Investment Strategy - I’m at a crossroads

  • LIM

    Hey friends, I could use some advice from this thoughtful, handsome, and hyper-intelligent group. After some reflection, I realize that I am able to act on some of my long term financial goals but I am not sure if my plan will have the impact I need or expect.

    I have spent the last few years flipping land and saving all of the profits in hopes for some financial security for my wife and I. We are in a somewhat unique situation because due to health conditions, my wife works part time and will most likely not work past 50 (we are in our late 30’s now).

    We live modestly and have stayed in our 1 bedroom condo to keep costs low while we save to invest in assets such as long term SFR rentals and build my land biz for a 2nd income stream.

    I now find myself wanting to make some moves for quality of life and future financial health. These include buying rental homes or other income producing assets, reducing my workload with the land biz by focusing on higher value deals with lower volume, and upgrading to a bigger home ($250k).

    My financial snapshot is something like this:

    • $70k equity in current home ($120k value)
    • $50k cash for down payment of SFR rental
    • $60k salary
    • $30k income from land biz
    • $50k student loan debt at 4% fixed

    Currently my plan is to buy a turnkey a year, continue with my land biz and lessen the workload, and hopefully be able to upgrade my personal home.

    I am currently on a few wait lists for turnkeys that still produce ok cash flow at the $150k mark.

    I have done my research in the turnkey world but still feel naive about the situation because all though I have read a ton about the benefits of leverage/hedging inflation/renters paying off your mortgage at 20% in, the return is small compared to what I am used to. And they do charge a premium.

    My end goal is to own 10 rental homes to bolster my retirement funds and increase my current income somewhat. I also don’t need a 3rd job, so the turnkey world is appealing to me.

    Right now, SFR’s are crazy high and slated to go higher (I don’t really see any info saying otherwise). So I do not see a huge downside about investing a significant portion of my funds into it, but again my knowledge is limited in real world SFR investing and I am looking for advise.

    Do you think it is a smart move to invest in turnkeys if you can find one with good numbers now? Should I hold out on upgrading my home and try to get into 2 rentals by leveraging my equity? Or is there a creative way to have it all?

    Regarding my student loan debt, I am reluctant to pay it off because I currently make way more than 4% reinvesting my land profits back into the land biz and just hate the idea of not making a return on my cash (even though the debt is costing me).

    I get that this is an impossible question to answer outright. But I am sure there are some experienced investors out there saying I bet you could do this and that…or don’t buy now. Or invest my saved funds into my land biz and wait for the crazy market to chill out and inventory to come back.

    Thanks for making it through my story and I cannot wait to hear you to tell me to invest all of my money in Bitcoin.


  • I happen to have multple SFR's that are professionally managed (far from where i live), that produce a decent cash flow. I am also heavy in land business growing.

    I am a conservative investor so I like to mitigate risk. Personally I would consider doing two things with your situation; first pay off the student loan right away and put that behind you. Maybe a couple decent land deals could knock it out?

    Second, why not use you aquisition skills to find something that isnt turnkey?
    Send some mailers to tired landlords. You can hire a handyman to do some repairs. Finding off market deals and forcing equity is what made my rentals very profitable. In the turnkey world the cap rates can be VERY low once you consider increases in property taxes, management fees, and mortages.

    Building sfr rentals will take some time and effort but is much more passive once it is rolling. These also help ypur balance sheet for getting credit from banks as well.

  • LIM

    Jason Wollbrink thanks for the reply. I live in Alaska, with no personal contacts in the areas I was focusing on in the midwest so my initial thought was to go for a turnkey. But yes, you have a great point. Why not make a mailer campaign and find a deal, build contacts, and force some equity.
    I do have an area with personal connections that could fit the bill, and if I do this I may actually be able to get into a multifamily building.

    I am still struggling with paying off my student loans before I invest in a rental unit. A lot of it is phycological. It took me a while to get where I am at and am excited to keep my money working for me.
    The issue with with holding that debt is my debt-to-income ratio will most likely quickly limit the amount of SFR's I could leverage. Because of my day job in the public sector, I do have a loan forgiveness option if I stick around for ever but I am not banking on this.

  • LIM

    I would agree with Jason Wollbrink on paying off the student loan. Kill that sucker and move on to bigger and better things! I’ve never regretted paying off mine, or any other loan for that matter.

