Am i stupid to not do this?

Question

Hello All,

I am currently going through growing pains in my knowledge of investing in real estate, for the past 12+ years i have bought 7 properties as primary residences when i would switch duty stations along my career. Each time i turned the property into a rental and hired a PM. Over the years i have been extremely passive with the business and never took the time to really learn how to property invest in real estate, i just assumed i was doing things correctly, i didn't know how to do the numbers, just went with the flow.

Since im down to 5 rentals and i made a very small amount of money selling off the negative cash flow rentals that just never recovered from the market crash in those 2 areas, since i bought to high in the peak of the market prior to the crash. i decided to apply for a mortgage to purchase another rental in my local area using some of the new knowledge i have learned recently, but after applying for multiple mortgages most of the places i applied basically said no, that cash flow to money lent to me is in a risky zone, basically i own properties that were not bought with rental numbers in mind, so turning them into rentals they barely cashflow except for my very last property i purchased that i did basically a flip on, that left lots of room between the mortgage payment and rental rates in the area. I did managed to get 1 mortgage company to offer me a loan, but they quoted me 6%+ on the loan.

So an option i have been thinking to do is just place all 5 properties up for sale, because if i can sell them all i would walk away with around 285k in positive equity based on current market vales on all of them, then 1031 exchange into something local since im not longer in the military. I feel i could greatly improve my cash flow just repurchasing new rentals local with the equity, even thinking of trying a multifamily like a 4plex.

What do you all think? I have never 1031 exchanged before, so it would be a learning experience, plus im thinking of trying out managing the properties myself locally.

Jeremy Schreiber · Answer

First of all, congratulations! This is a great set of problems to have, even if you feel you could have done even better had you been running the numbers all along.I fully agree with @Dave Foster's advice. I'd like to place extra emphasis on the 45 day time limit - which will be the biggest factor influencing your decision.If you have 285k of equity to play with, you're looking at either buying 1 larger multi-family property or several smaller properties, likely amounting to close to or in excess of $1M worth of property. From the time you sell your first of 5 properties, you'll have only 45 days to identify the perfect replacement property. So that's a lot of pressure with not a lot of time. Of course you can start hunting for replacement properties before you put the first one up for sale and that will buy you some extra time. Just be careful not to rush into a bad property because you have to meet the deadline. In short: Make sure you do as much of your homework, and setup your criteria before you start to list your first property for sale.Best of luck!Jeremy

Dave Foster · Answer

@William Huston, I'll speak to the 1031 :) What you're describing is a consolidation exchange. Selling several and buying one or fewer properties. This type of move can allow you to scale up your ROI while scaling down your management. One creative idea that @Jeff Copeland might be referring to would be a reverse exchange where you find the property you want and your QI takes title and holds it until your 5 all sell in their own 1031 exchanges. This could work but I sense that financing might be an issue for you initially.So a couple of other options1. I wouldn't be scared of the 180 days. That's 6 months to sell 5 properties. And if I understand correctly they're all in different locations so you're not flooding a market or overwhelming a realtor. 2. If you're getting close to the end of your identification period (45 days after the closing of your first sale) and all 5 are not under contract then re-evaluate. If you've managed to get 3 of the 5 under contract then locate an asset that would absorb only those three and use the other two for a different property when they sell.3. Use floating closing dates and contingencies. Sell your properties with extended closings. And buy your properties with as long a due diligence and closing period as you can.4. The reverse exchange as mentioned remains an option. You'd just have to overcome some financing issues.5. Lastly, always remember that your situation can change at any time and as long as you're on top of what your options are you can change tacks and still accomplish what you want - a portfolio of good performing rental properties located close to you. It just may be a two step process instead of one.

