168: Ask Bill! Turnkey Investing, AirBNB, Investing With No Job, Out-of-State Investing

January 5, 2018bmanasseroUncategorizedNo comments

SHOW NOTES FOR EPISODE 168: ASK BILL! TURNKEY INVESTING, AIRBNB, INVESTING WITH NO JOB, OUT-OF-STATE INVESTING

Are you considering purchasing a turnkey rental property? Are you interested in hosting AirBNB in your home or rental? Do you want to invest but are not currently working? Are you considering investing out-of-state? If you answered yes to any of those questions, today’s “Ask Bill” episode is just for you!

This is our monthly segment where Top Dawg Bill Manassero answers some of the real estate investing questions received during the month from emails, in-person conversations, phone calls or through online portals such as BiggerPockets.com and Quora.

Question#1 – Turnkey Investing

Hi there. Just started to listen to your great podcasts, maybe about 10 or 15 so far. It’s refreshing that you’re not trying to sell/push something. I may be a little different to your normal demographic in that I’m 35 and looking to become an investor (passive). I have around 70K to cash to invest and trying to find my first investment. I feel that a single family home would be good but you seem to suggest multifamily in your podcast? My long-term vision is for 3 to 4K passive income. I can’t tell yet from your shows if you are for or against turnkey properties? They seem to solve a lot of my issues in that I don’t have the time to fix properties up or the time to go hunting due to my regular job/career. Curious if for someone my age if you would recommend that or finding traditional properties through an agent. Thanks and keep up the good work. Amit

My Answer to Question #1

Hi Amit!

Seasons greetings! Thanks for listening to our podcast!

Great question! My “official position” on turn-keys is to NOT buy them. However, I will qualify that by saying I also understand that if turn-key properties did all that the turn-key providers say they will, they would be great investments. Now, keep in mind, my first 4 properties were all turn-keys. I, like you, did not have time to do the rehab myself and it was just very easy. The problem with TK providers for me is the following:

You buy TK properties at or above the local market value– Because the TK provider has done all the upgrades and found you a tenant, they really make their money when they sell you the property, just like a fix and flipper. I usually like to invest in rental properties where I can make money when I BUY the property. So, I always look for properties that are 10-30% below market. You’re not likely going to find this with a turn-key!
They provide inferior property management – This is my experience and the experience of many others I have known. Good property management is just hard to find. I would say 95-99% of PM firms are not that great, therefore, it is no surprise that TK PMs are any different. Plus, some TK providers have their own PM department or business but most just contract with local PMs just so they can say they are “turn-key” but, in reality, they are not actively working with your PM on your behalf after the purchase. They are generally done after the escrow papers are signed and then you are on your own with the PM. It’s no longer their problem.
They want cash-only transactions– As I mentioned, TK providers are basically just flippers. They deal in volume and they want fast transactions. If you prefer to finance the property, most TK providers don’t want to mess with you. They don’t want to deal with banks, inspections or anything that will slow the transaction.
They don’t always pick the best properties in great markets and neighborhoods– When most people buy from TK providers they assume that the property they are buying is in a good neighborhood and that their property will appreciate well over time. Unfortunately, that is not always the case. The TK provider makes their money on the spread. So, they look for cheap houses that they can mark-up. The bigger the spread, the bigger the profit. It’s hard to find those kinds of profits in the best neighborhoods.

I would encourage you to think “outside the box” before investing your $70K. Besides doing what most new investors might do when they first start out by investing in an inexpensive single family house and renting it out, consider the following:

What’s most important is knowing your “Why” and knowing what your goal is for the property? Cash flow, tax savings, fund your kids college, etc?
Listen to my podcast #090 entitled “If I had $100,000 to invest in real estate…” Now I know the example is different ($100K vs. $70K) but the concept is the same. In that podcast, I look at the options of buying one house for $100K cash, or 5 houses with financing or a down payment on a 15-unit apartment building, to see which option will be your best investment. Again, it depends on your goal. You may be surprised on the results.
If you are just interested in getting a good fixed return on your investment but don’t want the headaches of managing or running a rental property, you might consider being a very passive investor with someone you trust in their real estate property or an apartment syndication. Most syndications are paying 7-9% annually, so you will earn good money on your investment and, in 3-5 years (generally speaking), can get a cut of the equity when they sell, potentially doubling your investment. In addition, as an investor in an apartment deal you will learn the inside info on apartment investing – getting paid to get an education on apartment investing. And that experience will count toward your experience when and if you decide to buy your own apartment.

