All Forum Posts by: Clayton Mobley

@Isiah Ferguson While I am usually strongly in favor of leverage, I agree with those here saying that if you're not mentally prepped for taking on that risk, I'd wait. As @Randy Bloch pointed out, you don't have to go all or nothing. You don't need to pull all your equity out of both properties right now. While it's true that equity doesn't bring in any money, it does provide peace of mind, and it sounds like that is one of your priorities, and that's ok. 

You can refi just one, and let the other sit free and clear. You can take out a HELOC and only use a portion of the equity for a downpayment on a new leveraged property, so you'd still have 1 full free and clear prop, one mostly paid off, and one leveraged. You can put a bigger downpayment on new props to minimize your loan payments so that if you have vacancy it's not as big of a hit - there are a lot of ways to arrange your debt and equity so that you're putting that capital to work using 'OPM' (other people's money - in the case the bank and the tenants who pay the loan for you) while still having enough of a safety net to feel confident moving forward.

Once you get the snowball going (your portfolio will get bigger, faster, the more doors you have) you may feel more confident in having all your props leveraged, and you can make that decision then. Don't feel like you have to do what 'everyone else' is doing or go fully leveraged right now to avoid FOMO (fear of missing out, I am allll acronyms today). Everyone's REI path is unique and it's important, first and foremost, to understand both your goals and your NEEDS (not an acronym). If you have a strong need for peace of mind and a safety net, that's fine, create a strategy that incorporates that.

Congrats on your success so far, and best of luck!

@Steve Vaughan @Jay Hinrichs thanks for the insight on how this model developed, it makes logical sense given the timing and the economy that folks would try to target what little cash reserves investors had and build off that - although its certainly not the way I would operate... Of course, regardless of the fact that the whole model is convincing people to fork over their retirement money, any 'turnkey' company that ONLY allows their own inspection/appraisal and in-house financing is just.... red flags all over the place. 

I agree with Steve, investing in low-tier assets within your IRA is not the best way to put that money to work, more passive stable investments are going to be less headache and less red tape. Yeah REI in a solid market that's fully managed by folks with a track record if your IRA is just overflowing with capital and you want to diversify, maybe, but a C/D class property is always gonna be more complicated than you think, even if you're 'hands off'. Plus we all know that many of the fly-by-night turnkeys target these lower price points because they know inexperienced investors see the affordable price tag and put blinders on to all else, so there's a lot more turnover in that part of the turnkey industry - failing management and being handed off relay-style to whatever PM steps up to take their place is NOT the kind of hassle you want your retirement funds tied up in. Of course that doesn't help OP in this case...

@Steve K. thanks for the link - I had not heard of these folks before but WOW, that's a lot of red flags. Not quite the Morris 'model' but the 'only our appraisal' and 'only our financing' stuff is so bogus. One reason it's so important for new investors to know what they can and should expect from a real provider. 

@Larry Spradling I agree with others here, your PM has to go. Since the prop is held by an IRA, you will have to be careful about self-managing. It is possible, but you can't collect a fee or commission (obviously), you can't pay for repairs etc out of pocket, you can't accept checks to your personal account - all the financial stuff goes through the IRA. But you CAN be the one that picks tenants, signs leases, and does other non-value-adding activities that the IRS doesn't care about because it doesn't impact the value of the asset (but you CAN'T do any repairs yourself, because that adds value they can't tax). It will be tough long-distance but it is technically possible. You may need to bite the bullet and fly out to inspect, oversee any repairs necessary (hire a contractor through the IRA, of course), and find a new tenant if the current one needs to go as well.

I think the first step is to get a real value estimate not from the current PM. Once you know how much you stand to lose if you sell, you can make the decision about keeping it and trying to boost your cash flow by either forcing some equity with upgrades and upping the rent / self-managing, etc. Just remember that you can do the decision-making, but not the actual work. There are IRA services that facilitate this kind of thing, although that's another expense. I'd talk to a CPA first.

Sorry to hear you got caught up in this scam - best of luck in getting to the other side of it.

hahaha @Michael Skoczylas 'swap until you drop' is definitely a less gruesome version - I may steal that ;)

@Tommy Sowell As long as you continue to execute 1031 exchanges, you continue to defer the taxes on your gain and your depreciation recapture, as @Jacqueline Gardiner correctly stated. She is also correct that a popular and effective strategy is what I call '1031, 1031, Die' - maybe a bit morbid, but apt. 

If you ONLY sell props via 1031 exchanges, then leave your final props to your heirs, you avoid taxation entirely in your lifetime. Because the properties are inherited, your heirs received a 'stepped up' tax basis equal to the property fair market value at the time of your passing. 

So, essentially, if you die on a Monday and they sell the properties on Tuesday, your heirs could conceivably sell the properties with zero tax liability (since the market price on Monday = their tax basis AND the sales price, more or less). If they hold the properties as rentals and sell down the road, they only owe taxes on the gains and depreciation recapture accrued since your death - or they could 1031 exchange and continue the cycle.

