Thinking about the main issues raised here by excellent contributors like @Marty Joyner, @Brandon Hall and @Chris Clothier
1. Capex needs to be addressed in determining the value. The big items I think of are the roof ($10,000-$15,000 over 20 years), Heating and AC and plumbing. I would think about $200 per month would not be unreasonable when you prepare for the major capex items. If my cash flow is positive by less than $200, it may be in the negative. However, I have to assume that over the next twenty years, rents increase and improve cash flow (although expenses increase too)
2. Paying down the mortgage over the next twenty years also increases value
3. Conservatively estimating a 3% growth in value of the property also increases value and if the Turnkey company has gotten you into an area poised for growth near industry and population growth there is upside pressure for greater value
4. Brandon and Marty rightly indicated that the property expenses and interest and depreciation can not offset W2 income when it is over $150,000...Shoot!
...but, after crying for several hours, I went back over Brandon's and Marty's notes and noted that you can carry it over in the long term and when your properties are cash flowing much more and your W2 is much less (as we wind a little), you can then offset some of that cash flow income with the deferred expenses...not bad for sheltering income and having more of it
5. I was also thinking with good credit based on the high w2 income, it might pay to use a large line of credit (at say 6-7%) to help with down payment in buying multiple properties (unless you have a lot of capital which I don't) rather than cashing out a retirement account and taking a 40% tax hit at the high income rate, pay off the line of credit with income and allow the properties to start working for you.
I wonder if the smaller details in the numbers matter as much as preparing for key variables such as large capex items, potential tenant disasters (although as Brandon indicated, more properties diversifies these risks). The other key it seems to me is trusting the turnkey company to get the right property in the right area with good rehab and excellent tenant screening with some oversight and some education by the turnkey operator. The value is likely not in the short term as I think Chris Clothier pointed out but in the overall value of the portfolio over time. Some of it has to be speculation--but educated speculation guided by expertise of the Turnkey operator who has seen the value, added to it, taken some off at the top and given the investor the opportunity to both invest and speculate with some degree of confidence.
I am not sure how syndication provides the kind of benefit in terms of future long term deferred tax shelter of cash flows, future long term asset value and the autonomy to hold indefinitely. In the short term, it seems that 12% return is a lot better than 8% or less when considering capex but is that 12% return subject to income taxes which for me would be very high. Even if that return is sheltered, wouldn't the sale of the property in the syndication be subject to taxes (albeit capital gains taxes). In either case, that return seems to me more of a liability that will be subject to taxes when I might not want it to be (unless you can roll it over into another asset). Wouldn't it be better to earn 8% or less while building and sheltering equity and the building of deferred tax write off to use when W2 income drops and equity cash flows increase...and if you don't sell the property, you have the autonomy to indefinitely defer the capital gain
For me, it seems, the due diligence is less in the specific numbers than in the building of long term value with the right Turn Key company that has the expertise in locating the right properties in the right area based on trends on industry and population growth and can meet my goals of longer term value vs shorter term cash flow and does it in a way that I can make mistakes during my review because they are looking into those things as well (talking about tenants, right location, right property etc).
If I look at it strictly as a short term return, then of course, the better areas are going to have less and less value as the bidding increase, the turnkey company will get value at the front end, but the buyer does too (in some sense) because we are getting the right property based on the turn key company's expertise. That added value should come in play with lower capex and better long term value, something that may be of less value to the Turn key company than a model that provides up front value to them and then management fees and future sales to the client. It seems like a win-win to me because of our different needs and different timelines.
Finally, I like to pay someone to do the worrying for me. I buy audio from Crutchfield because I know they will take care of the product no matter what. I buy from LLBean because if anything goes wrong with anything they sell, they fix it or replace no questions asked. Yes, they are a little more expensive but their service is worth it. Service and trust are real values that makes for an improved quality of life.
My ignorant two cents, but I am getting educated and do very much appreciate the input by the many experts here on BP.
