All Forum Posts by: Account Closed

To clarify to @Ali Boone . Yes of course many of my tips apply to all rentals, not just turnkey. So let me talk specifically about turnkey perceived issues.

1. Price is higher than market: Its true that its hard to get a turnkey home at a discount with built in equity. To do that you need to be buying directly, rehabbing and then renting, i.e what people supplying the turnkey home do. If you have time to do that, great. But many people do not have the time or ability to do that, especially out of state. However, you should not be paying ridiculous premiums to market value either. The way I see it is if similar homes on MLS are say 47K and a turnkey operator may sell for $50K its okay. Because a couple of months of vacancy and fees to find a tenant would make up the difference easily. So the small premium is worth it. There are operators out there who will try to push the same house for $60K. I would not pay that. I have financed all my homes and have had no trouble getting them appraised for about $2-$5K above my contract. So I am basically buying at market price. I know that.

2. Rents are artificially high: Only bad tenants pay above market rent. I have learned to work with rehabbers now to screen the tenants they put in so I am not getting a crappy tenant (learned the hard and expensive way that lesson!). You can also check rents on Craigslist, rentometer, rent fax and number of other sources to see if rents for your home are inline with the market. Its easy due diligence.

3. Bad Property Management: This is the hardest risk to eliminate by due diligence. You can get references etc but at the end of the day this will make or break your out of state investment. Ali Boone sounds like she knows this well!

I've bought 8 properties so far in Indy, all turnkey. So here are my lessons.

1. This is NOT passive investing. Even with a property manager, its a lot of work.

2. Dont do it if all you are going to buy is one or two properties. Much like stocks or any other investment, a single unit is very high risk. But a diversified portfolio will likely give a consistent return. I have had one disaster home out of all of them with a bad inherited tenant and large damages and long vacancy. But even then, I made money on the overall portfolio that year. If it was my only home, I would have lost a ton of money.

3. You need business management skills. It is a business. You need a business plan and strategy. You need good processes for due diligence, managing your PM, accounting etc etc. And things will change. You may change PM/s. You may sell a bad performing home. You need to have good financial skills to analyze your numbers and see whats working and whats not. I do that kind of stuff all day at my day job so I am good at it. It helps a lot.

4. Focus on one or two markets and learn them. Develop the networks of people you trust in those markets. If you do out of state like I do, you need them to be ethical and efficient. I will trade some efficiency for honesty any day though because in the end, you have to trust them.

5. Don't sweat the small stuff. Whether a plumbing repair costs $50 or $100 will not make or break your ROI. Extra turnovers and vacancy will. Focus on the high value factors and optimize those as far as you can.

6. Don't put all your eggs in this basket. I wouldn't make turnkey properties more than 20% of my investment portfolio (i.e my cash in, not value). There are risks, many I don't even know about. Like any investment things can go wrong and I sleep better knowing it won't ruin my life if they do.

But overall I think I can get a solid high return over a 10 year period and so consider this a good strategy, at least for now. Money is cheap, rent ratios are decent and home prices are still low. If any of those factors change, I would stop buying more. No strategy is good at all times. You have to adjust as you go. But for now I am adding to my portfolio.

There is no magic number. If you are betting on appreciation, all you need is enough rental income to cover expenses. But for any decent cash flow or yield you are probably looking at $120-$150K max and even at those levels its hard to get better than 1% GMR ratios. Above that its negative cash flow territory. For example a $700K home in the Bay Area would only get $2800 or so in rent which would not cover PITI if you had 20% down.

On sub $40K houses you may get 2% or higher and in the 50-100K range you typically get 1.5-2%. Of course this depends on region, market etc but the above numbers apply in the typical investment markets discussed here. For me the sweet spot is the 50-100K range where the neighborhoods are not war zones but there is a large pool of permanent renters.

@Chris Masons I like MLP's a lot and have been holding them for several years now. The tax benefits of deferred tax on dividends and some depreciation is great for someone in a high tax bracket. The only downsides are 1. You cant really trade them because you would trigger tax on all the past dividends all at once and 2. They are concentrated in the energy sector and 3. My accountant hates the K1s!

