All Forum Posts by: Allen Tackett

 I've done a few deals this year, but I'm looking to buy one more in the next 30 days.  If you want to send me a few listings, please send me a PM.  

At risk of sounding demanding, a few caveats.  I don't buy anything with capex or maintenance needed in the short term (first 3-4 years of ownership).  So I need newer roofs, HVAC, hot water etc.  I usually buy new construction but realize this probably isn't the market for those kind of deals.  I'm not really into full remodels of homes pre-1960 because while the cosmetics can look great, there's no way to know the quality of the work behind the walls.  Foundation issues are deal breakers.  I buy in A/B neighborhoods.  No C or D.  I self manage so I can't risk tenant headaches. I'm usually overseas so I need it to be passive.  In 18 years, I've never had a missed rent payment or eviction and I'd like to keep it that way : ). 

Lastly, I do ask for accurate sellers disclosures.  Any major surprises at the home inspection and I usually just walk away.  I expect parties to be transparent and act in good faith.  I appreciate your time and would be happy to add OH to the markets I own in and work with you, but I don't want to waste your or my time so please do consider the aforementioned requirements.

 Brother Matthew - I just posted some leads for you below.  Good luck man.

Athens, AL (college town next to Huntsville) is a gem.  You can still get cash flow in both cities.  I've also recently bought in South Carolina and lots of cities there still work.  Most of Georgia still works, from Atlanta to Valdosta.  Tulsa, OK still works, and so does Waco, TX.  These are all great markets with growing economies for the most part.  Baltimore still works, but be careful.  Lots of shoddy rehabs and bad neighborhoods.  You can go further North and find cash flow, but with older homes, it just takes one bum HVAC or overlooked plumbing issue and you'll lose most your cash flow for that year.  Not saying don't go for it, but be careful with older homes if you're just getting started and out of state.  Good luck and reach out any time!

Hello Joseph, 

It looks like you're off to a great start and are thinking about things the right way.  It's clear your knowledge is way ahead of where I was at when I started, so I know you're going to do well.  If it's any consolation, every investor I know is struggling with current conditions.  But don't lose hope!  I am still finding deals and I'm sure you can too.  I have to look at 20+ properties a day, but there are nice cash flowing deals out there, mostly in the Southeast.  

Georgia, Alabama, North Carolina and South Carolina have quite a few.  You can still find some in Oklahoma and in Waco, TX.  I've found some in FL as well, although Tampa would likely be pretty tough unless you take some major risk to buy old or otherwise problematic properties.  

A few thoughts:

- I advise against negative cash flow for you if this is your first deal.  In a fast appreciating market, it might make sense to break-even on a deal and go for appreciation.  That's not the market we are in though.  In some cases, it also makes sense to show tax losses on paper to reduce the tax burden on other passive income (for example if you have several or some paid off).

- It's not all about the gain, it's a risk vs. gain assessment.  If you're going to take on more risk, you must have the potential to have above average gain.  Currently, you can make 5% risk free with CDs.  So any deal you do, which will entail some risk, must perform higher than that.  With cap rates around 5-6%, that makes many cash purchases questionable.  However with leverage, and depreciation, you should be able to get at least 10% total return, and very likely 15-20% total return.  By total I mean the sum of cash flow plus tenant paying off mortgage plus appreciation.

 - Why use a PM?  We own quite a few properties and don't use a PM for any of them.  It's hard enough to get the numbers to work without one, so why add more unnecessary expenses.  Further, I've found that many PMs schedule unnecessary repairs and maintenance, further driving up costs.  They often have their own maintenance staff so they have a financial incentive to schedule what in my opinion is unnecessary work.  

- I use a single line item for repairs/capex (10%).  To further mitigate risk, I'd rule out properties with old roofs, old HVACs, old hot water heaters and so forth; your annual expenses should be quite low.  I only buy newer homes and townhomes to keep costs down so that's something you may want to consider in your screening process.

