List of Questions
Turnkey, in general, means that the house is in good condition and set up to be a productive long-term rental property to provide cash flow, appreciation, debt reduction, and tax benefits over time. The properties are either newly built or renovated and leased and professionally managed. This allows the investor to purchase out of state, where systems and local teams are already established, and gives them the best chance of success when investing in markets with which they are unfamiliar. This is a great way to learn to strategically invest in real estate outside of your local area: from a team that has done this successfully for many years and has paved the path for you.
The biggest differentiating factor is the long-term relationship we build with our clients.
Many companies involved in the turnkey space – or real estate in general – have very transactional-based relationships. To them, it’s all about the sale of the property; once the property is sold, the relationship ends. The differentiating factor that Rent To Retirement brings to the table is a comprehensive approach to helping investors build a successful portfolio long-term, offering coaching and mentorship to assist an investor’s pathway to success. There are many aspects to building a successful business when investing in rental real estate, such as having the most appropriate tax, legal, accounting, and financing plan in place. We help our clients build a strategy plan to accomplish their investment goals in the timeline that they have set, as well as offer mentorship on the most efficient ways to become financially independent. Other differentiating factors are that we work across many different states and asset classes, allowing our clients to have a diversity of locations and property types in which to invest. We operate in multifamily, single family, commercial, and new-build property types. We also price very fairly for our clients, allowing investors to often have equity and cash flow in their rentals!
Zach and his wife have a background in health care in the field of optometry, working in a variety of settings. Zach was also an Air Force officer for seven years as an Optometrist. They worked in different areas of optometry and even owned their own successful private practices. They eventually retired from their careers in health care once they were able to replace their active income with the returns from investments.
A note from our founder, Zach Lemaster:
“Our investing career took off when we started to invest strategically in different markets where we could maximize cash flow, appreciation, and equity. We didn't go into real estate investing thinking we were going to build this turnkey business, but we did it naturally simply because we were successful investors ourselves. Our friends and family started coming to us to help them invest in markets to build financial independence like we had done. We sold our first turnkey about ten years ago, even before we knew we were really selling turnkey. Now we're doing 50 plus properties a month across multiple different states.”
We work with new and experienced investors alike. It really depends on the investors’ goals. However, turnkey isn't right for everyone. Turnkey is a great option for someone that is a very busy professional; someone that doesn't have an interest in managing their own portfolio or being an active investor. If you just want the simple benefits of real estate ownership, turnkey is a great approach as you can just purchase properties across multiple different markets. Turnkey investing is a great way to get initial investing exposure in an area, working with an experienced team to guide you through the process and increase your chances of achieving long-term success in your investing.
We work with investors in mapping out a strategic business plan to creatively reach their investment goals within the timeline they have set. There are many things to consider in regards to financing, legal entity structuring, tax strategies, etc. and which need to be part of your long-term investing plan.
We usually recommend single family first to build equity and scale up – maybe do a 1031 exchange after a certain number of years to diversify into more multifamily properties. Generally speaking, for a newer investor, we would recommend single family with the idea of scaling and diversifying into multifamily over time. However, we'll take it on an individual basis. What makes real estate powerful is the simple fact that properties grow in equity over time through appreciation and debt pay down. Maybe you’ll want to cash out, refinance, or 1031 exchange and sell those properties to expand your portfolio over time.
The same as any other real estate transaction. The first step is getting pre-approved with one of our recommended lenders. The next step is having a strategy call with one of our investment counselors to talk in greater depth about your goals and criteria. With this meeting, we can collectively come up with a plan to determine on which markets and properties we want to specifically focus. After that, it’s just a matter of identifying a property and taking action by putting a house under contract. We then turn that over to your lender and title company to start the underwriting and due diligence process. A typical closing timeframe is going to be anywhere from four to six weeks – sometimes longer, depending on underwriting. That’s basically what the process entails.
Our goal is to put you in touch with a lender that's going to allow you to accomplish your goals in the easiest way possible. There are different financing options available. A conventional (Fannie Mae or Freddie Mac) loan is the most common loan option available; it also has the best terms and interest rate. You want to try to use those loans first. You can have up to 10 mortgages under your own name at any point in time. If you can't go conventional or if you’re at the point where you’ve maxed out the conventional route, there are other options. This could be private money, portfolio type loans, or non-recourse loans. We have many lending options available that we can explore with you based on your goals and situation.
Most of our investors purchase between 3 to 6 properties at first, then continually do that in groups moving forward. We highly recommend purchasing multiple doors if you have the capital to do so comfortably, as this allows you to build a diversified and well-rounded portfolio from the very beginning. This mitigates your exposure to the risk of vacancy or maintenance of one particular property with multiple streams of income. This approach also allows you to likely diversify across a few different markets, as well as to have a more well-rounded overall investing experience instead of relying on one property. Having more doors sooner will place you in a better position in terms of equity and income, meaning you will be able to scale easier over time. Due to the affordability of our markets, most investors find they are able to easily purchase multiple properties for the same down payment they would use on one home in more expensive markets.
