All Forum Posts by: Clayton Mobley

One note I should have mentioned: You can't use the 1031 to purchase another flip... so if your goal is just to find another spot to flip then this won't work. If you want to move your non(ish) performing capital from the $135k SFR into another long-term rental, then the 1031 is your best bet. This way, you can sell your SFR and reinvest the proceeds without paying capital gains OR depreciation recapture taxes. The deferred basis is rolled into your replacement prop(s) so you would pay those taxes when you eventually sell the replacement prop(s)....unless you just keep executing 1031s each time, rolling more deferred gain into each subsequent property until you die. Then you leave your properties to your heirs, who receive a stepped-up tax basis equal to the value of the properties at the time of your death and, voila!, all that deferred gain disappears! 1031, 1031, Die is a morbid strategy but a very effective one.

The basic rules of the 1031 are that, as long as you reinvest at least as much value ($135k) and at least as much equity ($92k, $135k-43k of debt), then you're golden. You can always add more debt or more cash if you want to invest more, but you can't invest less than $92k of equity and $135k of total value. You could, however, pay off your $43k loan and then replace it with $43k of your own cash if you wanted to be debt free on the new prop, or use the $92k as down payments on a couple props and take out additional debt for the rest.

Exchanging from an SFR to an MFR is no problem. Exchanging from one prop into multiples is a-ok. There are timing requirements and documentation rule to adhere to, but that's what your QI is for.

Good luck!

@Lonnie ADams I agree with @Jaysen Medhurst that you should 1031 exchange the $135k property (the flip would not qualify since your stated intention is to flip it, making it inventory for IRS purposes). $100 net flow is not putting your capital to best use. Get in touch with a Qualified Intermediary (required in order to execute a 1031, @Dave Foster is a great resource here on BP) and take a look at your market. We're nearing the end of the holiday season, which is great for sellers, as props tend to move more slowly in the fall and winter (no one wants to move when kids start school or during holidays). 

Since you've been renting it, you need to take a serious look at what (if any) rehab work would need to be done to make it market ready and weight the pros and cons of putting in that work vs lowering your ask. If you can get more just by throwing up a coat of paint and replacing some fixtures, great. 

@Andrew Pfleger I see, well if he's not in a tight spot timing wise then you don't have as much leverage, but if the numbers work, the numbers work! Being able to use the 1031 timing as leverage isn't the end-all-be-all of this deal. I'd just be sure to ask specific questions in your meeting about expenses, cash flow, etc. At $2mil +, I'm guessing this is an MFR, so tenancy history and age of capex items and appliances (if not provided by tenants) would be great in terms of hard data.

Best of luck in your meeting, hopefully you and your partner can make this deal a success!

@Richard V. Thanks so much for the kind words! Always happy to hear folks like what they see when they come to Birmingham - the city really has undergone such a transformation over the past few years, and we're just getting started! 

We look forward to adding you to the Spartan family in 2019!

@Michinori Kaneko Yes, for a 1031 to be valid, you must identify your replacement property options (up to 3 normally, though can be more under certain circumstances) within 45 days of closing on the sale of your relinquished prop, and close on your replacement(s) within 180 days of closing. So yes, if the seller has already begun the 1031 process, they are in a time crunch and being able to move quickly could help @Andrew Pfleger negotiate. 

On the other hand, the seller may just be planning to do a 1031 and not actually have begun the process. Most folks (esp those who will need to reinvest a lot of $$$) start looking for replacement props before they sell their current prop, to give them more time. So, if the seller is in this position (ie hasn't begun the 1031 yet, needs more time to figure out what new prop(s) they want) then it might behoove them to put the prop under contract with Andrew,  with a delayed closing date, giving the seller more time to search for a replacement. In this case, Andrew's ability to be flexible with a delayed closing could be the negotiating factor. 

Either way, being flexible with time is always helpful when buying from someone trying to execute a 1031.

@Vincent Herrera unless your primary goal is to get some cash out of the property, I would suggest a 1031 exchange since you've converted it to a rental for a year. You can sell the property and replace it with another rental (or more, depending on how much value we're talking here) and defer CG and depreciation recapture taxes, basically keeping your tax dollars working for you. There are rules and regs I won't get into here, but again, unless you really need the cash, I would suggest doing some 1031 research. 

If you do need the cash, I'd move back in to qualify for the Sec 121 exemption. 

@Steve Holly I agree with @Jeff Schechter and others regarding full-service turnkey as a solid option for OOS investors. Full disclosure, I am also in the Turnkey business (President of Spartan Invest), so of course I am biased toward the niche. That being said, your question is a common one on BP, and I know there are a lot of mixed feelings about TK, and specific providers vary widely, so I'll try to give you some guidelines for what you should be asking and a few things to look out for.

Regardless of where you live or what market you're considering, it is very important for all investors (new and seasoned) to ask the right questions to weed out the bad seeds (and there are plenty) when selecting a provider. It's just like picking a stock - if you don't do any research, look at the income statements, study past performance, and the stock you pick is a dud....who is really to blame? It would be great if there were no snake oil salesmen and you could trust everything you read online, but it just isn't the world we live in, so due diligence is the price you pay for a successful passive investment.