Regarding using an agent, yes, that can be a great idea but the agent would have to be the right agent that understands the investor’s mindset.

Question #2 – Converting units to AirBNB

Hi Bill! First of all I want to say you are ABSOLUTELY amazing. It’s so inspiring what you do. I’ve been following your blog for a while, but I haven’t been able to find an answer to my specific question. Is it possible to buy a house with the intention to rent it out when you don’t have a job? I have about $50,000 saved up. But I quit my job so I don’t have a steady income. How do I start? I rented out my apartment (still has a mortgage) that is giving me a cash flow. And I’m living with relatives now so I am not paying rent. I want to become an investor. Everywhere I look I need to have a job to be qualified for a mortgage to buy anything. How does it work to do this in retirement?
I would really appreciate your advice on this! -Ria

My Answer to Question #2

Ria,

Thank you very much for your kind words.

I will attempt to answer your questions below:

First off, if the $50,000 is all you have and you don’t have a job, I don’t think I would spend it until you have a job. Also, if you have no emergency reserve fund, ala, Dave Ramsey (3-6 months “survival money’) I would also wait. When you get a job, then you can consider investing. When you invest, you don’t have access to those funds, unless you do a cash-out re-fi.

Is it possible to buy a (rental) house if you don’t have a job?

The simple answer is yes! If you pay cash for the full price of the house, you do not have to qualify for a loan. But my next question for you is, “Where do you live?” And, if you don’t live in an area where houses sell for $50,000, then are you willing to buy out-of-state? I was fortunate enough to purchase a duplex in Indianapolis for around $50,000. I was able to rent each side out for $650, which brings we Gross Rental Income of $1,300 per month. It’s definitely possible to find good rental properties in certain states.

But, if you want to buy near you and there are no houses for $50,000, and you don’t want to buy out-of-state, there are still a number of other options:

Find a property where you can get the seller of the house to carry back a loan for the difference. This way you don’t have to qualify and can re-finance the loan at a later time. (see more “no money down” ideas in Brandon Turner’s book Investing in Real Estate with little or No Money Down) Brandon was also interviewed by me on episode 021 on “Buying Properties with Little or No Money Down.”
Get someone to co-sign or sponsor the loan for you and only use $10,000 of your money for a down payment. If that person has strong credit and net worth, they could help you get the loan.
You can get a “hard money” loan that is easier to qualify for but you’ll pay a much higher interest rate. This could be a good short-term solution until you get another job or build up your income. Later, you can re-fi.

I hope that at least gives you some ideas to consider.

You also asked how bank loans work when you’re in retirement. Well, banks prefer W2 employees. They always have. If you don’t have W2 income they look at your other income (Social Security, Pension, rental property income, 1099 income, etc.) If they see you have a good credit score and steady money coming in, that can help but it doesn’t guarantee you’ll get the good loans. As you get into larger commercial properties (5 units or more) they look more at the profitability of the property and its business plan and less at you.

Well, I hope that helps answer your question. I hope all works out well for you.

Best,

bill

Question #3 – Investing with No Job

Hey Bill!
I’m not an old dawg, 35, but still love your show! We own 12 units and are under contract on 26 more in the mid-west. I was interested in converting one of the units in the 26 unit (location is close to downtown/stuff) to AirBNB and was wondering if you’d recommend that route. I know you did this on your 22. Just curious about your experience and haven’t heard about it in a while.. I listened to your update a while back.

My Answer to Question #3

Hey Melissa,

Thanks for writing and for your kind words about our podcast! It’s OK if you’re only 35. The way you’re moving into real estate investing, you probably have a few things to teach us Old Dawgs!