I believe it was the very wise @Dave Foster that recently said 'You can live tax-deferred but you gotta die to be tax-free' 

@Caleb Heimsoth thanks for the shout out. Glad you folks are out there taking the time to help new investors avoid the Morris scam - honestly can't believe that guy is still going!

@Robert Tinker I should preface this by saying we are a turnkey company in Birmingham, AL. That being said, the following advice is what I tell any and all new investors regardless of which market they're looking at.

@Mike D'Arrigo  made some really good points that you should take note of, esp his comments about incomplete pro formas, inconsistent rehab processes, lack of references, and selling only low-tier props.  

There are several markets where you can get relatively comparable returns for relatively comparable properties - turnkey investing isn't that complicated and the specific market isn't what's going to make or break your investment. The people, on the other hand, and the research you do - that's what's going to decide your fate. The most important factor is finding a provider that is transparent, communicative, and is going to be around for the long haul.

Below are a few things to do, look for, or look out for, when shopping for a turnkey investment. It's important to remember that all investments have inherent risk, but you can mitigate your risks to some degree by being prepared and thorough in your vetting.

1. Any turnkey company you consider should be full-service, meaning they do everything from finding props to rehab to long-term management. If they sell you a property and then sign you off to a third-party PM, that's another team you need to vet, and means the TK company has less skin in the game (ie once you close, their work is done).
2. They should have solid, data-backed answers to your questions at-the-ready. Any TK company worth your time knows their vacancy and maintenance rates, turnover, avg move out costs etc off the back of their hands. If they don't, they're not paying enough attention to the metrics that help them improve performance, which is a bad sign.
3. Some will disagree with me on this, but I advise most investors (and new ones especially) to stick to B/B+ properties and areas. This means places that nurses, teachers, skilled laborers, etc live. Places regular middle-class folks would be happy to raise a family. These areas have the best combination of cash flow, appreciation potential (never guaranteed), exit options (you might be able to sell to an owner occupant rather than another investor down the road = higher sales price), and stably-employed tenant pools. Cash flow for lower-tier props can look amazing on paper, but there are a lot of other factors that make real-world returns less impressive. New investors, esp out of state, should look for reliable, consistent cash flow and capital preservation. If you want to get into C/D class props, take your time to learn the ropes and try to invest in your own market so you can self-manage to minimize expenses.
4. Use Google Earth to check out the neighborhoods they list in. Ask for a couple properties they have sold recently and take a virtual walk around those neighborhoods to see if they line up with the class of property you're being sold. There is a difference between B- and B+, and it's sort of a 'you know it when you see it' situation. But you'll know right away if something is being listed as a B but is actually a C or D ( I have seen folks listing props in C+ areas here in Bham as being A-, and someone from another market wouldn't know the difference without looking). In B areas, homes will be modest but maintained, grass mowed, no cars up on cinder blocks, etc.
5. After you've narrowed down your choices to your top one or two, just make the trip out to meet them. See the city, tour the neighborhoods, check out some properties, meet the team. Face to face is still the best way to gut-check your decision, and this is a long-term relationship you're getting into, so make the investment in your investment and just fly out. If you invest with them and it goes well, you don't need to make the trip again, you can build your portfolio with that provider pretty easily.
6. Even if you haven't narrowed down your list yet, ask about a visit. Many fly-by-night operations will talk a real good game but then suddenly stop responding or 'not be able to accommodate you' if you ask about coming out to see them. Why? They don't actually have real boots on the ground in the markets they advertise, let alone offices. They're either marketers calling themselves turnkey (ie they don't own any properties, they get a referral fee from other TK companies around the country for sending buyers) or they're some sort of Morris Invest house of cards (search the forums for Morris to see what to avoid).
7. Pay attention to language. If a TK company sends you emails with a used car salesperson vibe, lots of ACT NOW!!!!!!! messaging or too-good-to-be-true promises, just walk away. This also applies to anyone who tells you that you need to sign a contract within minutes of being emailed a prop (ie before you have time to run numbers and ask questions). Real estate isn't going anywhere, don't let this type of hype make you pull the trigger on something you haven't had time to properly vet.
8. Go ahead and spring for your own 3rd party inspection / appraisal. If a company you're considering working with balks at this, that's a bad sign. 

Hopefully some of that is helpful. Turnkey can be a great investment, esp for folks in pricier markets, but it isn't the Passive Holy Grail that many people make it out to be. You need to put in the legwork to find a real long-term partner.

Here are a couple recent-ish threads that might be helpful in terms of learning how to vet turnkey providers and markets.

https://www.biggerpockets.com/forums/88/topics/638...

https://www.biggerpockets.com/forums/48/topics/683...

https://www.biggerpockets.com/forums/21/topics/674...

https://www.biggerpockets.com/forums/55/topics/676...

