, I may be biased, but I do think turnkey is one of the best options for people in your shoes - it would be nearly impossible for you to self-manage all the time with your job and family obligations. Plus, being stationed in SD means most of the worthwhile investment props in your area are likely ludicrously priced, your money can go further elsewhere, which you've already figured out.

While I am, obviously, a big fan of turnkey, it's definitely a bit of a minefield these days, although I do believe it's getting better. As the niche got more profitable and popular, a ton of not-so-scrupulous 'providers' popped up all over the country (see any thread re: Morris Invest for how that story often goes). So the primary thing you need to focus on as a new investor looking at turnkey - before market, before budget - is nailing down exactly what you're looking for in a provider and which questions (and there should be plenty) you'll need to ask of the providers you consider. I always say if a provider can't or won't provide solid, data-backed answers to your questions in a timely manner, it's time to move on. 

There are a handful of really reputable, solid providers out there, and you can find information about any provider worth your time here on BP. That's not to say that smaller providers can't be a good bet, but when you're going out of state, it pays in peace of mind to go with someone with a proven track record. Use BP for all it's worth - look at reviews, reach out to providers directly, ask for references, and talk to people via PM who have worked with those providers. People tend to be much more forthcoming in their inbox than they would be in the forums. 

Do your research and be clear about goals and needs, the opportunities that meet those criteria will become evident once you narrow the field.

Best of luck!

Clayton

@Rick Thompson Everyone's risk tolerance is different of course, but all things being equal, i always recommend that our clients stick with 20-25% down. Why? Because your tenants buy you 75-80% of a house over time, what's not to love? 

Yes, the risk is higher because you still have to pay your loan if you have vacancy, but your risk is also high with a cash investment because all your capital is tied up in one property, so one vacancy wipes out all your income. They are different kinds of risk, but both have their upsides and downsides. From my perspective, in terms of building an REI portfolio, the best bet is to spread your capital over a couple solid cash flow properties and let your tenants pay down your loans over time. If you don't need the monthly income, devote it to paying those loans down faster.

I do also agree with others here that a fixed rate loan right now is the better option, as rates are likely to only increase after so many years of super low rates.

@Mike Bales I'm going to second others here, you're looking at negative cash flow even with the most basic assumptions about expenses. That equity could be put to much better use in other markets. 

Lucky for you, the greater Puget Sound market is only getting hotter as Seattle prices people out of the city, so if you sell now you'll likely make a pretty good profit. Plus, this cycle is likely nearing a peak - it can't keep going like this forever and interest rates can really only go up in the near future, reducing people's buying power. Whenever you're in a more volatile market like that, it's better to get out a little early than a little late. Right now people are desperate for even moderately affordable props in Seattle and surrounding areas, so you're in a good position as the seller.

Good luck!

@Adrian Ruark I'm not usually one to tell people to get rid of a free-and-clear property, but I agree with @Jason Lee - the tax advantages of selling now are huge. He also makes a great point about interest rates, they're only going higher. You're likely very near the top of this cycle, and that money could be put to work elsewhere. 

I do like Jason's idea of putting it toward the house and using a HELOC to access the equity. Although, if you have the 20% you need already and you're prepared to make payments, you could always use the proceeds from the condo sale to invest in less pricey markets and skip the HELOC process.

Assuming you used the whole 475k, you could have a nice little portfolio of cash flow props in Birmingham (and other Midwest/Southeast markets). If you were ok with taking on additional debt (loans your tenants would pay down for you over time), you could potentially leverage that 475k into 10 or more cash flow properties (though there are limits on how many loans you can carry at once).

Of course, there's always a middle ground too: sell the condo, use some of the money to increase your DP on the new house and use the rest for investing. With no loan on the condo and no capital gains tax due, you're sitting quite pretty.

You've got a few good options here, but unless the condo is going to rent for way more than 1%, that capital could likely be earning you more elsewhere.

@Tim Haenn I'll have to agree with others here, we need more data. For example, I see you're using 5% for several of your expenses, but what is that based on? Is this your estimate or do you have hard data backing those numbers up? It also looks like you only have 6% for your PM fee, which is quite low. Most PMs charge 8-10%. On the other hand, you have utilities listed, which hopefully your tenants would be paying. 

