All Forum Posts by: Clayton Mobley

@Alexander Coventry I'm going to echo what @Jason Carter and others have said -  BP is going to be your best tool here. Think about markets you're interested in and set up increasingly more specific keyword alerts. So for example, I'm in Birmingham and I sell turnkey, so I like to know when people are talking about my market and my niche, so I have 'Birmingham AL' 'Birmingham turnkey' 'Birmingham turnkey reviews' 'Spartan Invest' etc. This helps me know when people are talking about something that relates to me generally or specifically. When you see someone doing the type of investment you're interested in and succeeding in the market you like, reach out to them and ask about their experiences, ask people for references for providers, agents, contractors. The worst they can do is say no, and you'll find most people on BP are more than willing to help out new investors. 

If there's an REI meetup in your area, go to it, shake some hands, make some connections and learn from people that are further along than you. BP is one big social club where we all have one obsessive interest, so make the rounds, send some PMs and start building a network. You'll be surprised how many useful bits of advice, solid leads, and valuable referrals can come from BP relationships.

Good luck!

@William S. once again we cross-post lol

If you have a plan to pay for the rehab expense-free, then all the better. Sounds like you know what you need to do. Sorry I couldn't offer a more profitable plan of attack. Hopefully if you end up selling next year when the weather thaws you'll have had tenants paying your mortgage and maybe a little appreciation to reward you for your patience.

One thing to keep your costs low, which I'm guessing you already have thought of, is to make sure you keep up on the maintenance. Don't defer things, as they just fester and become bigger, costlier problems down the road. We try to get any maintenance calls taken care of in 24 hours, which keeps good tenants happy and our long-term maintenance costs down. Since you're going to be the landlord instead of hiring a PM, just something to consider.

Good luck!

@William S. Ok that makes things clearer. So you really don't have any appreciation gain to speak of and very little of the loan paid down aside from your downpayment.... 

It sounds like with your limited options and seasonal restrictions you may have to, as you said 'make the best out of it'. The upside is that it likely won't lose value over time, so if you will need to do the kitchen remodel regardless at least you can boost the resale value for next year. The rent rate (at $1200) is good for the price you paid, it's just a shame that you need to pour more into the prop to get there, although those improvements will increase your tax basis which will be useful if/when you sell. If it's just cabinets and other cosmetic things, maybe you can get it done for less than $15k, fingers crossed.

Another thing to keep in mind is that if you rent it out for a 12-18 months, 'officially' converting it into a rental, you could use the 1031 to leapfrog tax-free (deferred, not completely avoided) into other investment props. If you sell within the next three years, you can still qualify for the Sec 121 capital gain exemption (up to $250k if you're single, $500k if married). So there is a sweet spot where you can take advantage of both (basically after one year but before three). Just to point out that you will have additional strategic options down the road if you do end up renting it for a while.

At this point, it sounds like you will need to just massage your numbers to get to positive flow, let tenants pay down the loan for a while and then try again next year if you feel like selling is the better option. It's kind of a tough spot to be in, but there are many people in much worse situations with their accidental rentals - at least you have a way to force positive flow, even if it isn't necessarily ideal.

@Sarah Manshel While that cash flow (assuming that 'over costs' means net positive) sounds fantastic, I'd need more info about the prop, what you bought it for, how much you owe now, what you could sell it for. Have you looked at comps in the area to see what similar homes are going for? Are you married or single (this impacts how much gain you can take tax-free, although you still pay depreciation recapture as Dave said)?

$700 net flow per month is great, but if this is a highly appreciated piece of property you could be getting more, with greater diversification. Like Dave and others have mentioned, the 1031 is going to be a powerful tool for you if you do sell, so don't skimp on the research there.

If you're willing to post some more specific numbers for the property we could weigh in with more specific advice :)

@William S. sorry looks like you guys were posting while I was writing lol

At your interest rate and minimal equity, you don't have a lot of options finance-wise unless it has appreciated a lot while you've owned it. To pull money out via HELOC you can only borrow a max of 80% of the home value (for primary residences, but since you're converting to a rental, likely just 70-75%), less what you owe. At this point, you still owe almost 80% unless the value has changed considerably, so you'd have very little, if anything, to draw on. Your options are similarly limited in terms of refinancing because you haven't really paid down your first loan yet and you already have a very low rate. Since you're converting into a rental, your refi rate will very likely be higher since the bank sees investments properties as higher risk than primaries.

If you have a lender you really trust you could talk with them about options but I wouldn't hinge your plan on anything miraculous happening on the bank's end.

@William S. while the increased rent is good, it requires a substantial expenditure. Think about how many months of $160/month cash flow it will take to earn that investment back. 

