All Forum Posts by: Max Briggs

@Mike D'Arrigo I understand your point and I think that Turn Key providers can justify their existence, wespecially to out of town investors.  But in the case of Smartland, in Cleveland, their properties don't cash flow either.  So, if they aren't cash flowing, you don't have equity, and the market isn't expected to appreciate more than the country as a whole, what value are they providing?

Assuming that you finance the entire operation using your credit line if looks like your expenses including payments on the debt are around $850 per month. That means you are getting $150 per month or ~ $1800 per year. If you truly believe that you are buying a $40k house and putting $17k into closing + Renovation, and that you can resell for $120k I would flip it in a heartbeat and use the profits to fund other deals. I would much rather have $60k in profit now than $1800 a year, even for the next 100 years. The alternative is the BRRR, but you'll almost certainly be cash flow negative after the refi if you're pulling that much equity out, so I'd just sell it and move on.

I agree with @Brian Garlington.  I have been buying properties in many of the same areas as Smartland and I have no idea how any of their investors make money.  They are selling houses right now for over $100k and charging $1050 for rent.  That may or may not sound bad to you depending on what your market looks like, but I can tell you that the area they are selling in has extremely high property taxes, so by my calculations you're looking at a $450 mortgage, $350 property tax (monthly), $75 insurance, $50 vacancy, $120 cap/ex+repairs and your profit is ~ $5 per month.  I've bought properties a block away for $60k, contracted the repairs for $12k, and rented for $1200.  I understand that some out of town investors cannot manage the rehabs themselves and may not be able to achieve Brian's returns or even mine, but it seems like Smartland is not passing any of the benefits of their efficiency to their investors.  Also, in my opinion they are selling above retail.  Might not be the same with all turn key providers, but that is my impression of Smartland.

@Thomas S. Good advise.

@Thomas S. I am just posting an update to this thread and your request to report back in six months.  I chose tenant #1 and so far everything has been excellent.  Their rent is on time every month, I haven't received a single phone call, and they are taking great care of the property inside and out.  The garbage disposal went out in month #2 and he did indeed ask if he could install the new one himself and knock the purchase price of the new unit off of the rent, which I agreed to.  I checked out the install and it was done well, and he didn't request any additional money for the labor for the install, so I considered it a win.  I did a thorough screening of prior landlords and employers to reduce risk from the red flags, but didn't go beyond what I typically do for other tenants. 

As for the lease term, it was me requesting long term leases to compete with other applicants looking for long term leases.  However, I think everyone made good points that the long lease term actually works out in their favor not mine, so in the future I may stick to one year leases and renew as necessary.  

Thanks for all the discussion.

Well... as for whether you're a closeted Socialist or not, I'm not sure.  But one of the beauties of capitalism is that it has a natural flow of resources from the inefficient to the efficient and efficiency does have a societal benefit.  If a large company has systems, teams, and processes that allow them to offer more on purchases, while offering less on rent, and still make a profit, thus putting me out of business, that's actually a good thing for everyone except me and it provides overall societal benefit.  However, capitalism without any regulation can certainly lead to inefficient markets through monopolies and oligopolies.  For example efficient markets require some things like ease of entry into markets, which large companies can sometimes prevent.  If a large company is so large that they control what the market rental rates are they can temporarily lower rents to drive competition out, buy their assets, then raise rents to inefficiently high prices.  Alternatively, they could try to sway the regulatory environment that makes it difficult for small businesses to compete by increasing the cost of entry into the market.  So... I never fault someone for trying to grow.  If you believe that what you are doing provides a societal benefit you absolutely should try to grow, and I don't perceive it as greed.  However, if the goal of your growing is to drive out all competition in an effort to eventually be able to profit in a way that efficient markets wouldn't allow, I'd say that's bad and needs to be regulated.

