My First Remote Out of State Turnkey - 18 Month Report Card

[Lane Kawaoka]

This Birmingham, Alabama property was put into service in September of 2014 and was the successful beta test to prove the concept of remote out-of-state investing. I acquired the property from a marketer that makes connections with the rehabbers in certain markets and finds buyers such as myself who are typically located in low price to value ratio locations (this does not necessarily mean high-priced locations) such as California, New York, Hawaii, Seattle, Portland, and basically the coastal areas that all the cool kids what to actually live. Marketers have their place if the buyer is totally clueless but once you purchase a few of these properties the marketer really does not offer much value. The only thing I see that they would offer would be someone to be the bad guy role in a negotiation but many of the marketers are buddy-buddy with the rehabber because of their business relationship and won't stick their neck out for you. As the buyer, you need to take ownership of the due-diligence process and negotiations because that marketer is not a licenced agent and does not have a fiducial responsibility to you.

Why Birmingham?

Check out my previous post more a bit more context. My goal was straight cashflow so Memphis and Birmingham were at the top of my list as opposed to Atlanta/Texas which seemed to trade off some cashflow buffer for appreciation potential. I was comfortable going with a seemingly grungier city because I was going for cashflow (rent/value). A wise mentor of mine told me once "the security of your investment in a market correction is how much cashflow/buffer there is from between your rent minus expenses... when bad times come, how much can you lower the rent to ride out the bad times." I think most people get wrapped around in analysis paralysis over the plethora of data such as crime stats, employment trends, population trends, etc. Those indicators tell part of the story but for me the reason I moved forward was just talking to a couple of people who were (not referral based salesmen) investors with disinterested agendas that said "dude, just buy it (from the right people), it just works". If you have ever heard the saying "stand on the shoulders of giants" that's what I did - if it worked for these other investors then I'm just going to start where they left off - after all every month I delayed action I lost a potential $200-300 of cashflow. In the end, maybe it's just because of my personality, I chose Birmingham because I heard so many podcast ads for Memphis and saw all the investors going there.

Due diligence:

I apologize, it has been so long that it's hard to remember, but there were really no huge exceptions in the due-diligence process. I did a 3rd party inspector that I got off a referral from other investors. Remember do not take a referral from anyone on the sellers side as that is a huge red flag for their integrity due to the conflict of interest. A big difference in my growth as an investor is running these processes together with the lender's parallel process and being able to effectively negotiate additional renovations or contract terms. Looking back I probably over paid a few thousand at least more than I would have today with my experience because you just can't read about this stuff. Also it's worth noting that you always should connect with a few property management companies and interview them early in this period. In addition, use them to validate your rental numbers and property location.

Closing:

I paid cash for the property initially because it was the sellers terms. I would never it do it again this way since I basically waived my right to a property appraisal. The next step was to refinance the property with a convention Fannie Mae mortgage to pull out most of my initial investment. We had a lot of trouble getting the property to appraise for the value due to the technical processes of the appraisers. Finally, after the third try I finally got an appraisal number that I was able to live with, but the damage had been done and I had to have all my cash tied up in the deal for 2-3 months. Lesson learned was to always have a financing/appraisal contingency to ensure that the property that you buy appraises and that what you pay is what it is worth. This is another example of a standing on the shoulder of giants, when you are financing from day 1 the bank owns 75-80% of the home via the mortgage and they are doing their due diligence too via the title work and appraisal. Therefore use the banks process as your friend. I got a lot of help from my lender in this transaction as they were the ones behind the scenes working the appraisal issue. This the difference between going with any big bank lender and a lender that works exclusively with investors. Again the golden rule is to always go by referral by another investor.

After the smoke cleared I was out of pocket $27K and had a $50k mortgage. The interest rate was a little under 5% but that does not matter. Sophisticated investors do not look at interest rate and the amount of debt instead they focus on cashflow and effect on net worth.

Operations:

After all the closing issues got taken care of everything else went pretty smooth and the property got filled by a nice family. Here are the numbers per month:

$875 Rent

- 10% Property management

- $395 Mortgage/Interest/Insurance/Taxes (PITI)

I typically get $300-400 per month after expenses.

Knock on wood - it really does not get any better than this property because in the first 18 months of ownership I have experienced no vacancy and only $300 of repairs. :) So yea things are pretty boring on this one.

[Lane Kawaoka]

I don't personally agree the aforementioned underwriting especially the quazi 5% holding costs but I'm not really here to argue that. What I do know is this being my first property like I said I over paid by 3-7k cause I did not know what the heck I was doing. @Sundeep Amin It really has nothing to do with 1% 2% that is just a starting point. I can get properties all day long today that rent for 800 that cost 40-50k but the tenant quality is lower and the 'time' it takes to acquire it.

That brings up the *Time-Money-Experience* triangle. Look I know that there are a lot more experienced folks who have the ability to find 2-3% deals and do magical things. Myself I have a full-time job that I make a good salary and I enjoy going to for the most part. Heck I get free coffee there. What you see in these forums is what I call the #BPBP Syndrome (the BiggerPockets Bi-Polar Syndrome). What I mean is that the vocal folks on the forums are very active saying and they can do much better. Real Estate is their job and they are damn good at it. I am a passive investor who has limited time to source screaming deals and just needs to place my money and quit screwing around on the sidelines. I believe passive investors like myself are actually the (quiet) majority of folks on BiggerPockets.

I think what we can all agree is that real estate is the best investment vehicle out there and what I love about it is that even when I buy these "lukewarm" deals I still reach my goals faster than the stock market.

#BPBP Syndrome