I think converting one of your 26 units to an AirBNB could possibly be a great idea. Being close to downtown could make it a strong alternative to hotels and that’s a key benefit of AirBNB. Have you checked AirDNA.co? They can give you some info on the market for AirBNB in the area. Also look in AirBNB for other apartment units being used for AirBNB and check out their rates, amenities, etc.

Regarding the AirBNB unit I have in my 22 unit Indy apartment, it has actually worked out quite well. I’ve had my issues but overall I think it is a big bonus. In the 5 months that I have had the unit, I have generated almost double what I would have with the same unit on a lease. I’m looking to add a second unit next year (2018).

Having an AirBNB unit in an apartment building is a different scenario than renting out someone’s extra room, guest house or home. There are some unique challenges and maybe even some advantages.

Here are a few things to consider:

Keep in mind, you’ll need to completely furnish and decorate the unit, provide artwork and other touches that will make it look nice. That can be a significant investment.
If you want to be competitive, you’ll also want to add cable, Internet access and an HD TV. Look at what your competition is providing.
You’ll also need to supply things like towels, sheets, pillows, appliances (both large & small), kitchenware, dishes, glasses, silverware, etc.
There’s also the issue of the contact person who meets them, gets them oriented and is available for any issues with the unit during their stay. Will that be you be that person or will you hire someone?
You’ll also need housekeeping to wash sheets, towels, etc between guests – does the turnarounds. Now on this, I only rent my unit out for a 30-day minimum. That way, we only have turnarounds once a month and there aren’t a lot of people going in and out. Sure, your daily rate goes down but it also reduces labor, laundry, and other related costs.
Finally, there is the issue of all different kinds people, whom you can’t vet as well as tenants, coming in and out of your property on a regular basis. You have to be comfortable with this. You can screen AirBNB guests on a limited basis and look at their guest reviews but it still isn’t as thorough as tenant screening.

If all of that seems OK to you, I’d say give it a shot.

I hope that helps answer your question. Let me know what you decide and if you have any questions.

Best,

bill

Question # 4 – Out-of-State Investing

I’m starting to invest after I lost several 4 plexes in Kentucky and almost lost my house. I reside in northern California, just about half an hour to San Francisco. I am interested in investing in Indianapolis, Indiana, and Atlanta, Georgia, I had problems with management and am fearing to invest out-of-state. I looked at several properties here in California which were about a couple hours drive but after running the numbers, the returns are pathetic and that’s why out-of-state seems to attract me because properties are cheap and easy to cash flow if I have the right team. Do you have any recommendations? Thank you. PS I enjoyed your podcast.

My Answer to Question #4

Freida,

Thank you for listening to our podcast!

I can definitely relate to your dilemma. I also live in California and, because of the poor returns here, have had to invest out-of-state. I also am familiar with both Indianapolis and Atlanta where I have properties and the challenge of finding good property managers.

If you had problems before, I would be cautious before venturing into out-of-state investing. You definitely have to have the stomach for it. Yes, it can be lucrative but, at the same time, it is not without its challenges.

There’s no easy solution but if you do your due diligence, you can create a steady cash flow from out-of-state rentals. You’re right, building a good team is KEY to successful out-of-state investing. But before you build your team, you need to be clear on your goals. Why are you buying rental properties? How much do you need to generate monthly? How much do you have to invest? How will you achieve your goals, over what period of time? You must be crystal clear in those areas before you even purchase a property because your goals determine what types of properties you need to buy, where you need to buy them, at what price, to generate what cash flow.

In setting up your team, your property manager is your most important person on the ground. If this person or organization is weak, your entire operation will suffer.

I would recommend that you listen to a few key podcasts and read a few key articles on olddawgsreinetwork.com (if you haven’t done so already). See below:

I know that may seem like a lot of podcasts/articles to review but they should help you put together the team you need. Also, I have a list of great books in our resource section that should be helpful as well.

Well, That’s it for today!

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bmanassero

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