All Forum Posts by: Clayton Mobley

@Aariff Kadar It sounds to me like you may be overthinking a few things here. Definitely not an uncommon problem for new investors, but you could be making it harder than it needs to be.

For one thing, most new investors just starting out don't need to bother with an LLC. Especially if you're just buying one property at a time, it's usually an unnecessary hassle. Run the numbers on an insurance policy and compare it to the cost of the LLC, and include the cost of the operating agreement, not just the CA annual fee. Since traditional financing is the best way to leverage your capital at low rates, I'd skip the LLC for now.

As for your #3 - I would highly recommend you stick to traditional financing (mortgages) whenever possible. I do not advocate that anyone take out high-interest credit card debt or raid their retirement funds. If you don't have enough cash for a downpayment (25% of the property value), then your first step is to build up your savings. Do not sacrifice your financial future to starting investing sooner.

As for questions #6-8, this website will be one of your greatest resources. You can find connections to agents, contractors, and property managers (and turnkey companies, of course) all over the country. But again, you don't need to tackle everything at once. Your first step (after making a plan to ensure you have enough cash to buy something worthwhile), is to decide what kind of investment you want. Do you want it to be a full-time job? Do you want to do rehab work yourself? Do you want to be a landlord? Do you prefer to just collect rent every month and let someone else do the work? Your answers to these questions will point you toward a more specific strategy and make the research phase less overwhelming.

For example, if you do decide to go the turnkey route, then you don't need to find a contractor or agent or PM - because a good turnkey provider does all those things. So before you try to figure out how to make contacts in a bunch of different markets, I'd say tackle your research in this order:

1. What kind of investment do you want? Passive or hands-on DIY?
2. Where do you want to invest? Depending on your answer to #1, different markets might be better for you. If you want to buy houses and remodel them yourself, and then manage the tenants, you need to choose a market you can get to easily. If you go turnkey or want to use a Property Manager, you have more options since you don't need to be able to get to the property regularly.
3. Learn how to analyze deals. There are tons of threads here about how to look at numbers on rental properties and decide if they are a good bet. Learn about vacancy, maintenance, turnover, etc and then practice doing the math on properties you find on MLS or Zillow. It doesn't matter if you actually want to buy them, it's just practice.
4. Start analyzing actual deals in the markets you have chosen. Or, if you want to go turnkey, start researching which provider you want to work with. I won't go into all the things you should ask to vet a turnkey provider here, but if you are considering that option I'd be happy to give you a list to start with.

Don't let yourself get overwhelmed with all you don't know yet. Choose something to study, questions to answer, and answer them. Then move onto the next logical step.

Good luck!

@Jaysen Medhurst makes a very good point re: the tax liability transferred to your son. If you sell at $650k but it's worth $900k, he's already got a tax basis way below his (eventual) sales value, unless the market takes a serious dip before he sells... 

Interested to see what CPAs have to say about the gifting aspect as well.

@Derwin Villanueva I will defer to @Dave Foster here, but my understanding is that there are stricter rules with regard to 1031 exchanges involving a 'related party' (which would include your children).

Fairly certain the primary stipulation is that both you and the receiving party (your son) hold the property for at least 2 years. So if you've owned it for more than 2 years, and you sell to your son, he needs to them keep the property for at least 2 years as well.

http://www.exeter1031.com/1031_exchange_related_pa...

As for the selling below market value aspect, I'll let Dave weigh in on that. It sounds like something the IRS wouldn't be keen on, but I don't know the specifics.

@Amanda Aesho, @James Dunwoody hit the nail square on the head. If you want to be close to your property, self-manage, or will just have lower stress feeling a little more 'in control', then find a market near you, or at least driveable. 

If those things don't matter for you and you just want solid cash flow, then it's all about vetting the people you work with. James listed a bunch of to-do's you should probably write down: ask for referrals (and call them), check out reviews here and elsewhere, spring for your own appraisal and inspection, etc. All great advice.

I would like to add a couple additional things you should keep in mind when vetting a turnkey company:

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, they're 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're not 100% sure is right for you.

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, like many people say. You need to put in the homework to find a real long-term partner.

Good luck!

@Brandon Marshall welcome to BP! Always happy to have another Bham native on the site! I love your plan - especially your long-term thinking with regard to loan pay down. If you don't need the income now, the best thing you can do is plow it all back into the loan. The amount you can save on interest over time doing this can be extremely powerful (of course, doing this with a portfolio of 5+ cash flow props will make the process go faster and save you more than with one prop, but the principle is the same). When you make extra payments, make sure to specify that they be applied to your principle. You may not need to do this, but sometimes lenders apply extra payments to future interest charges and it's just better to be safe than sorry.

Best of luck!!

