David Campbell & Hassle Free Cash Flow Investments – Dallas / Fort Worth, Texas Turn-Keys

[Stan T.]

Wondering if anybody has had the chance to work with David Campbell of Hassle-Free Cash-Flow Investments. His concise and informative ebook struck a chord with me, as it is exactly the investment philosophy I am looking to get into the business with, and I stumbled upon it here on BiggerPockets!

He offers a phone consultation explaining his construction/development business, investment strategy, and his current project in Texas. The basics of the deal are this: Newly constructed, fully-managed, $130,000 4 BR-2 Bath properties renting for $1300/month in DFW, TX. He offers to personally finance 15% of the purchase-price, leaving you with 5% down payment and a meager, modest ~$50 positive monthly cash-flow, on paper. If you stayed with conventional 20% down loan, and his same figures, it looks like you could cash flow around $100-150/month.

Right now I’m looking to get into ~$250k of solid turn-key cash-flow property. This deal seems attractive, and wanted to know if anyone has experience doing business with him.

[Jon Holdman]

I've never heard the term "cash on cashflow return" either. Further, using it as you've described makes no sense. You could use the term "cashflow on cash return" because the word "on" in such phrases refers to division.

IMHO, the phrase "cash on cash" is more accurately applied to the cash returned to the investor by the property than trying to apply it to these non cash items. Lets take them one by one:

cash flow - actual money put into your pocket by the property. The good stuff.

amortization - paydown of the loan and an increase in the value of your equity. Good stuff too. But not cash. You can't easily spend this. You either have to take out a loan (costing you interest) or sell.

devaluation of debt - not sure what this means. I think you mean that if inflation kicks in, its easier to repay the debt because rents and expenses go up (hopefully in synch, but certainly no guarantee) while the debt payment remains the same. Maybe that happens. Maybe not.

tax benefits - hoo boy. Here's my big bugaboo with many sellers. Often the lipstick that gets slapped on a pig of an investment. Sellers claim "this produces a passive loss you can use to offset other income". Boloney. Good rentals produce taxable income. These supposed tax benefits come from depreciation. All other deductions you make against the gross income to get to your taxable income are actual cash out the door. The ability to get any benefit from the depreciation is 1) limited by your income, and 2) has to be paid back.

On point 1, you can only take a passive loss against ordinary income if you have an AGI under $100K or are a real estate professional. AGI's below $100K can take up to $25K a year in passive losses as a "special allowance". Above $100K it phases out and at $150K its gone. You can take it if you're a RE professional which means spending at least 750 hours a year And more hours doing real estate than anything elses. Full time job? The threshold is 2081 hours. Unless you're doing real estate as your only job, you're not a professional by this IRS definition.

Point 2, as you take depreciation (or, even it you could, but for some crazy reason don't) the "basis" of your property decreases. When you sell, the "gain" is the net selling price (selling price less all costs) less the basis. On the amount of gain up to the total amount of depreciation taken or allowed (whichever is more) is subject to a tax on the unrecaptured depreciation. That's your ordinary, marginal income tax rate, though it is currently capped at 25%. So, those benefits you got if you were able to use these passive losses have to, in most part, be repaid when you sell. If you can't take the passive losses, they can be used to offset the gains when you do sell.

Complicated math can be used to make a crummy deal look good. IMHO, all you need to do is this:

NOI = rent/2 (and convince yourself its even this good)

Cash flow = NOI - P&I

Cash on cash return = Cash flow / total cash invested.

That's the money you can put in your pocket.

A very strong deal. Folks, don't forget to apply the 50% rule to turnkeys just like any other rental. 50% of gross schedule rents are going to vacancy, expenses and capital. I've never seen a turnkey ad that claims anything close to 50% as the number here. Your actuals will vary, but the best case is taxes, insurance, and property management. Worst case can be much, much worse. And then you take out your debt service (P&I payment). Truly netting $300 would be a very excellent rental.

Speculation pure and simple. "Buy my crummy rental using too much leverage and you'll be OK in the end because rents will go up". There are ZERO guarantees that will happen. Your rents may go down. It does happen. All too often on these turnkey deals I've examined the rent promised by the turnkey sellers is above market rent to start with. You may find that after the one year rent guarantee expires you're stuck re-renting the property at the lower market rent.

You may also find that if you decide to sell the property you have to bring cash to the table. With only 5% down if you sell after a year that you have to bring cash to the table. Despite this gross oversimplification "but for the sake of making a complicated subject as simple as possible $4100 is the average annual loan paydown", you pay almost nothing in principal for the first 10 years of a 30 year loan. After paying closing costs you will be in the hole even if you can sell for the price you paid. Its entirely possible you discover the price you paid was above retail and to get a buyer you have to sell it for less than you paid. So, you're even further in the hole.

Before jumping into any rental purchase, and especially turnkeys, make these assumptions:

1. The house needs work. If it was rehabbed, assume its shoddy, cosmetic rehab that has covered up underlying problems.
2. The house is overpriced.
3. Rents are overstated.
4. Demand for rentals in the area is overstated.
5. Expenses are understated.

Then work to invalidate these assumptions. Get on a plane and go visit the property. Drive the neighborhood. Late at night. Look at other houses. Research rents. DO YOUR OWN DUE DILIGENCE. Then buy only if it makes sense based on your own research. Sellers, turnkey or otherwise, are always going to oversell their deal.

Don't look at a far-away deal with your local eyes. This seems to me to be the number one area where turnkey sellers look. The market in Detroit, Memphis or other popular turnkey areas IS NOT the same as your market in NYC, LA or SF. If you use your local eyes and think "this is a great deal" you are probably fooling yourself. Just because it would be a great deal if that property was in your area doesn't make it a great deal where the property actually is.