Generally speaking, we don't like anything with an HOA because of the cost and the hassle, but I don't know your market and what non-HOA props might be available.

As others have said, the area makes a huge difference. A $110k prop in one market could be a solid B/B+ (Birmingham) and be a total nightmare in another market (good luck finding anything decent for that price in Seattle, for example). 

I'd also want to know about CapEx items and how old they are. When was the last rehab and what was the scope? Will you need to put additional time and money into this to make it a viable rental? How much?

I know it sounds like we're being picky, but analyzing a deal is as much about context as it is about numbers, so these are the types of questions you'll have to get used to asking as you progress in your REI journey.

@Said Aliyev the primary issue for you will be the fact that this property was purchased as a 'fix and flip'. the 1031 exchange is only valid for long-term investments, not short-term flips. While sometimes even long-term investment props end up being sold fairly quickly after purchase, the IRS requires that you be able to demonstrate your intention to hold the property long-term when you bought it. The fact that you have referred to it as a Flip in writing doesn't aid you in proving that intent.

There's no hard and fast rule, but the general consensus is that you need to have held the prop for 12-18 months in order for the IRS to feel ok about your intention to hold the prop as a rental long-term. But, even if you have held it that long, if it is clear that you bought it with the intention of flipping it, the IRS considers that inventory, not a long-term investment, and the 1031 would not apply.

Hope that helps!

As an aside, I noticed someone mention that you can buy turnkey props on MLS and I just wanted to point out a distinction because it is a source of a ton of confusion in REI. The term 'turnkey' has come to be applied to a lot of different investment products, so it's good to clarify.

What I like to call 'lower case t' turnkey is just any property that is rehabbed and rent-ready. These you can buy on MLS or directly from a seller on your block, but you then have to manage them or find a manager, you don't know much about what went into that property prior to laying eyes on it. 

'Capital T' Turnkey is the full-service investment product I discussed above, where one company takes care of every aspect of the investment process, from finding props to managing them.

You'll also sometimes see marketers referred to as Turnkey Providers, but what they really mean is that they advertise and sell turnkey properties owned by other people or entities, so they themselves are not Providers at all. These companies usually market props in many different markets, owned by many different companies, and when you buy one they get a little off the top and you get signed off to another company you may or may not have even vetted yet. 

It's not that marketers aren't a good resource for investments, but it's important to know that when you buy a prop from a marketer, you may or may not be getting a Capital T Turnkey product, and if you are, you need to do additional due diligence on that provider before pulling the trigger, because the marketer isn't the company you'll be dealing with for the long haul.

@Renata Miyerov, @Spencer Hilligoss is right on the money. Markets are important, and of course the numbers need to work, but when it comes to Turnkey it's People First all the way. You could do all the market research it's possible to do, you could find the best house at an amazing price in a neighborhood ripe for appreciation with rental demand through the roof, and it can still turn into a money pit if the turnkey provider you choose drops the ball. 

Generally speaking, the property management side of things (in any rental investment) is the make or break aspect of your investment. When it comes to full-service Turnkey, however, this is doubly true. Because a true Turnkey provider does it all - finds the props, rehabs them, markets them, manages them - they should be incentivized at every step to keep long-term performance in mind. That means living and working in the market they sell, so they know all those little micromarkets from street to street. It also means doing high-quality rehab work with consistent results and upgraded capex items to keep good tenants happy and maintenance costs low as long as possible. It means keeping maintenance call out times down and rent payments on time. If you have a provider that can't or chooses not to deliver on any of those crucial aspects of their business, then even the best prop can end up being a loser in the long run.

There are plenty of good markets for Turnkey rentals, primarily down here in the South and in the Midwest. I agree with others that secondary markets are going to have a lower bar for entry and less volatile ups and downs as the real estate market cycles.

If you're going the Turnkey route, focus on the people first and market second. Ask for reviews here on BP, ask providers for references, and when you've narrowed your choices down to the top one or two, fly out to meet them. Shake their hands, look at their work, tour their properties. You can still tell a lot about the quality of an operation by looking its people in the eye, and the investment of time and airfare will pay off big time in peace of mind.

Good luck!