Looking at where to start.....Priced out of local Market

[Christopher Hand]

Hello Everyone,

Backstory:

My wife and I up until recently have been buying and renovating homes and then selling after 2 years or so to avoide paying taxes on the gains. Well it looks like this last reno will be the last for us since she has fallen in love and wants to stay in this home for long haul. That leaves me wanting to get my self into REI. Currently i'm in the Bay area and feel am priced out of the local market, I can't be the only one right? I was looking at out of state investing but have heard mixed reviews. Hopefully I can find a couple people to pick their brains on Turnkey investing and/or BRRR out of state.

Current Situation:

-Wife and I are currently working w2 Jobs and have a combined income of 160k

-Excellent Credit

-250k Liquid  (would like to keep 50-75K as a emergency fund)

Current RE:

-Primary home with 400k @ 3.625%  Value: 650-675K

-Open HELOC with 100k Limit

-SFH in Las Vegas, NV 90k @ 4.25 Value: 275k (Joint owned w/ brother) Rented @ $1375/mo

[Jim Goebel]

Hi Chris

Thanks for the post.

Oddly enough, there's at least a small element of what you're communicating in what my wife and I are experiencing - however our background and history and location are different.

We operate out of Des Moines IA so the financials are way different than out in your area.  When I shared some of the numbers with a programmer making 150k in the Bay Area when we were playing a game on our phones together, he was nearly blown away.  Keep in mind some of the following are NOT what we are experiencing now - as it has changed.  That said, we got spoiled in a sense and now it does feel to us like we would be smart to explore 'other options' given the deals we are seeing out there now.

Here's a few data points: (we own 6 rentals, 2 more that are done and coming online in early 2018)
In nearly all cases we have leveraged based on the appraisal and have between a 20%-40% equity position in property

Rental 1: Wife's original house, bought for $91k, rent it for $1300/mo, appraised/estimated current value of $137,000

Rental 2: Bought for $88.9k, put about $5k into it, rent for $1400/mo, appraised/estimated current value of $117,000

Rental 3: Bought for $36k, put about $8k into it, rent for $1300/mo, appraised/estimated current value of $117,000

Rental 4: Bought for $46k, put about $25k into it, rent it for $2175/mo (duplex), appraised/estimated current value of $126,000

Rental 5: Bought for $97k, put about $24k into it, rent for $1300/mo, appraised/estimated current value of $168,000

Rental 6: Bought for $174k, put about $2k into it, rent it for $1700/mo, appraised/estimated current value of $245,000

Primary Residence (likely to be converted to rental in 1st quarter of 2018): Bought for $59k, put about $55k into it, appraised/estimated current value of $133,000

Rental 7 (owned under IRA): Bought for $52k, put about $68k into it, rent for $1550/mo starting Jan 1 of 2018, appraised/estimated current value of $215,000 - note though this property took a year to complete

Current project (will be primary residence when complete): Bought for $48k, put about $35k into it to date, estimated another 35k will be needed, appraised/estimated value when complete of $160,000 - 200,000

I'm providing that visibility to communicate where we've seen the market change.  The 'diamonds' that are listed for $30-60k that were numerous back 2-5 years ago (over supply of foreclosures, etc) are really not there anymore.  For instance, our Rental #3 is not attainable anymore.  We are finding that the deals that may be comparable to rental #5 are attainable however like anything it takes some real boots on the ground to locate them.

We had some fortuitous timing on the purchase of Rental #6 - however we do believe that at the top of market (at least here in central Iowa that property we do believe is the top where we'd want to invest and should do a great job of holding its value/appreciating over time) - there are opportunities to find the house that needs new carpets, a kitchen remodel, and a smoke smell removed in the nice neighborhood.  However, there's still an opportunity to get hurt when prices are inflated by 15-30% as I believe they are now.  That's not to say that they are over-valued, simply that I see a 15-30% 'too high' prices compared to where we are more consistently 'in the money' when evaluating opportunities.

Again, I believe in the market we have here in Des Moines the Rental #3 and #4's really are not there anymore, there were lots of them as recently as 2-5 years ago although you still would need to know what you were looking for and have the skills, balls, and grit to execute.

The #5's are there now but require some looking and obviously require a little more in terms of capital to get into them, as the trick in that price range and value of home is to find one that can be financed, or to have the cash to buy outright.

That means for us we are evaluating other options in life - however we also have evaluated other markets, and the last one we looked at for a possible out of state arrangement was Chicago.  There are tons of well built houses available where the price point would make sense, however when there is a 5-7k property tax bill coming off the top every year, that was what caused us to balk at that.  We mainly wanted to explore other markets to get some comparison to what we were seeing over the last couple years as the volume of #3-4 type deals was going away.

.................................

Now on to commenting on the possibility of out of state investing.

We haven't done it before, but a lot of the same problems / challenges occur with in state /area investing - if you are not doing the work it is a lot harder to maintain accountability and control over the end project/budget.  The way that I'm wired to be honest, on your end of it, I would NOT want to be an investor and feel 'out of control' in that way at least in terms of my comfort level and feeling sure that I wouldn't be buying a plane ticket and staying in a location for months at a time when not wanting that... - as I would feel that whoever my trusted resource was, would have too much leverage on me and my budget.

That may or may not help. 

All that said, I was ready to move forward with the exact type of arrangement with a real estate agent/developer out of the Indianapolis, IN market (which last I looked I do believe there to be some solid opportunities) - I had a contract drawn up, we had the house we were focusing on, etc...  The guy dropped off the map and I didn't get visibility into why.  I was ready to give it a go though.  For the most part, I'm a contract kind of person at least to set expectations.  That said most contracts that I've thrown together I've found most other people are NOT that way.  Especially the profile of the person that can provide the most value in terms of executing a house remodel.... If you want to see the contract I had together for this type of arrangement please let me know.  I will have to dig for it but I'm pretty sure I have it around somewhere, in email or something.

Also and if this comes across as a solicitation and that's not welcome, well - just tell me to shut up :)

There may be a fit in terms of profit sharing if you wanted to discuss some projects that we have 'in the hopper' in this market, that fall under more of the rental #5 in terms of financials.  I think a PM would be the best way to explore this and there's no guarantee from either end that there'd be a fit.  But big picture right now our current major project and taking this one on simultaneously could not quite pass our 'stress test' in terms of finances.  In terms of bandwidth and capabilities I have a high degree of confidence that we could take on another project and have one that would work.