All Forum Posts by: Jeremy Horton

This is a question you need to answer yourself depending on the type of investor you want to be. 

A turnkey company will charge a premium for marketing, advertising, locating the property, rehabbing the property, placing the tenant, managing the property etc. Their numbers will be biased in their favor - ie: underestimating vacancy, repairs, Cap Ex etc. But there's a good chance they get you into a property in a good location too. 

I can locate a property, buy it, rehab it and get a lot more cashflow myself than going turn key. I am a hands on investor though, I enjoy getting into the numbers, managing rehabs, my own deals, etc and seeing it all work out in the end. Also, I want more $$, so I cut the middle man (which is essentially what a turnkey company is). It's a different type of investment. 

Quote from @David Mathews:

Quote from @Anthony McEvoy:

Hello @David Mathews:

shouldn't the current political/economical environment be a recipe for more demand for rentals?  It depends on the rental and the location.  If you have a high end rental in an area that is not that high end, then you may not see an uptick in that demand.  Historically, when a market softens and people are more forced to rent, then they typically rent down to a lessor house from what they would buy.  Also, the location is important and the happens in the community where the tenants are drawn from.  If the area just saw a decrease in job opportunities because a company just left, then demand for rentals may decrease.

Also, what do you mean by "experiencing less traction with listings"?

Thank you for the replay. Yes, I should have been a bit more clear on a few things but #1 was speaking "in general" and #2 I was trying to spare members with too much fluff to read in my post.LOL  

So... I am in Lake Charles, LA on the Gulf coast and our economy is driven by petro/chem industry and a couple casinos. We hardly noticed a blip when 2008-2009 hit. The drilling moratorium during the Obama administration did a lot of damage to surrounding Gulf coast areas who are dependent on offshore drilling but nothing noticeable to the Lake Charles area. When Covid hit every REI I know was able to continue clicking right along thankful that our area wasn't seeing the nightmares we were reading about with the eviction moratorium. I say all of that to say that it seems that our area is fairly resilient.

I invest in C class first time homebuyer type of neighborhoods. I usually list fairly competitive to the fellow landlords in the same areas. Certainly don't want to be labeled one of those "greedy landlords."(sarcsam) For the past 7 years when listing a vacancy it would almost be overwhelming to keep up with the inquiries. If I would list on FB Marketplace during the evening time I would wake up the next morning to at least 30 to 50 inquiries. I've had a few vacancies over the past 2 to 3 months and I've noticed the number of inquiries have drastically reduced. Plus, within those inquiries the number of qualified applicants has seriously fallen off. 

I am seeing similar stories all over the country on BiggerPockets Facebook page.  I am not to a point of alarm yet but a bit puzzled as to how or why a market shift in real estate buying power would effect rental demand when I expected the complete opposite effect. My theory that I posted on BP FB page was that most of my clientele seem to be Millennials and GenZ.  Sure it's not politically correct to group people with a generalization but I never claimed to be politically correct so here goes...  I noticed that for the most part that age group has no problem making lateral moves. I see it constantly. Instead of selling their vehicle I'll see them list it for trade. Same goes for material items like ATV's, jetskis, boats, etc...  Well in my experience as a landlord I've seen it with their moves in residences. They'll move simply because their lease is up.  Funny thing is they end up moving to similar priced units, in similar neighborhoods, that are similar in age and layout.  So with that said, I have made the assumption that the noticed lack of traction with my last few listings may have something to do with people hanging onto their money due to uncertainty.  They simply aren't willing to pay the move in cost of arbitrarily switching places while everyday costs like gas, food, etc are all up.  Just a theory.