It's been a while on this thread, but I don't see any indication of how much the property is worth now. Do you have any idea? What was the offer that fell through and why did it fall through? That and how much you still owe on the loan will give us an idea of the opportunity value here. Not sure if you refi that you'll get a better rate, as rates are increasing now. 

But despite those numbers, it sounds like you're just trying to force this one to work by massaging it a bit - which is usually an indication that you should move on. You mentioned that you need to rent it in August due to the time of year - is that because school starts again and people don't like to move then? What's your thinking here?

My personal thought is still that you could be getting more for your money elsewhere, especially if raising the rent requires a $15k kitchen remodel and getting to any significant (ish) positive cash flow requires that you self-manage AND find new insurance...

@Jimmy Lane without even really diving too deep into the numbers I'm gonna advise you to pass. For $70k you can get a better property than that in other markets. That's a lot to pay for a property that you definitely will need to pour additional capital into. Plus, in a C-class area you're going to have a higher-risk tenant pool than if you go with B/B+. 

The pre-existing tenant is a great perk, but it doesn't guarantee that they'll stay, and the lower down the prop class ladder you go, the higher turnover you're likely to see. I see you're including a 10% PM fee, so I assume you're not planning on being a landlord. If you're already paying that for management, look for a better property in a market where you capital goes further.

Good luck!

Clayton

@Dan Smucker absolutely, use BP as the amazing tool it is. Search the forums for reviews and then reach out to people via PM to get the full story. Referrals from people you really know are a great way to start as well, though if you need to expand your referral pool (like if the people you know aren't looking at the same kind of investments) BP is the place to go.

As an FYI, the average rent for our props is $950, so certainly not CA rents, but not CA prices either. In general, our first year returns for financed purchases range between about 17-20% including cash flow and loan paydown, and go up from there as tenants pay more and more principle each year. Return calcs do not include depreciation deductions or any kind of appreciation. Birmingham is like any other market, there are good areas and bad. Regardless of where you invest, working with people who really know the micro markets is crucial to successful investing.

Good luck finding the market and the team for you - I'm sure BP will be extremely helpful in your research.

@Alexander Coventry, @Jason Carter is right on the money -  the people you work with are going to make or break your investment, even if you choose the perfect market. Of course, the numbers need to line up, but that being said: People first, market second. 

There are tons of people here on BP in the exact situation you're in - pricey home markets force you to go out of state to make the most of your capital. The best advice I can give is to focus on the people - and that goes for the turnkey route as well as the more DIY strategies like BRRRR. Ask questions and expect solid answers based on hard data (ie if you ask what a turnkey provider's occupancy rate is, you shouldn't get an answer like "oh it's great, like 100%"). Ask for references - any provider, agent, contractor, or PM should be willing and able to put you in touch with people who will talk to you about their experiences. Use BP to check out review threads, ask people here via PM what their experiences have been. Do your homework and vet the people you're considering partnering with like your life depends on it - because your investment definitely does.

When you've narrowed down your top one or two markets/teams/providers, bite the bullet and fly out to meet the people, tour the operation, and see their work first-hand. It's a small expense in the scheme of things and it will pay you back ten-fold in peace of mind.

Best of luck!

Clayton

@Dan Smucker of course, I am definitely biased, but I'd encourage you to check out Birmingham, AL. There are several markets in the South and Midwest that are great for cash flow at much lower entry points than CA, but we're pretty excited about the future in Birmingham right now. 

With regard to your price point, if your primary goal is cash flow, you don't even need to going that high. You can get a solid B/B+ cash flow property here for approx $100k. In more rural, blue-collar areas, a B-/B prop can be lower, down to $75k -  still rent ready, still fully rehabbed with new capex items, etc. On the high end, our properties are about $130k for more B+/A- areas. 

Whether you go turnkey or DIY (find and vet an independent agent, contractor, PM, etc), investing out of state is mostly about the people you work with. Like you said, there are a lot of 'hot' markets right now. But you could have the best rental prop in the best market turn into a money pit real quick if the people you trust to manage that investment drop the ball. I'd say do your research on markets, of course, but focus on the people. The numbers need to make sense and meet all your requirements, but the folks you choose to build that relationship with need to be transparent and stable (ie they won't be closing shop in the next 10-15 years). Ask questions and expect solid, data-backed answers. Ask for references for anyone you consider partnering with - they should have plenty and be willing to put you in touch.

Once you've narrowed down your markets/teams to your top one or two choices, bite the bullet and fly out to see the area, shake hands, look people in the eye, see some of their work with your own eyes. It's an investment in your investment and it will pay huge dividends in peace of mind. 

You're not alone - plenty of BP members live in pricey markets and have to go out of state to make the most of their capital. Do your homework and insist on quality, you'll be fine.

Best of luck!

Clayton