Other than that, they are great investment vehicles for long term tax deferred growth outside retirement accounts.

I have done both. But I dont have time and knowledge to do due diligence on many properties so the Private Lending has been to people I trust and know. Its more based on person than property, even though I do get the Deed of Trust. Since I only do that on a limited basis, I dont have money working all the time. I also have invested in a fund from an SDIRA account thats paid b/w 12-15% with regularity with no effort on my part. So I definitely like that model a lot. Again, you have to find someone who you trust and knows what they are doing and have to be an accredited investor.

For me its more an issue of control. I have ZERO influence on the performance of stocks or their underlying companies. I also have friends who are hedge fund managers and I understand just how rigged that game really is. ANd to the 34% return, sure last year everyone was a stock market genius. What did your friend make in 2009? Thats not to say I dont own stocks. I do. And while the long term returns on an index fund might be decent, the actual entry and exit points matter. Ask anyone retiring in 2009. Contrast that to my real estate portfolio. I have homes that pay off fully in 10 years so I get 4X my investment in 10 years with no appreciation assumed. If the value of the homes drop 50% I still get 2X my money in 10 years. The rental yield is at least partly under my control and better management can improve returns.

Having said all that, diversification is key. I have rental homes, a primary home in a high cost high appreciation area, private lending funds and Tax lien funds in my portfolio. I also own stocks, stock funds, muni bonds, everything except gold which I just dont believe in.

@Account Closed I am really not sure what your beef is here. Let me make one final attempt to clarify for the audience.

Cap rate = NOI/ purchase price.

How you calculate NOI is up to you. It's an estimate in any case. You can use past data on the property if you have it. But even that is no guarantee of future. 50% works well for a certain class of properties but if you hate it so much don't use that. Instead Pay someone like @Account Closed 5000 dollars to give you a complicated spreadsheet that comes up with 54.235% if it makes you feel better.

What an acceptable cap rate is, depends on the market.

Cap rates are the most similar number to bond yields or stock dividends and therefore the best comparator. You can use GMR if you like but that's not equivalent to yields or dividends. That's why I like Cap rates. You can use other metrics if they suit your needs better.

That's it. I can't be any clearer and so will end my part in this fun debate now.

@Account Closed As an investor I care about one thing only RETURNS. I dont care about how appraisers value property. As an investor I want to effectively allocate my capital across various asset classes and wish to compare investments. The correct way to do that is ROI or IRR which is a complex calculation that factors in risk and cost of capital and time value of money. I am not here to provide an economics lesson. Cap rates are a simplification that allows rough comparison between investments. You can argue with me all day an night about how to calculate them and at the end of the day they are all based on assumptions. But so is the return of the stock market, a muni bond or any other investment class. Lets just say you can go invest your way and I will go invest mine. But to say it is wrong to calculate cap rate or any other form of ROI on SFRs and that the only way to do it is via an appraisal is just ludicrous.

@Account Closed Calm down dude! Wheres that Aloha chill? Of course a serious investor would look at the income and expenses of each property individually. I was just illustrating with simple back of the envelope calculations. Of course the cap rate is set by the market. In the Bay area you would never get 10%. The point was that when you sell a package, the buyer would be an investor and would consider the cap rate. What an acceptable cap rate is to an investor varies by market, investor etc. You can buy negative cap rates if you like, I choose to have a threshold. I showed a simple way for the wholesaler to approximate the value by considering cap rates.The 50% "rule" is rough but seems to work well in a certain segment of the market. At the $800 per door rent segment it works remarkably well by mine and others experiences. Also, at 800/door rent this is not the Bay Area either so I would not expect cap rates much lower than 10%. Given that, my rough guidance is most likely correct.

@Jon Holdman Of course you are correct. An investor would pay the LOWER of the two approaches. I just meant that if you want to sell a package, the buyer is necessarily an investor and would consider the cash flow.