 I live in Lafayette, LA originally from Houston, TX. So Lake Charles had the hurricane - wiped out a good bit, I think you had a lot of people permanently leave. I mean we know LA is going to get a bad hurricane every 5-10 years, so this is just history repeating itself. I think on top of that the industry is volatile - LA is an oilfield state, no matter which way you slice it. If you get rid of the oilfield I have a feeling you'll lose a good bit of the population permanently - the oilfield has been in a slow steady decline for the last 10 years or so - is it going away, definitely not, but the increased regulations/taxes has slowed the volume (this is my personal experience anyway). Also, there's not a big reason to live in LA, unless you're from there or work there. Does the governor do anything to promote industry and attract business...no? Schools suck. Roads suck. New Orleans is one of, if not the most dangerous cities in the entire US. Is the weather good? No. Anything to drive tourism? Not really. Is there a lot of big money in the state. Not really. You have great pocket areas but there is also a lot of poverty and low income jobs. Lots of people living off the "system". Is the cost of living low? Not in a desirable area. It's also an old state, lots of old rentals and buildings. I don't think there's a big drive to the state overall. Now this is my outside opinion, but it's what I've noticed moving here from the suburbs of Houston. Texas was much better in almost every way. 

You do have an increase in healthcare, some IT/tech, but nothing outstanding.

Ah we are already in one, it just hasn't completely hit yet. Unemployment will increase next, home prices are coming down (and will continue to further), stock market is down 25% YTD, we just haven't felt the full effects yet, but we are mid recession. The inflation data was horrible core rate of 6.6% YOY and increase of 0.6% from last month, so the interest rates will continue further to slow the inflation and the housing market needs a reset. 

I would keep liquid capital and only make amazing deals, right now, that's my strategy now. Definitely still in the market but it needs to be a great deal (like always) because we will, imo, see these prices fall even farther. It's gonna take 6+ months I believe to see the trough. Everyone wants to compare comps to 6 months ago but the RE market has changed rapidly in the last 6 months. If you bought in mid 2021 to beginning of 2022 you are gonna be taking an L in the equity column for awhile. 

3 problems you may be having 

1) location 

2) problem with property 

3) PRICE TOO HIGH

RE is like anything else, supply and demand. The market now is not the same as it was 5 months ago - interest rates have gone up since then, so your price will likely need to come down. You're looking at 150 days on the market, activity will be lower, people may think the place has problems, the price is too high, and you will likely just get low ball offers. I'd take it off the market and put it on again at a new price with new pictures. 

Run numbers as an investor and see if your own ROI numbers work...I'm doubting they do. I make offers at prices that work for me, then generally ask for additional compensation - closing costs covered, rate buydown etc

If chips went up to $10/bag, I wouldn't buy chips that week. I have a feeling it is the same going on with your property

Quote from @Dmitriy Fomichenko:

@Cariza Abinguna,

Yes, you can establish a self-directed IRA and then rollover your old 401k into it. Once the new account is funded you can invest your IRA funds any almost anything, including real estate. This way you accomplish several things:

1. Remove your 401k from exposure to the stock market (which you can't control)

2. Will have the ability to invest in real estate (which you can control)

3. Avoid paying taxes and penalties on early distribution, which could wipe out 30-50% of your 401k balance (would be poor financial move)

 Hmmmm - couple of things I could use an explanation on

1) Can't control the stock market. This is true to an extent but we DO have a 100 year history to look on and we can assume, by looking at past performance, that we can average 8-10% a year. May be out of your control but still predictable over the long term in my opinion. Very liquid investment as well. 

2) Can control RE investments. I agree again here to an extent. You can't control loan terms (points, amortization periods, DTI etc), interest rates, the market itself (same with stocks), consistently finding under valued properties, realtor performance, even investing in your local market may not be an option, not a liquid investment - in fact I'd say the only thing you can control is the actual deal you make and you're able to find yourself. Can most people do this successfully and long term and beat the stock market - no. Does everyone want to be a landlord, no. Does everyone have the cash to start and the assets to continue to run a business successfully - again no (as is the subject of this very thread)

Point I'm making is it takes a dedicated persistent individual to become a real estate investor and stay with it over the long haul. 

For a brand new investor even thinking of cashing out their 401k or any type of retirement investment is a HORRIBLE idea. This is the beginning of a train wreck in MOST cases. I would never advise someone to do something like that. They are making a risky move that requires money (risky just based on skill level and capital available) and have absolutely no safety net...and they will end right back up at square 1 after their 401k money is spent. What would the advice be then?