Rich,

Thanks for the response. I agree that having the strategies in place beforehand is a good move, but I wouldn’t want the strategies to be too rigid, in a way that would cause me to not be able to adapt to changing markets. For example, I wouldn’t want to say ahead of time “I will sell if the price reaches $xxx,xxx dollars, because my decision isn’t based on sale price alone, it would depend on other variables such rental rates and interest rates, and what I believe I can get in alternate investments. I guess my overall strategy is to maximize return over a time horizon of 20-30 years. That strategy may lead me to sell and reinvest, refinance and buy additional properties, or simply hold depending on what else is going on. 

Thanks for your feedback JD.   Your point about tax implications and having a viable method of redeploying capital are well taken.  

While I do consider myself to be a buy and hold investor (not only of real estate, but of stocks/index funds as well), there has to be some price at which even a buy and hold investor is willing to sell right?  I am certainly not trying to predict the peak, but if cashing out and reinvesting in index funds (or whatever else) can net me more cash flow than I am getting from the house why not do it?  If the price to rent ratio comes back into profitable territory later great, I can get out of my alternative investment and get back into profitable houses. If the prices continue to rise without corresponding rent increases, I'm still better off from a cash flow perspective than I would have been, right?  

Hello,

I am a fairly new real estate investor in the Cleveland area. Last year I purchased two properties that are performing well, providing roughly 18% CoC return, which I consider to be pretty solid for my first two investments. Despite getting what I consider to be solid performance, I am seriously considering selling the houses at the end of the current leases (both are under two year leases signed in June).  Between the sweat equity from the rehab and market appreciation I have about $50k in equity per house, with each house profiting about $6k per year.     Rent in the area has not come up nearly as fast as prices, so using the equity to refinance and purchase more similar properties is not an option at the moment.  I know that many of the members of Bigger Pockets don't believe in selling rental properties, advocating growing the rental portfolio in almost all situations.  However, when I look at the Net Present Value (NPV) of a property that is profiting $6k per year I get about $60k (assuming an 10% ROR on my alternate investment).  If over the next two years the properties appreciate another $10k (which may be wishful thinking) then I will be right at the $60k equity level that would make it worth selling according to NPV.  Obviously a lot can happen over the next two years and everything could change, so I'm not making any decisions now, but I wanted to throw this scenario out to the forums to get some feedback on whether I'm analyzing this properly.

A more concise and abstract version of my questions is:  Does it make sense to sell a solid cash flowing rental property to take advantage of appreciation (especially if refinancing to buy additional properties is not an option)?

I am local to Cleveland and have two investment properties at the moment.  I am in the market for my third and am considering property management and/or turnkey in an effort to maintain scalability since this is not my full time gig.  I began seeing Smartland properties popping up on zillow while doing research on market rents for upcoming vacancies and noticed that their renovations looked very nice and started looking into doing business with them.  They were responsive and transparent in the their pricing.  However, I had several disagreements with their numbers.  First, you'll find that what they consider to be the market price for their properties is well above what the vast majority of the houses in the area go for.  They argue that their renovation is top notch, so the price is justified, which may or may not be true, but but generally the high quality of the renovation does not pay sufficient dividends in the form of increased rent, so the price to rent ratio just isn't there.

They typically advertise a 9% to 13% cash on cash return, but be careful, this is their "first year projection" and in their first year they do some things that I find a it deceptive, such as not accounting for vacancy because they place a tenant prior to closing, and they budget essentially nothing for repairs or cap ex since it is renovated and they offer a warranty.  However, for every other year you will be paying these costs or at least needing to budget for them, and they will likely take away all of your margin.  

They also claim that their property management fee is 10%, which is true as long as the unit is occupied, but if you factor in the first month rent payment for placing a tenant and a 5% vacancy rate (about once every two years) then the property management fee is closer to 15%.  This is something that is not exclusive to Smartland, almost every property manger budgets like that, but I think it's deceptive and can be a big deal when you're already dealing with thin margins.  By the time I run my numbers on Smartland properties every single one of them loses money.  In my opinion, they are treating  houses in lower cost neighborhoods like medium to high end flips, but selling to investors, which I don't believe is a viable business model.  The high sales price eats into the margins in a way that doesn't work for investors.  I think they would be better off just selling to owner occupants.