1031 into increased cashflow: remote Turn Key vs Local BRRRR?

Question

Hi -- I'm new here and just getting to know my way around, but figured I'd jump in and ask the community for advice/opinions on my situation:

I have a SFR rental property that I've been holding since prior to the downturn.  It is not cashflowing, and I have the opportunity to sell it to my tenants.  I've spoken to my CPA and -- cutting to the chase and factoring in passive losses, etc -- if I were to 1031 it into different investments, I'd need to spend about $100K of equity against about $300K of debit (for a total of $400K) in order to qualify for a "like" property and avoid capital gains.

What I'm looking for are thoughts on the best strategies moving forward.  My goal is to parlay the money into investments that 1) are reasonably stable while 2) providing good cashflow and 3) begin to build a more thoughtful/strategic and lucrative REI portfolio.  Another factor is that I am now also able to play a more active role in building my portfolio than I have in the past, time-wise.

What strategies would you focus on?

I am attracted to the BRRRR model -- it seems like an intelligent way to methodically build a good-sized portfolio by reinvesting my original equity over and over, but I also acknowledge that there's a lot to learn.  I would be either focusing in Reno, NV or in the Roseville/Sacramento CA areas, where I could oversee/manage the process and could then be my own property manager.

On the other hand, parlaying my existing equity into a portfolio of 3-5 cashflowing properties in the $100K range (with 20-25% down) in other parts of the country -- places like Memphis, KC, Charlotte, etc -- is attractive because if I get in with the right Turn Key companies I could use my cashflow to continue to acquire additional properties over time and leave the details to the professionals.

Are there other strategies I should consider?  SFR vs MFR?  Are their pitfalls in either of these strategies that I should be especially wary of?  It seems that figuring out how to finance a BRRRR (purchase plus repairs) via a 1031 would be more complex than simply working with an established Turn Key or two in attractive markets, but would it be worth it in the end?

Thanks -- I'm glad to have found BP and look forward to learning from you as I continue to think this through!

David Hutson · Answer

@Michael Penwarden,

Memphis isn't a great place for small multi family, in my opinion.  I have purchased 12 homes there in the past 2.5 years and haven't been able to find quality smaller MFR.  I'm in the military now and don't have time to research larger $1M + properties there, at least until I retire in a few years.  I have seen several smaller 6-12 unit properties and they are not something I would want to own.  SFR's in Memphis are pretty simple, especially with the turnkey companies I am working with.  The wholesale/rehab homes I buy are really simple also as every management company out there either has a team in place inside the company or works with one to fix up the homes, usually in a few weeks.  I have found that the turnkey is a little more pricewise but I don't have the vacancy or unexpected rehab costs up front.  A rehab home will take a few weeks plus the time to market it and get a good tenant.  My turnkey homes pay me from day one.  I also only buy rehab homes now when I go out there.  I won't buy one sight unseen.

I ALWAYS recommend buyers go out and look at homes, whether it's turnkey or rehab.  I go out every year and it's under $2k for the wife and me for 5 days.  You may be able to write it off against the properties you purchase/own. (I'm not a CPA, but I do write my trips off).

Over the past few years I have built great relationships with a few the bigger/prominent turnkey companies, a management company and a few agents.  I stay in touch with all of the pretty actively and I visit them all when I fly out as I plan on purchasing four houses per year out there for the foreseeable future.  BTW, if you plan on going out,  schedule it around their local REIA group, Memphis Investor's Group.  I did that my last trip a few months ago.  Many of the locals who are actually working the deals show up.  I even found my last wholesale house there that night.  For $20 and a few hours of your evening it's a very worthwhile event.

Sorry it's long but there is a lot to it and I figured you or someone else would ask about this if you didn't.

David

James Wachob · Answer

@David Hutson I have a 6 unit apartment complex in Memphis for sale

David Hutson · Answer

@Michael Penwarden,

My opinion is that the turnkeys are better with funds from a 1031 exchange.  I am going through this now, just sold a fourplex here in Sacramento and buying five homes in Memphis.  The reason I found turnkey to be better is that if you do the BRRRR you must have the repairs completed and paid for within the 1031 window to qualify.  There are more requirements/complications if you want to get the home rehabbed with money from the exchange.   If you do not meet the timeline then any repairs not completed will become disqualified.

With my exchange I only bought one that needed rehab work and I am paying for the repairs out of my own pocket so the house will be part of the 1031 but the repairs will not be.

If you have any other questions send me a message and I can tell you what I know from the experience.

David

David Hutson · Answer

@Pamela Starnes,

For me, I haven't seen any quality properties that provide a good return and  do not need so much rehab that it is financially worth purchasing, especially when compared to SFR.  There are several smaller properties available but they are in the not so good parts of town and while I see all the talk about how great the cashflow is I'm sure the turnover and repairs is taking up most of it.

I'd say take a look and see what you find.  What you are looking for may be different that what I do.  There are some good properties but they usually still need repairs and the return is too low for me.  Be careful on the west side of town

Alexander Price · Answer

Well it sounds like you have two options to explore. If you go turnkey figure out your target market and start interviewing the TK companies. Good luck and let me know if you decide on Memphis. I have started working with folks out there and I can give you some contact info.

Account Closed · Answer

Could you back up and explain these qualifications for a 1031 that you mentioned, using some numbers?  I'm not seeing the picture there.  Thanks.

Leslie Pappas · Answer

Hi @Michael Penwarden, if you are an accredited investor, you can buy into $50-125M projects with as little as $100,000 and diversify for some added safety. These are hands-off, institutional grade real estate investments. Professionals with decades of experience and very impressive track records do all the heavy lifting for you.  You get potential cash flow and appreciation.  Loans are non-recourse.  This is the world of Delaware Statutory Trusts.

Leslie Pappas · Answer

Rarely over 65%

Michael Penwarden · Answer

@Leslie Pappas -- I was just providing the baseline threshold numbers I need to hit on this property in order to remain in compliance.  However, I like the 75% LTV for leverage.  What does your typical DST look like?

Leslie Pappas · Answer

@Michael Penwarden,

yes you can, however, it looks as though your loan to value is at 75%.  I rarely have DSTs available with that much debt.  Best- Leslie

1031 into increased cashflow: remote Turn Key vs Local BRRRR?

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