- Could you put down 25% instead of 20%?  You might find it's easier to get closer to a 4-7% cash on cash return if you do.  You should be able to get 6.75% for sure, although 6.5% and lower is possible with a rate buy down (which usually makes sense with a breakeven of less than 4 years)

- Your closing costs of 1.5% look low to me.  I've found it's closer to 3% or higher if you're buying down your rate.

 - I don't think you need the 1% rule to make things work; you should be close on any home that's .75 or higher on a rent to purchase price ratio, unless you're looking in Texas and other high income tax states.  I'd recommend you look in states with low income tax (i.e. Alabama etc.), which makes it easier to cash flow

- You may want to consider assumable loans. All FHA loans are assumable, so you can ask a local agent to run a keyword search for you in MLS. A lot of agents don't put "assumable" or "FHA" in the listing on Zillow or Redfin. Of course you'll need to move into it, but if you can buy a primary residence with a 3% assumable loan, it'll likely cash flow when you move out in a year.

 - If you listen to BP podcasts, they will say that finding deals is dead, and that you have to make them.  I disagree - you can still find deals.  But it's a fair point: it's so hard to find them that you may want to try to make them instead.  The easiest way to do this in my opinion is to buy large properties that give you the chance to add bedrooms, and to buy properties with lots of bathrooms so you can rent them out to roommates (or rent by the room) to try to get above market rents

 - If you are comfortable with taking some risk, there are multifamily properties listed right now in dangerous neighborhoods in Philly, and very old properties in the midwest that high the 1% rule and cash flow.  I don't do deals like those because the risk of headaches is too high for me, but they do work on paper and may be worth a close look if you are ready to take the plunge

My very best wishes to you.  If you ever need any help or want to chat, please don't hesitate to reach out.  Ciao, allen

Hi Nicholas,

Regret any confusion.  You pretty much nailed it, but I’d clarify: 

It doesn’t need to be turnkey - just long term buy and hold

It is not enough to beat risk free investments, it needs to have a compelling risk-adjusted return.  I know lots of high return markets, but the risk is even higher than the extra return

I’m curious where people are buying now for optimal risk-adjusted returns.  It seems like a variety of private equity funds are buying up so much inventory that many of the cities and neighborhoods that used to work - even at higher interest rates - have no inventory.  I’m still facing bidding wars lol. Just thought I’d see how other investors are handling this.  Thanks for your thoughts

 Wells Fargo and a dozen other banks and credit unions.  You can find them by googling "which CDs offer 4%".  

Hi Will Fraser,

I have a busy day job; background in analytics.  I used to own a chain of coffeeshops and have bought and sold a few small businesses.  I have bought around a dozen investment properties over 15 years and consider myself fairly savvy with finance and deal-procurement.  Harder to use my old approach though with today’s interest rate environment so looking for fresh ideas and peer mentors to take my game to the next level.  Happy to help others as well!

All really great points Pat.  Thanks for highlighting those markets.  Any specific neighborhoods you love (or avoid) in those three cities?

Depreciation and leverage are indeed what gives real estate the edge over other asset classes in my opinion ( at the expense of liquidity and high transaction costs).  That’s why I don’t pay cash for most deals.  For newer investors - please keep in mind leverage works both ways.  If you are 90% leveraged in a market with dropping values, you’re in a tough spot if you overpay and if you don’t have sufficient reserves to account for an unexpected HVAC replacement or a tenant who stops paying/vacancy.  You could lose more than the capital you put in.

Nonetheless, I find cap rates are still helpful to quickly sift and filter potential deals, even though I plan to take a loan.  If the starting cap rate is say, 4.5%, I usually don’t bother running the full pro forma because I know it probably won’t work, unless there is something special about the deal.

This post is for LONG TERM BUY AND HOLD RESIDENTIAL REAL ESTATE INVESTMENTS.

First, let's bench mark the range of options so we can put in context any potential opportunity:

 - CDs and some savings accounts are back to paying 4%.  That's for zero risk.

 - Inflation-adjusted Treasury Bills pay 6%+, for almost zero risk, but are capped at $10k per person.

 - Most residential investment properties sell for a 5.5 to 6% cap rate, so for a cash buyer, 6% is a fairly easy return to obtain for newer properties with very low risk.

