If you had $50K to start your real estate portfolio....?

Question

Hey BP community, I'm a new BP user and have been following the discussions/forums from the experienced investors and have been learning a lot. But I realize there's a lot of investment strategies which can be overwhelming. I'm looking to begin real estate investing, most likely single family or 2-4 unit multi-family.

I'd love to tap into the brainpower of the successful and experienced investors within the BP community, with a broad, open-ended question: If you had $50,000 to invest in real estate in 2017, what would you do? (Please keep in mind that although I live in SoCal, Im open to other markets in the US since it's so expensive in this area). Thanks in advance!

Clayton Mobley · Answer

@Garlin Smith Given the info you've offered so far (that you own appreciated property in CA, including a primary and rental) and aren't looking to locate, and that you are looking for passive income (as opposed to making REI your new job right away), then turnkey is likely going to be the simplest option if you want passive RE income. Of course, there are other passive investment options out there (ETFs etc), but if you've decided RE is where you want to put your money to work, then out-of-state (OOS) turnkey is going to be the simplest option. Of course, I'm the CEO of a turnkey operation, so I may be biased, but I think you'll find the same answer from experienced investors here on BP given your current situation.

Given that you have $50k, you could potentially leverage that into a couple good cash flow props in markets here in the South or in the Midwest. Bear in mind that you should hang onto $10k or so as capex/emergency buffer, never deploy all your cash right away. A good turnkey investment shouldn't have any big capex expenses (new roof, new HVAC, new boiler etc) in the first several years anyway, but it's always prudent to be prepared - and the peace of mind having that reserve will bring you cannot be overstated.

Turnkey is a term that's come to be used by a wide range of companies, so it's crucial that you educate yourself about the type of product you're looking for before you jump in. You should focus on full-service operations, that do everything in-house - from finding props, to rehab, to marketing and management. This model incentivizes the company to make financially prudent client-focused decisions from day one. Many companies calling themselves turnkey are actually just marketing properties owned by other people/businesses, so they haven't had anything to do with the vetting or rehab quality of the props they're selling. They then pass investors off to a third party PM, which means the PM had no control over rehab quality etc (which can seriously impact maintenance costs and tenant satsifaction) and the 'turnkey' company has no skin in the game in terms of long-term performance. This is a topic that comes up a lot, so I'm sure you'll find plenty of info about this issue as you do your research.

If you're not comfortable with leverage (debt) then your $50k won't go as far. I never recommend people aim for the bargain basement sub-$50k turnkey props that get advertised like crazy. A property that has been bought, rehabbed, marketed and then sold to an investor for $50k or less is a C or D class prop, bottom line. Think about how cheap the prop had to be for the company to make a profit on such a sale, then think about where properties can be purchased for that little. Do you want to invest in those neighborhoods? People do make money there, but it's almost always people with experience, who self-manage the props (which cuts the cost of a PM) and invest in markets they live in or know extremely well. It's not a strategy built for new investors.

If you want to deploy your capital towards a cash purchase, I would wait until you have a bit more capital. Of course, a good turnkey investment will have your tenants paying your mortgage for you anyway - eventually resulting in a free-and-clear property that you paid 20-25% for - but not everyone feels comfortable taking on debt. That's a priority decision you'll need to make before you get started.

The other option is to self-assemble a team (agent, contractors, marketing, property manager etc) from afar. This is not as simple an option, and does have more moving parts, but it also gives you more control over each aspect of your investment and may save you money if you want to put the work into hunting your own deals with the help of an agent. It's a lot of work to get up and running, but once you get all the pieces in place it should be pretty passive unless a team member drops out or becomes unreliable, in which case you may end up with a last-minute flight out to find a replacement. The decision to go turnkey or self-assembled team depends on your priorities with regard to time/energy, control, and returns vs passivity. Both are viable strategies, it just depends on what your priorities are.

In either case, there are plenty of great rental markets, primarily in the South and Midwest. What you'll find is that, at a certain level, the numbers start to get pretty similar. The highest tier turnkey operations are high-tier for a reason and the returns reflect that (you should be expecting a 6-20% ROI in the first year for a solid B/B+ prop, depending on how you finance). What you really have to focus on is the people you choose to work with. Passive OOS investments can be an excellent way to generate hands-off investment income, but they can easily fall apart if the people you hire to manage them drop the ball. You have to find a team of people (the turnkey provider you choose or the PM if you self-assemble) that is going to consistently deliver and stand by you for 10+ years.

I always advocate asking a TON of questions of any provider (or PM etc) you consider, and then scheduling a visit to the one or two companies that make your short list. Even if you can't actually make a visit, just floating the possibility of making the trip can tell you a lot about how the company views service. Even a team that talks a great game should be ditched if they suddenly don't have time for a visit, stop communicating, or don't make any effort to work out the logistics with you. Ideally, you'll be able take the time to go for a visit, look them in the eye, tour some props, see the town and get a feel for how they operate. It really makes a huge difference in gaining peace of mind or clocking red flags. Consider it an investment in your investment.