    I also probably wouldn’t opt for turnkey rentals. They might be easier to acquire, but you could probably get much better numbers with something you find on your own (maybe try including a few hundred houses on your next few direct mail campaigns?).

    One thing you’ll have to get used to with other investing strategies outside of the land flipping business is that 100% ROI deals are not normal and the margins are much thinner than what we’re accustomed to.

    I still struggle to accept this on many of the non-land deals I look at today, but it’s the cold reality of working in other niches that have much higher competition.


  • Something about turnkey investing sounds so vanilla to me. Very predictable and boring, with far lower returns than other strategies can offer.

    That's just me though. Some people prefer the slow and boring path. If that's you, to each their own.


  • Greg Morris Hey Greg - first off, congrats on setting yourself up for future financial freedom! I flip land and own turnkeys (as well as some other real estate). The turnkeys are much lower return, but almost entirely passive. I barely think about them after the acquisition period. As you said, the market for turnkeys is hot and they are hard to get right now, especially at numbers that make sense. I don't believe that will always be the case (as foreclosure moratoriums and stimulus programs end, etc), so I still think what you have outlined is a good long-term plan. In the short term, flip some more land, pay off your debt, build up more capital, and when the market turns for single-family, you'll be very well-positioned to take advantage and build up the portfolio. Also, consider that interest rates are crazy low right now, so that will strengthen your cashflow on a leveraged rental. Is it enough to counterbalance the higher acquisition prices? You'd have to run the numbers yourself.

  • LIM

    Seth Williams, I appreciate the advise. Is there really a good reason for me to participate in the rental market right now? I don't want to compete with emotional buyers, which is all that seems to be going on right now and the FED are stoking the flames.

    The emotional side of me doesn't want to miss out on more appreciation and I feel like I will never get in on a rental at the pace the market is going.

    And yes, I can absolutely see myself looking at turnkey returns in the future and dreaming about what I could be doing with the money wrapped up in them.
    I think adding some house mailers to the mix is a great idea.

  • LIM

    Mark Koster, thanks! It feels great to have this problem. It is certainly a first for me to have reached a financial goal like this. I'm a late bloomer I guess.
    Time to send some mail out and pay off that student loan.

  • LIM

    Greg Morris said in Investment Strategy - I’m at a crossroads:

    The emotional side of me doesn't want to miss out on more appreciation and I feel like I will never get in on a rental at the pace the market is going.

    Yeah, I totally get that. I would also feel hesitant to jump in while everyone else is going nuts (having seen the other side of things ten years ago, it's not hard to have some perspective on this). However, even though people may be WAY overpaying for properties on the MLS, that doesn't mean there aren't off-market deals to be found via direct mail and other mediums.

    Since we're talking about houses, I would be ready to deal with some pretty rough properties that need a bit of work, but as long as you're mentally and financially prepared for that, there are always motivated sellers out there who will let their property go at below-market prices.


  • Define your efficiency metric.

    The “ROCE” or return on capital employed figure is useful in helping me determine which is the right location to place my effort and I factor in the amount of hours to achieve that return…So I have a metric which is ROCE per Expected Hour of Effort.

    For example- I calculate a ROCE for each investment opportunity that I have available to me…Dropshipping is extremely light on capital intensity and is medium to low on hours of effort….returns are “meh”. Land flipping is high on hours…it requires more capital also…but the returns are brilliant. There’s also the sustaining effort of hours…we can’t ignore this input…land flipping is an active investing model…The only passive part about it is the ad-words trafficking to your website and the checks coming in from a note you’ve written.

    There’s also the baseline alternative assumption. The stock market generates a base return (whatever assumption you want to use here) with nearly zero hours invested.

    What I do is open a sheet and start modelling. Each option gets five or six lines with rows for hours investment, Capital needs, Returns modelling, and some other items I factor in for things like liquidity and risk.

    Drag race your options and work out which is right for you.

    For me, I’m looking for a balance of risk and liquidity and am willing to reduce hours of effort and ROCE to achieve that.

    Sorry seems “ranty” I’m on mobile.

