Buy local or Turnkey

[John Upperman]

Okay BPers....I need some input.

First - a quick intro. I am new to REI and this will be my first investment. I will be making these purchases through my Solo 401k so the usual tax benefits don't apply and my up front cash requirements will be higher than a traditional, non-qualified purchase.

I live in the Raleigh, NC area and have spent the past two months analyzing more deals than I can remember. I have looked at numerous SFH opportunities locally and have yet to find anything that offers the ROI I require to support the cash investment (especially considering the fact that I have to discount any depreciation or tax benefits).

Here is my current situation:

Behind Door # 1 is a local Triplex with the following stats:

Purchase price $215K

Improvements $15K

Total rents (after improvements) $2475/mo

GRM 94.1

Cap Rate 7.5%

ROI w/o appreciation 11.84%

Cash on Cash 9.5%

Behind Door # 2 are 3 SFH located in Memphis, TN through a turnkey service:

Total Purchase price $249K

Improvements $0 (all improvements are part of the turkey service)

Total rents $2800

GRM 88.8

Cap Rate 8%

ROI w/o appreciation 13%

Cash on Cash 10.5%

I know all the math nerds are going to ask specifics about expense assumptions.  Being a math nerd myself, I have a detailed spread sheet that I am pretty confident captures all of the details, which is how I developed the high level results above.  

On the triplex I feel like the positives are the fact that it is local. I have driven the neighborhood and the person advising me on the purchase manages multiple MFH's in that area and has been investing locally for 20+ years. The cons for me are having all of my eggs in one basket (building) and the fact the MFH's don't appreciate as quickly as SFH.

For the Memphis properties I think the positives are a reputable company managing the rehabs and property mgmt (I have gotten references and confirmed).  The obvious downside is the fact that I have never set foot in Memphis and don't know that market.  

I would really appreciate some input/advice on this one.  Cash on Cash return is VERY important to me since there are retirement funds I need the money to GROW.  Otherwise I can just throw the money into a SPDR fund and forget about it.  I would especially like @Brandon Turnerto weigh in (although I'm pretty sure I know what his response will be). 

Thanks!

John

[David Faulkner]

I would actually advise investing your own personal money, outside of the 401k, locally first, before you do anything REI with your retirement funds. If you are new to REI, then the first thing you need is an education (and you are starting out in a great place) and shortly after that local hands on experience (the best kind of education). With a solo 401k you will by definition be hands off, even if the properties are local.

Another thing to consider is taxes. Is your solo 401k roth or traditional? Buy-and-hold REI is generally already fairly tax efficient, so make sure you aren't doing the equivalent of buying muni bonds in a Roth IRA. Also, leverage is one of the major benefits or buy-and-hold REI that you won't necessarily be able to take advantage of through a 401k (unless you are getting non-recourse commercial financing, but that tends to be expensive). Hard Money Lending or Notes, on the other hand, are tax inefficient and not suited for leverage, so may be much better options for REI in a 401k, but they are not typically methods recommended for a newbie.

I'm generally not a big fan of out of state turn key. Investors are giving up too much control and upside to make it a good deal IMHO. If you want to invest out of state, I would 1)buy a fixer (via realtor), 2)fix it up (via contractors), and 3)rent it out (via property manager) so that you can profit at each of those steps rather than giving up the profits of the 1st & 2nd steps (and maybe the 3rd step too) to a turnkey operator. However, to do this effectively you will likely need some education and local hands on experience first.

Good luck!