I know this is a long ramble ;) but I guess the primary points here are :

• Have a serious conversation with yourself and/or your spouse about what your priorities are with regard to passivity vs control, time/energy, risk/leverage etc. 
• Decide how you want to deploy your capital -turnkey, self-assembled team, or some other option that meets your criteria established in the convo above.
• If you don't want to use leverage, develop a plan for building capital instead of trying to find the cheapest way to invest now. A solid investment later is better than a desperate investment now.
• If you go the turnkey route, especially, focus most on people, even more than market. There are a lot of great places to invest, but fewer full-service turnkey operations with the track record and metrics to back up their claims. Use BP to get reviews from experienced investors, reach out to people via PM, schedule a visit once you narrow down your choices.
• Do all the research you can, but then trust your gut - if something seems off about a property or team/person, there's probably a reason why.

This comes up a lot, so if you do go the turnkey route, take a look at this thread for another CA investor looking at OOS turnkey, it includes a list of questions I think any new investor should ask of a turnkey operator they consider:

https://www.biggerpockets.com/forums/55/topics/361999-new-investor-from-glendale-ca

You're already in a pretty great position since you own CA property already. If/when you decide to move or want to liquidate that equity to redeploy it elsewhere, you have TONS of options that can net you tax-free cash and/or enable you to roll your property value in a nice portfolio of cash flow props in diversified markets. Whether you meant to or not, you've actually done a good job getting yourself a solid foundation for a lucrative REI career. Congrats!

If you have any questions, feel free to shoot me a PM any time.

Best of luck!

Clayton

James Wise · Answer

I would take the 50k & purchase a 200k C-Class 6 unit apartment building OR Two 100k B-Class single family homes in a mid western market.

Garlin Smith · Answer

@Timothy Murphy III

Thx for reply. ideally Id like to find rehabs in the LA area but its very difficult as Im competing with a ton of developers and very experienced teams...so my gut is telling me to begin with turnkey single family or multi-units in other markets (such as my hometown of Ohio). What I need to quickly get as familiar with is finding properties that will have good cashflow potential quickly, and will have ability to appreciate so I can refi and pull cash out to continue investing. I have other cash 'reserves' I could tap into but I'm curious to see how I can start with $50-$70K and begin growing portfolio, with the goal to create cashflow and build appreciating assets.

Steve K. · Answer

@Garlin Smith ,

I like the BRRRR strategy.

Get inspired by recent successes.....here are 3 examples:

Read some real life case histories of @Joshua D. , @William Collins and @Austin Fruechting did in 5, 2.5 years and 7 years, respectively, buy using https://www.biggerpockets.com/forums/223/topics/459415-500k-net-worth-in-5-years-im-30-today?page=1

https://www.biggerpockets.com/forums/48/topics/429980-officially-financially-free-at-32----exciting-day

https://www.biggerpockets.com/forums/223/topics/445367-full-time-employee-multiple-brrrr-side-hustle-2875-to-goal

Garlin Smith · Answer

@James Wise @Lane Kawaoka

Thx for the reply and advice James and Lane, my strategy is becoming more clear each day and in-line with your thoughts.

I want to give a quick shout-out to the BP community and it's founders, Ive really been impressed by my initial experience with the site, the amount of information and tools available is unreal (almost overwhelming), but I'm even more amazed by the responsiveness and engagement of members of the community who have replied to my questions and emails. It's a supportive group that you generally don't see in other industries in today's age.

Continued success to all!

Timothy Murphy III · Answer

Yeah, I live and invest in the midwest so I'm more prone to think in terms of the prices and opportunities available here. The strategies in expensive coastal markets need to be different.  PM me if you have questions about the Cleveland market and I'll be happy to answer.

Timothy Murphy III · Answer

@Garlin Smith

Assuming my own market was too expensive(I see you're in California), and / or I wanted to be more hands off, I'd look into using it as a downpayment on a couple of turnkeys or potentially a small apartment building in markets that cash flow better.

If I wanted to be hands in and was located in a good cash flow market, I'd look for value add and rehab opportunities in my city. I'd target C or D caliber areas (though B caliber areas would also be fine if that's where your risk tolerance and personal preferences take you) and look to acquire the property with all cash or seller financing and get to free and clear as soon as possible. I'd then use the free and clear cash flowing properties  as collateral to raise additional private money and lather / rinse / repeat the process. Essentially a BRRRR process.

Garlin Smith · Answer

@steveK, thanks for the links, love seeing these and will keep soaking in as much as I can. As much as I am enjoying the successes, I also want to become well versed on the other side, the pitfalls and costly mistakes newbie investors seem to make and how to avoid them or minimize the chances. As Im sure all of us think about, I need to get a few early wins from the start.

If you had $50K to start your real estate portfolio....?

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