Advice on my father's turnkeys in Memphis, Dallas, and Philly

[Matthew S.]

Hi All,

I'm a 30-year old man with two rental properties in the Washington, DC area.

As of last year, I've also started helping my father, also based in DC, make real estate investments. He is 60, had about $400,000 of investible cash saved from a long career, and also had just inherited a second home from relatives worth $600,000 approximately. Amazingly, he had been keeping the $400,000 in cash uninvested in the bank for almost a decade, and so after finally finding this out I was eager to help him get some return so that his money won't run out.

My father is quite backward when it comes to using technology (e.g. email, internet), and also somewhat ignorant about real estate and rentals, and so my help in researching and transacting property purchases is crucial. We looked at local properties for him in DC but quickly decided they were too expensive and the returns too low. Then we read about turnkey companies on BiggerPockets and decided we would visit some providers... over the last year we have made in person visits to take tours in Memphis (), Chicago (, ), and Philadelphia ().

We liked each of these companies, none of which I am affiliated with, and my dad decided to make the following investments, which are already done:

House #1 - $145,000, 4 BR/2BA single family house in Memphis through Memphis Invest bought in cash late last year. Rented currently for $1300/mo.

House #2 - $130,000, 3BR/2BA SFH in Dallas through Memphis Invest bought in cash early this year. Rented for $1250/mo.

House #3 - $90,000, 3BR/2BA SFH in Philadelphia through ABC Capital bought in cash; my dad is about to close this deal. It is not yet rented; but projections are it will rent for around $1,000/mo.

I am aware that the first two are retail cost and not the best return one can get through other approaches. However, my dad simply lacks the desire at this point to learn deal-hunting, to renovate and/or manage his own properties, etc. He has other priorities and wants something easy, and turnkey investments yielding about 7-9% returns per year seem to fit the bill. We also are stuck in Washington DC where opportunities for truly good non-turnkey deals are quite limited compared to less expensive cities.

Currently, we have also finished renovating and are selling my dad's inherited 2nd property, which is right now under contract for over $600k; he will get almost all of this money as there is no loan on the property and no other significant taxes on the sale; the property is being sold in a country in Europe with no major estate/inheritance or transfer taxes. My dad will then transfer the money here. We have been wondering what might be a good idea for how to diversify this money into different properties. I have suggested to him the following:

• over the next year, using the 600k cash, buy 2 houses in Chicago, 2 more houses in Philadelphia, and perhaps 1 house in Indianapolis through turnkey companies. I like these markets as they seem to have many houses in the 90-130k price range with decent returns, managed by some pretty decent turnkey companies. I think owning houses in 4-5 major but diverse cities is a good way of diversifying while still remaining within one asset class (do other commenters agree?)

Among other considerations, I've strongly encouraged my father to keep a significant cash reserve and to apply for a HELOC – to be kept as an emergency line of credit, not used, of course. He is doing these things. My dad is a very conservative investor and person, and so I need to keep this in mind when helping him. He also does not live a lavish lifestyle and does not need to profit to the max, so therefore leverage is less attractive to him. Having said this, he does see the advantage of having loans on a limited number of the properties to allow investments in other additional properties.

The biggest question right now is should my father take out loans on some of these houses? Within the next year I expect he'll own 7-8 houses in cash, each worth around or a little over 100k, and each earning about $1000-1300/mo gross rent. I see no reason for him to take too much risk by getting heavily leveraged. Even if he got no loans, he could add another house every year or two just from the returns on the existing houses. My initial suggestion to him was to get conventional loans on two of the houses – this is something he can easily do, as he has very little other debt, and still has a good conventional income. That way if the economy turns bad in one or more of the cities, he will not struggle.

What do others think about the number of loans? I think it is better to be conservative and only have loans on half or less of the properties. But I don't know for sure. We are working on the 75% cash out refinance first loan against the Memphis property right now with SNMC Capital / Team Bighaus () out of Washington State, a company that specializes in making conventional loans to RE investors.

Would appreciate any criticism or suggestion you have of this “lazy” strategy of turnkey investing for my dad... what do you think about the leverage... what about the number / spread of different cities to be invested in... what about other types of real estate or other asset class investments... what about how much money to keep on reserve?

I realize that no one is giving financial advice and the risk is all mine/my dad's. Please just share how you might think if you were in my shoes helping your father. I appreciate any thoughts you have positive or negative.

Thanks,

Matt