@Akshar Patel it depends on why you moved. If you just moved after 20 months because you found another property you liked better, then you don't qualify for the exemption. If you moved because of work, military assignment, work in the intelligence industry, health reasons, or another IRS-approved 'unforeseen circumstance', you may be eligible for a pro-rate exemption.

https://www.nolo.com/legal-encyclopedia/the-partia...

https://www.irs.gov/publications/p523#en_US_2018_p...

@David Roe I don't think this is about the price point, or the cut the seller is making. It's more about the area a property of that value is going to be in, and the short-term (ie not guaranteed for any length of time) rental history of the one unit. Firstly, you said yourself the area has a lot of foreclosure gut jobs and props selling for 30-40k. This tells me you're looking at a C or D class property that's been fixed up. The problem with that is that it will still always be the nicest prop in a less-than-nice area. As such, your tenant pool for the one long-term rental unit is going to always be folks who wouldn't live there if they could afford a better area. And usually that means low-income and unstable employment. You can absolutely find great tenants in low-income populations (about as much as any other income pool) BUT the nature of their employment situation means they are one sick kid or one flat tire away from missing rent. By this factor alone they are simply a higher risk tenant base.

As for the airbnb side of things, I know the rent from the last couple months looks great, but the issue with short-term returns is that they are, by nature, not indicative of long-term potential. Plus, with no kitchen (that's a bit weird) it would take a lot to convert that space into a real rental unit. If the seller has Airbnb'd it up to look great in photos, then my guess is the tenants are mostly folks who need a cheap place in your city and haven't looked into the neighborhood before booking, just saw a pretty looking place that was cheap. I'd check on the reviews to see if tenants have mentioned anything about the area feeling safe or unsafe etc. Since the property has only recently been rehabbed and only has a couple months of rent receipts to go off of, I wouldn't feel comfortable with that amount of data to move forward.

As for your point about ignoring the Airbnb side and just going off the one long-term rental, I wouldn't invest in anything that only netted me $50 per month. 

If it were me, I would pass based on what the price point says about the area. It sounds like you're pretty set on this property, but I would advise you to take a step back and consider the seasonal nature of airbnb rentals, the cost of making that unit into a real rental if the airbnb thing doesn't pan out, and your potential exit strategies down the road (ie selling to another investor because folks that can buy homes don't purchase in C/D areas). My advice to new investors is to wait until you can afford something solid, with reliable cash flow, in at least a B/B+ area. Don't jump into something just because you can afford it right now.

Best of luck!

@Jay Hinrichs yeah OP said the guy already told him that he gets a referral fee, so it's definitely a marketer, but not one of the pros from the look of that email text lol

To sum up, my revised strategy recommendation is this:

1. Stay in Prop B for another 8 months to qualify for the 121 exemption. 
2. Meanwhile, look for solid cash flow properties in the midwest to prep for a 1031 exchange
3. Get yourself a Qualified Intermediary before you go to market with your SD prop
4. 1031 exchange your SD prop into a portfolio of cash flow props in the midwest. Same amount of debt (more or less) but with positive net income each month, greater diversification, and a spread out tax bill if you do decide to sell any of the props outside another 1031 down the road.
5. Sell Prop B, take your 121 exemption, use it to buy your new home in the midwest

@Chase Burge I agree that the 1031 should still be on the table for Prop A. You can exchange into multiple properties and really use the capital you have tied up in a minimally-performing asset to get a nice portfolio going in the midwest. If you have 20% equity, that's about $144K, let's round down to $140k since you said you have less than 20%. I'm not sure about the pricing in the market you're looking at, but here in Birmingham that could be 4-6 down payments on solid B/B+ cash flow properties, netting $250-350 per month (with management and all expenses accounted for). 

To make the 1031 work, you would need to replace the rest of the value with debt (or extra cash if you have it, but always you must have equal or greater equity AND equal or greater value to defer all taxation), but rather than having one big loan on a prop worth $720k, you'd have 4-6 smaller loans on properties that produce positive income (even with management). Again, this is based on numbers here. I assume if you're looking at a specific market in the midwest for investment (not just to live) then the numbers are similar or better. 

My point is that if you are looking to make this midwest market your new investment market, you could take that SD property and turn it into a portfolio fairly easily, deferring taxation along the way. 

I'd say it's in your best interest to explore the 1031 option more closely. The longer you hang onto the SD property as a rental, the greater your depreciation recapture tax bill will be when you sell ( you can wrack up a hefty sum pretty quick on a prop of that value). So whether you do it now or later, a 1031 is going to be (in my opinion) the best option. Yes, exchanging into multiple properties takes more legwork and you need to be aware of some timing constraints, but it's definitely doable. What's more, divvying up that value of that SD prop into multiples in the midwest will also divvy up your tax burden, so that if you sell one of the midwest props outside another 1031 exchange (although I generally recommend just doing 1031s until you die) you won't be liable for the full tax bill that would be due if you sold the SD prop right now, just a prorated portion.