Bettina F. · Answer

I cannot speak to the 1031 exchange -- that is outside of my experience, but I can give a hearty YES to multifamily and self managing.Multifamily has so many advantages for self-management. We do our own lawn care (no different than feeding and mowing your lawn at home!) so we are at the building every 5-6 days. This helps us keep an eye on things, do common area maintenance. etc. Having a high profile as LL communicates that you care, and tenants are less likely to attempt violations. We have been self managing for 4 years. We have learned to quickly quash bad behavior. The first year was tough, so leave yourself lots of free time and extra $$ that first year. (This is NOT the year to coach your kid's Little League team!) Few affordable buildings on the market will have had stellar management or be in great shape. Expect this, and know your laws and what procedures you should follow ahead of time. For example, only 3 out of our 6 units paid their rent on time the first month after we closed -- the prior LL had never enforced lease provisions. Because we knew what legal forms our court used, and I had already downloaded them on our computer, we were able to quickly serve the 3 day notices. When we served the 3 day POQ notices on the 6th day, two of the tenants scrambled and paid (in cash) that day. The 3rd tenant complained "that's not how [prior LL] did it." I replied "[prior LL] was not making any money. That is why he sold the building". That shut her up, and apparently she called her mother, as they rent was delivered within several hours. Each month got easier as the tenants learned we meant business, and inherited tenants left and we replaced with better tenants that we had screened.Our building had a lot of deferred maintenance. We made the mistake of asking tenants what repairs needed to be made in their units and ended up with a pick list a mile long. We should have just rehabbed units as units became vacant. We currently have 4/6 units rehabbed with remodeled bathrooms, new paint, new Allure floors, new light fixtures and new window coverings. We only hire out the bathroom remodels, as we have learned to paint, rip up old carpet, install Allure, change light fixtures and hang faux wood blinds. We have been able to raise rents 50% in our remodeled units, and place much better, easier to manage, tenants. Our remaining inherited tenants are elderly, and will be in their units until death or a nursing home.Install QuickBooks and start learning it now. Take a Udemy course on QuickBooks for LLs. I do all the book keeping for our building. We have an LLC and separate business checking and savings accounts. Join your local LL Association now. Start learning your local laws and networking. We used a commercial broker when we bought our building. Be sure your building has adequate parking. We are 4 years into this and it is awesome. We took a sad little building, and now have a pretty, friendly, profitable community. We are able to pull $3K a month out of the business (except for one month last spring when we had back-to-back turnovers). We spend 4-5 hours a week managing the building (much more with turnovers). We continue to read, network, learn and improve. It just gets easier and better each month. Go for it! You can do this!

Jeff Copeland · Answer

Now is generally a pretty good time to sell. It remains a strong seller's market in most areas of the country, and most of us agree the market is close to it's peak.Beyond that, it's hard to really offer specific advice without knowing more about your situation and your properties. 1031 exchanges are a great way to defer taxes, but they come with some hoops you'll have to jump through. Timing being one of the most challenging - you'd have to sell all five properties, and buy any replacement properties, within the time limits specified for a 1031. Keeping 6+ deals together at the same time is a lot of plates to keep in the air, and finding properties to buy (with so little inventory and so much competition) ends up being the most challenging part for many investors. Though there are some creative solutions to this and other issues - Fellow BP member @Dave Foster is the man to talk to about the 1031 side of things, and he has a lot of tools at his disposal to help with all of the above.

Joe Tomko · Answer

Have you considered investing in small multis? Buy a quad, live in one, rent out the other three? This only works if you invest in your back yeard, however. If all the units are rentals, and it is not a SFR, then maybe you could get funding. Personally, I would not invest in SFRs for a host of reasons, only multis.

Bettina F. · Answer

Since we purchased with cash, we were able to place our building directly into an LLC. Also, LLCs are cheap and easy to set up in our state. You will need to investigate the impact on financing if you go the LLC route. You should also investigate putting your RE into a self-directed IRA while you are young.Yes, LL Association refers to the local Landlord Association. If you are interested in multifamily, I am sure that the state you plan to settle in has an affiliate chapter of the National Apartment Association. They have great trainings, although most of the attendees will be employees of mega apartment communities. Networking with these folks is a great way to learn what the big providers in your area are charging, and what they are charging for (extra for parking, storage, pet rent etc.) A local LL association will be valuable for your networking for finding properties and brokers who can help you find properties to buy.Whoops! Most of my reply to you is hidden in the quoted text above. I bolded my responses!

William Huston · Answer

That was a lot of good information, i do have a few questions tho...How much money are you recommending to leave aside for the first year? I was thinking of trying to use the 1031's to purchase 1 or 2 properties out right, or the other idea i was recommended by another investor since i am still young was to purchase the properties w/ 15yr mortgages since they still have very low interest rates vs 30yr loans and purchase a few properties that still cash flow with the 15yr loans with enough pay down with the 1031's. Basically he said to look for properties that would cash flow with a 30yr mortgage with the normal numbers, then apply it to a 15yr mortgage and offset it enough with 1031 + cash to make it cash flow still. Why do you recommend QuickBooks? I am curious what your using this for? i thought this was for tax prep.. in the past ive just used a tax accountant.In regards to the LLC, this is one of the reasons i am wanting to sell all my properties and condense down to my local area/state, because when i purchased my houses while in the military, i bought them with my VA entitlement. I purchased 1 with tier 1, and the others with tier 2 with downpayments. So when i talked to the attorney about converting these into a LLC, I was told that they would no longer be guaranteed like a VA loan anymore, because the llc is not the veteran, so most banks will enforce them to be payed off in full afterwards. He told me if these were normal loans then i could probably get away with it, because they are secured differently from what i understood talking with him. Repurchasing would give me a chance to redo the process correctly in an LLC, Currently all my properties are in my name only. In regards to the local LL Association, are you referring to Landlord association?