A few general notes: Steer clear of anything that guarantees tenancy terms (can't be predicted or promised) or excludes any expenses in their ROI calcs. Most importantly, learn all you can about the key metrics that are used to measure success in TK investments (ROI, lease terms, maintenance rate, occupancy rate, turnover, etc.), what they mean and how they are calculated. Then ask any provider you consider what their metrics are and how they are determined (do they track them daily, weekly, monthly, do they estimate? that last one should usually be a 'no'). Any TK provider worth your time will be more than happy to lay out their numbers and walk through any and all calculations - and that's probably the most important thing to look for. If a provider can't, won't, or 'doesn't have the time' to talk with you about your questions in a timely manner (like within the week in most situations) then are they really someone you want to work with for the next decade or more?

Look out for used-car salesman tactics (SUNDAY SUNDAY SUNDAY LAST PROPERTY AT THIS PRICE ACT NOW), providers that will only accept cash, not financing, and properties under the $50k mark (there just isn't enough room there for the TK company to make money unless it's a low-tier prop in a questionable area). Stick to solid B/B+ props, at least in the beginning, since they tend to offer more reliable tenants with more consistent cash flow, without losing all appreciation potential. A-class props are better for appreciation plays than cash flow, C/D props look amazing on paper but are a ton of work, folks that do well in that class are experienced investors who usually self-manage in their own market. 

I know this is already long, so I'll just finish with this quick list of some basic questions new investors should be asking of any TK provider they consider. Answers should be prompt, thorough, and data-based (not estimates or 'oh it's really good'). A good provider will KNOW these numbers off-hand.

1. What is your occupancy rate? Do you track it regularly? What is the lookback period (the longer the better)?

2. What is your annual maintenance rate? Lookback period?

3. Do you defer maintenance?

4. How quickly does the typical maintenance issue get resolved? What's your average turnaround time?

5. What do you expect your maintenance rate to do as your portfolio ages and capex items need repair or replacement? (an estimate is ok for this one, of course, but it should be based on the age of the property and the life expectancy of capex items etc)

6. Does your maintenance rate include move-out costs?

7. What is your average net move-out cost?

8. What is your minimum lease term?

9. What is your average length of stay?

10. What is your property management fee?

11. What is your leasing fee?

12. Do you charge any other fees?

13. What is your average time to first lease on a new property?

14. What is the average time between tenants?

15. Can I see an appraisal for the property I am considering? Can I get my own independent appraisal as well?

16. What was done to the property during rehab? Can you see a scope of work list?

17. What is the expected life on new appliances/flooring etc?

18. How is your ROI calculated and what does it include? Can you walk me through the math?

19. What type of service can I expect once I've made an investment? How do I know when rents are paid, when maintenance issues are resolved? How can I see rental or PM contracts to review terms? How do I get in touch with you if I need something?

Sorry for the wall of text, hopefully this gives you a good place to start when beginning your search.

Best of luck!

@Wells Mangrum is the gas station making you money? if there is cash flow, is it something you would prefer to hang onto but are donating to charity purely for the tax break? If so, and depending on the value of the property and other details, you might looking into a charitable remainder trust. It's a little complicated (definitely talk to a CPA) but basically, you transfer property to an irrevocable trust, pull income from it (cash flow) for a certain period of time and then the remainder (either the property itself, remaining proceeds from the sale of the property, or other investments purchased by the trust using the proceeds from the sale of the property) goes to charity. You get a charitable deduction in the year you form the trust, get long-term income, and get to benefit a cause you believe in. 

It certainly isn't the right option for every person or every property, but it's something to consider if your goals align with what the CRT can offer.

@Jesse S. I have to agree with @Jason D. and others. Obviously this wasn't actually fixed, and if you're buying turnkey, everything should be as-new or as close as possible. I also agree that the sort of blase attitude about this inspection item raises some alarm bells re: what other things did they patch over or cut corners on? Is this indicative of how they will approach other issues with maintenance/repairs/tenants in the future? 

Looks like you've gotten some good advice on what should be done to remedy this situation structurally, but the question is whether the company will be footing that bill or lowering the price to compensate. This is an issue that will become a bigger/pricier problem down the line, so I would make sure you are protecting the future of your investment by dealing with it now if you're really sold on this property. 

Good luck!

As for your next steps, if you're going to go out of state (pretty common for CA investors) you'll need to decide how you want to tackle that. Turnkey or a more DIY (build your own team of agent, contractors, PM etc) can both work, it just depends on your wants and needs regarding time investment and control. If you're looking into MFRs, you may need to go the DIY route as that is not as common an asset type for Turnkey providers (mostly SFR). More moving parts and more due diligence (vetting multiple team members rather than just one provider) but it may be the best route for duplex and triplex investments. Again, I agree you should stick to higher class props, but B/B+ is better than A for cash flow.

The next step would be to do some research on markets that have a strong rental market with numbers that add up for you (I guess if you haven't determined what those numbers should look like that will actually be Step 1). Then if you're still focused on MFRs, narrow by those that have strong rental demand for that type of property, decide on Turnkey vs DIY, and start doing your due diligence. I always recommend that OOS investors make the trip out to meet the folks they are thinking of working with (whether Turnkey or DIY, the point still stands) once they've got a shortlist of 1-2 teams/providers. A few hundred bucks is a small investment in your investment, and making the trip will allow you to see some of their handiwork, tour neighborhoods, and get a feel for who these people are that will be responsible for making your investment a success.

If you have any questions about the turnkey model or the Birmingham, AL market, feel free to reach out any time.

Good luck!