    -Cory

  • LIM

    @cory excellent idea. I have a half-built sheet similar to this idea but it was at the beginning of my investment path and needs some serious refinement. I will try to come up with some realistic metrics and let you know how it shakes out.

  • LIM

    @cory Would it be possible to get a screenshot of your sheet setup? You can exclude any real information, I'm just curious about the layout.

  • LIM

    @cory would you be open to sharing what your spreadsheet looks like? If not, no problem… but that sounds like a great way to distill those variables down so you can make a decision.

    If you’ve got a working model that helps you make a data driven judgment call, that sounds like a great tool to have!


  • Seth Williams Greg Morris
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    Some of these effort/return linkages are hypotheticals…such as how I escalate the hours per quarter with land flipping to align with the increase in capital.

    The model for land flipping assumes capital is fully deployed and returned 4 times per year, which is an amazing effort really and not really achievable at $150k+ levels while maintaining rates of return. Hours of effort for land flipping increase as the capital availability rises to sustain returns.

    -Cory

  • Mod LIM

    Greg Morris, in addition to all of the great comments already posted here by the others, I just wanted to suggest something additional for you to consider, along the lines of paying off your student loans.

    You mentioned you'd been hesitant to do that, because you liked having the capital on hand to support land flipping. Have you considered opening a HELOC on your current home? As an example, if you opened a line of credit at 80% Combined Loan to Value, based on your $120k current home value and apparent $50k outstanding balance on your mortgage ($70k equity), you could presumably get at least a $46k line of credit at pretty good terms, as long as your debt-to-income can support it. There are institutions that will go to 90% CLTV, typically with a bit higher interest rate.

    With that in place, you could pay off your 4% (constant) student loan debt with your cash on hand, or after another small windfall or two from land deals like others suggested, and then when other good land flips arise moving forward, draw against the HELOC temporarily for working capital. That way, you're taking a constant 4% debt, and turning it into short term / temporary working capital debt, only as needed.

    I opened a HELOC on my primary residence a few months ago for the same reason (readiness to fund larger land deals), and it looks like I'm about to tap it for the first time; although not for land. I haven't been actively pursuing any more rentals, but last week I saw a FSBO 1br condo in my area hit Zillow. It should cashflow like crazy, and I just had my all-cash offer accepted by the owner today. I plan to use the HELOC to support a quick cash closing, and then refi into a30 yr fixed as soon as I can. I might not have gone for it, or had my offer accepted if I did, if I didn't have the HELOC already in place.

    I remembered Dave Van Horn (note investor) saying on Bigger Pockets how it's a good idea to secure HELOCs on your properties when money is cheap and values are high. Provided we use the money responsibly, it seems like good advice.


  • Greg Morris Some of this might already have been said, nonetheless here is my 2c!
    Take your condo[refi out some cash] and convert to a nicely furnished semi-long term rental 3-12 months,. higher cash flow great tenants.. [corporate, nurse, educational etc] - Not Airbnb hassle.
    $70k equity in current home ($120k value) - Refi at 80% LTV = $70k or so
    $50k cash for down payment of SFR rental- Add to the above =$120k - Good
    $60k salary - W-2 good for qualify [other units help you qualify]
    $30k income from land biz - yearly or equity - Exchange it in 1031 = $30k or more?
    $50k student loan debt at 4% fixed - Let it ride for now
    SO then you have almost $200k? Leverage that into 2-4 Units!
    House hack into 2-4 units FHA with 3.5%-20% down, even better house hack into a fixer rehab loan with FHA 203k - The more down the better and less PMI.
    fix and furnish and live in a unit for a year. Refi then repeat. Buy the best 2-4 units you can get in a decent or up and coming area. Think schools, hospitals, tech, corporate etc
    You might be able to buy 1 4plex a year x 10 years = Nice portfolio!
    I have other ideas to really goose the property too.
    AND
    Leave the student debt alone as long as DTI is below 43% For Conv and 50% FHA or so
    Or even sell a piece of land and do a 1031 Exchange. See above, Land is usually dead equity and not earning any income. Unless you can improve it, entitle it or get plans etc. If it has utilites, figure out all the costs to build and lay that out for the buyer, get bids and create value.
    Use those funds to grow [appreciation and depreciation] is going to go faster than that debt, use future dollars to pay off and make a principal payment from your new cash flow from units.

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