Best of luck!

Clayton

@James Wise this looks great! It's not something we've really considered before, but I have a lot of respect for @Dave Foster and you and I always line up with our core values and business ethics on the forums, plus you regularly provide value and education to new investors (and much more succinctly than I do lol) so it's definitely something we'd like to talk about more. I'll put you in touch with our new CEO, Lindsay Davis, and y'all can talk turkey.

@Alpesh Parmar   feel free to reach out any time if you're looking for turnkey in Birmingham, or just have questions about the market. 

@Sam Lopez once again, @James Wise nails it - take note of his post and the things he lists, he's spot on.

As he said, there are several markets where you can get relatively comparable returns for relatively comparable properties - it isn't that complicated and the specific market isn't what's going to make or break your investment. The people, on the other hand, and the research you do - that's what's going to decide your fate. His list of popular turnkey markets is a good start - you know there are proven returns in these areas. From there, it's about finding a provider that is transparent, communicative, and is going to be around for the long haul.

In addition to Jame's points, I usually like to add a few other things to look for, or look out for, when shopping for a turnkey investment. As James said, all investments have inherent risk, but you can mitigate your risks to some degree by being prepared and thorough in your vetting.

1. They should be full-service, meaning they do everything from finding props to rehab to long-term management. If they sell you a property and then sign you off to a third-party PM, that's another team you need to vet, and means the TK company has less skin in the game (ie once you close, their work is done).
2. They should have solid, data-backed answers to your questions at-the-ready. Any TK company worth your time knows their vacancy and maintenance rates, turnover, avg move out costs etc off the back of their hands. If they don't, they're not paying enough attention to the metrics that help them improve performance, which is a bad sign.
3. Some will disagree with me on this, but I advise most investors (and new ones especially) to stick to B/B+ properties and areas. This means places that nurses, teachers, skilled laborers, etc live. Places regular middle-class folks would be happy to raise a family. These areas have the best combination of cash flow, appreciation potential (never guaranteed), exit options (you might be able to sell to an owner occupant rather than another investor down the road = higher sales price), and stably-employed tenant pools. Cash flow for lower-tier props can look amazing on paper, but there are a lot of other factors that make real-world returns less impressive. New investors, esp out of state, should look for reliable, consistent cash flow and capital preservation. If you want to get into C/D class props, take your time to learn the ropes and try to invest in your own market so you can self-manage to minimize expenses.
4. Use Google Earth to check out the neighborhoods they list in. Ask for a couple properties they have sold recently and take a virtual walk around those neighborhoods to see if they line up with the class of property you're being sold. There is a difference between B- and B+, and it's sort of a 'you know it when you see it' situation. But you'll know right away if something is being listed as a B but is actually a C or D ( I have seen folks listing props in C+ areas here in Bham as being A-, and someone from another market wouldn't know the difference without looking). In B areas, homes will be modest but maintained, grass mowed, no cars up on cinder blocks, etc.
5. After you've narrowed down your choices to your top one or two, just make the trip out to meet them. See the city, tour the neighborhoods, check out some properties, meet the team. Face to face is still the best way to gut-check your decision, and this is a long-term relationship you're getting into, so make the investment in your investment and just fly out. If you invest with them and it goes well, you don't need to make the trip again, you can build your portfolio with that provider pretty easily.
6. Even if you haven't narrowed down your list yet, ask about a visit. Many fly-by-night operations will talk a real good game but then suddenly stop responding or 'not be able to accommodate you' if you ask about coming out to see them. Why? They don't actually have real boots on the ground in the markets they advertise, let alone offices. They're either marketers calling themselves turnkey (ie they don't own any properties, they get a referral fee from other TK companies around the country for sending buyers) or they're some sort of Morris Invest house of cards (search the forums for Morris to see what to avoid).
7. Pay attention to language. If a TK company sends you emails with a used car salesperson vibe, lots of ACT NOW!!!!!!! messaging or too-good-to-be-true promises, just walk away. This also applies to anyone who tells you that you need to sign a contract within minutes of being emailed a prop (ie before you have time to run numbers and ask questions). Real estate isn't going anywhere, don't let this type of hype make you pull the trigger on something you haven't had time to properly vet.

Hopefully some of that is helpful. Turnkey can be a great investment, esp for folks in pricier markets, but it isn't the Passive Holy Grail that many people make it out to be. You need to put in the homework to find a real long-term partner.

Here are a couple recent-ish threads that might be helpful in terms of learning how to vet turnkey providers and markets.

https://www.biggerpockets.com/forums/88/topics/638...

https://www.biggerpockets.com/forums/48/topics/683...

https://www.biggerpockets.com/forums/21/topics/674...

https://www.biggerpockets.com/forums/55/topics/676...

Best of luck!

Clayton