First off - this is a bad idea, you'll pay income taxes plus a penalty and not have your 401k anymore. Surprised you're ok with this. My 401k is good for a 20k deduction a year, that in itself saves me 5k in income taxes...and I still average 8-10% a year in returns over the long run, and it diversifies my portfolio. This is a win-win. And if all else fails, I have something to fall back on - this is a great safety net. I also do a backdoor Roth IRA - another great tool to use. Very good to diversify with both stocks and real estate in my opinion.

Have you done any deals yet? Maybe prove to yourself you can get the returns you're imagining first. 

Other tool - you can take a 401k loan for up to 50k or half of your 401k balance - whichever is less. I find 50k is more then enough for most rehabs I need. You can take loans on your brokerage accounts at some banks too. HELOC loans on the equity in your house. Income from job/side hustle. My point being there are a lot of ways to get usable/liquid money from where it's tied up.

Question for you - what happens once you've used your 401k money? You are now back to square one with a little residual monthly income and no 401k. It'd be better to think ahead and use credit/loans/buy undervalued properties before you screw yourself. 

Quote from @Shannon Smith:

We have $100,000 savings in the bank. We found an amazing and unique $500,000 house with 5,000 taxes. We can put 10% down and with closing costs spend about $75,000. We will easily spend the remaining $25,000 in misc furnishings, paint, etc. We will have to live off of our checking account and the income from this house for one year until we get a bonus check from work. This house is already generating $3,000 per month on just 1 of the bedrooms in a 5 bedroom house. I feel like it’s such a great investment cash flow wise so we shouldn’t pass it up…but I’m super nervous given we’d be spending all of our savings right now. What would you do? 

How many deals have you done? My guess is zero

Generally a very bad idea for a newbie to go all in, it usually ends up in a trainwreck - that's all the stories you don't hear about. I guarantee there's more trainwrecks than successful stories 

.

Going off what you said this is pretty much a no brainer - buying a ready to rent place (15k of work, I'm not seeing where) for 115k and instantly gaining 50k+ equity. Surprised it's not scooped up. 

Call me skeptical, but I feel like something may be off here 

Quote from @Chase Hoover:

Quote from @Jeremy Horton:

@Chase Hoover

Hey Chase, the thing is I'm looking at gross revenue numbers then calculating backwards to find what price I should purchase at to get the return I want. Only way to do that is to calculate monthly expenses. Cleaning would run about 8k year or ~700/mo. This is a pretty big expense.

So to find your net revenue, or what you're actually making, you need to calculate all expenses, especially cleaning. This is the reason why lots of people think they're making a ton of money, then when you look at their balance sheet, they pulled in 4k/annual net on a 80k investment. They say wow I make 40k this year, 3k month expenses, 700 month in cleaning...and they netted a measly 300/mo.

I'm definitely going to pull the trigger when the numbers work out. If they don't, that $ could be better somewhere else.

Thoughts on that?

Hey brother, totally understood - I've been in the STR game for 7 years and own 50+ units. You're right, but I still think you're overthinking it (respectfully). Instead of taking full stock in the projected ADR/gross revenue shown in airdna/pricelabs and trying to work this number backwards, run a comp analysis of other STRs in your area and build out your proforma breaking out your own projected rent, cleaning fees, other fees, and expenses.

 Gotcha man. I guess I have somewhat done this as well - my trouble is estimating the gross revenue. I can use AirDNA/Pricelabs/PM Companies for their ADR, occupancy rate and generate an estimate of monthly revenue - but this includes the cleaning fee, so the ADR and thus gross revenue is inflated - see what I'm getting at here. 

So my estimation for gross revenue is off from the beginning. I can calculate the expenses fairly straightforward - but then I get to the cleaning again...well it has to come back out since it's put into the ADR...right? What gets me is a lot of people are not subtracting out the cleaning fee and calling it a pass through charge. If you don't subtract out the cleaning then you have to use the nightly rate (not the ADR) to generate a revenue estimate (but lots of people are not doing that, it seems). 

I can use my own projected rent by comparing to others in the area for the nightly rates - really would need an annual average. This seems like hard data to get, very time consuming. I'm guessing you would need to manually go through every date, essentially to get a rate. How do you like to find the nightly rate?