- Equities offer 7-9%, but with arguably higher risk and fewer tax benefits; plus this is BP, so I'll focus on RE as the asset class to discuss (rather than say talk about buying a business on Flippa or BizBuySell for a 3x multiple).

- Flips and BRRR can generate larger returns, but they aren't passive so I'll leave those opportunities to others to discuss.

- STR is a changing playing field and is not passive, and carries more risk, so I'll leave that one to other forums as well.

Okay, on to business.  Let's assume that since it's easy to get 6% return on cash invested, with almost no risk, that's the bare minimum we should consider for our return for any investment (real estate or otherwise).  Now let's assume someone is trying to figure out how to invest $50,000 to $300,000 in an optimal way, to maximize the risk-adjusted return.  If you're going to accept more risk, you must receive more than 6% return.

What are the top cities people are able to find a total return of say, at least 15% (adding up cash on cash, equity build up, and a very conservative estimate for appreciation - I use 2%)?  I'm looking for new markets.  Most investment loan rates are around 7-8% and require 20-25% down, so let's use those assumptions.  Let's further only look at A and B neighborhoods since the risk profile of a C or D neighborhood are so different, one would need substantially more gain to justify the extra risk (i.e. one eviction can wipe out 1-2 years of gains, and so forth).

A few things I'm seeing:

- Baltimore: With cap rates at 8% or higher for rehabbed townhomes, you can still get close to the one percent rule and still generate 18% total returns.  However, you'll have to accept some risk given the issues of crime and unemployment in the city.  

 - Norada, Rent to Retirement and Real Wealth Network are still offering up some good terms, but there are strings attached.  I like these companies, but have had some issues with their local partners (PMs who overcharge, new construction with unfavorable and one-sided contracts, a seller who backed out of a deal etc.).  Their markets and properties are definitely worth a look, but think it through.

 - I can not get numbers to work in my favorite markets any more: DC, Charlotte, Raleigh, Austin, Phoenix, Portland etc.  I'm finding that I have to go to small towns that I had not heard of, and look for less expensive deals, to get anything to work.  Havelock, NC  or Texarkana, TX anyone?  I just saw a few lovely properties under $200,000 that would cash flow and generate nice returns for a new investor.  

 - For these types of markets, big long term appreciation will likely not be there, so it does depend on on what you're looking for: income replacement or wealth building that's not liquid.  I like hybrid approaches with a little of both.

- Oklahoma City: still offering 7.5 to 8% cap rates in the better neighborhoods and the homes still pencil out with total returns of 18% or more.

- Spartanburg, SC: still a few deals there, but for older homes.  Hard to gauge the additional risk of some of these properties for no additional gain.  Higher tax burden for investors as well that could wreck your pro-forma if you're using numbers from Zillow, Realtor.com etc.

- Lincolnton, NC: has cheap lots and some new construction duplexes that still cash flow.  Closer to 14% I believe for the total return.

Where are other people finding deals?  Would welcome some fresh ideas and new markets.

I personally purchased an umbrella insurance policy instead of creating LLCs for each property, but I do move my properties to LLCs after I have a large amount of equity or if they are paid off. I'm not advising that for everyone since I'm not a lawyer, but you have to consider a few things:

1. What risk are you trying to minimize/prevent and are there any ways to minimize that risk other than creating an LLC?

2. What is your net worth?  How much equity would you lose if sued?  Is that much equity worth the hassle and cost of creating/maintaining several legal structures?  Maybe, but have a good cost/benefit plan in mind.

3. Why would you be sued?  I'd spend more time thinking about how not to get sued than how to defend a potential lawsuit.  Be cool to your tenants; be fair; be generous; be compassionate; follow the law.  

4. What happens if you want to refinance or do a 1031? Is the LLC going to do those things if the LLC is now the legal owner? There are tax implications to holding a property in an LLC that you should consider.

I don't pretend to be the expert on this topic and I might be doing it all wrong, but I hope some of the thoughts here are helpful.  Good luck!