We operate in both single family and multifamily asset classes. We like to take a strategic approach to each individual based on their situation, goals, criteria, timeline, and resources in order to develop a specific, tailored plan. The market or asset class that may work for one investor may not be the best for the next. In general, if you're a newer investor and have less than 10 properties, we would suggest starting with single family houses first.
Yes, our goal is to provide our client with a renovated or newly-built property that is leased and professionally managed by the time they close. Each specific property has a different timeline associated with it. Some of the properties on our website are finished with tenants now, but it’s more than likely that most are currently in some phase of rehab and may be a few weeks away from completion. The lending process right now usually takes about 4-6 weeks. This gives us plenty of time to finish the renovation on a property and place a tenant prior to closing. Typically, properties that are being built or undergoing renovation will be reserved by people if they fit their criteria, then they will sign a purchase agreement. This will reserve the property with the understanding that the home will be completed, along with having inspections and appraisals, before actually closing on the property.
We have a lot of investors that are international. There's no requirement; we don't care where your citizenship is or where you reside. We work with a lot of different lenders that will actually finance foreign nationals or investors that cannot qualify for a conventional loan. The rates, terms, and loan product itself may vary.
We have fundamental criteria when looking at a market from an investment evaluation. We have developed teams and invested in these particular markets for a reason. These are areas that have fundamentally good cash flow, but we're also looking at landlord-friendly legislation, low taxes, population, and economic growth in the path of progress. We also want to invest in areas that have a diversity of industries/diversity of economy, high rental demand, high rental rates relative to home prices, etc. We do extensive research to determine the type of markets in which we want to invest.
We work with the investor to develop their individualized plan and look at different markets that fit their goals and strategies. Each market will vary in terms of price points, appreciation, asset classes, legislation, taxes, etc. The best market for one investor may not be the best market for the next investor because you have different goals and criteria. Determining the best market for an investor is part of the strategy planning we do with each client. So while this is not a simple answer, all markets we invest in meet our fundamental criteria.
We cannot provide legal advice, but we can speak to what we do personally and what we typically see most investors do. The important thing to know is that if you're using conventional financing, you cannot close with an LLC; you have to close in your own name. As most people develop a larger portfolio, they will develop some sort of LLC structure that's mainly for liability protection. As part of your strategic investment planning, we put you in touch with CPAs and attorneys specific to real estate in order to determine the right course of action for you.
The first answer to this question is that we absolutely do keep a good number of rentals in our own portfolio. We're professional investors that retired from a career as doctors by doing this. We spent years developing our teams and systems in a market to find, acquire, rehab, and manage properties that meet our criteria. When we enter the market, we have a very specific business plan on how many single family, multifamily, commercial, and new-builds we want to acquire in each market. Keeping every home we come across that is a good deal does not meet our business plan. So, instead of simply passing on a property, we are able to still offer the property to someone whose goals match as a buy and hold investment for cash flow and appreciation. Our profit margin is built into the purchase price, so there is no additional cost to the investor beyond a normal real estate transaction. We are able to build in our profit margin by taking the time and risk it requires to find, acquire, and rehab properties that have problems or are outdated. As long as the cash flow makes sense for the end investor, this can be a win-win for everyone involved. This is how the best business partnerships are created!
We do our best to price homes at or below market value. You will have an appraisal to verify that the home is priced appropriately for the market, as this is a requirement of the lender. It is important to understand that this is the same as any other transactional process you would go through. However, there are many added benefits with which our team of professional investors assist you, helping you to become a successful investor in the long-term. There are many aspects to consider when attempting to build a sustainable business model while investing strategically in multiple markets. You can absolutely do this all on your own, but there would be a significant amount of time, risk, and money involved by doing so. You can easily purchase properties anywhere off the MLS, with or without an agent, but that doesn’t mean that you are not paying a premium. With this traditional method of investing, you will undoubtedly be paying market value for the home; in many markets, you will be paying above market value in a multiple bid situation. I think it’s funny that I get this question from investors asking if they are paying a premium for the property. By premium, they mean paying market value. When I ask them in what scenario they would expect to pay under market value for a property, I usually don’t get a response. The only way to get below market properties is to search and advertise for distressed properties that you plan to fix up with your own team. This approach, of course, has a lot of risk, time, and money involved. A novice investor is often excited about the idea of flipping a home because it seems sexy and easy – especially after attending a weekend seminar led by a ‘guru’ or listening to a podcast with a successful home flipper. They’re determined to find their property to flip and to be proud to say they completed a successful flip. It takes them months to find the right deal – they end up initially overpaying, then underestimating the rehab budget. They find out that babysitting contractors is a full-time job (for which they don’t get paid) and the project ends up taking months to complete. They’re exhausted and just want it to be completed. By the time they refinance it or sell it at a profit (if they’re lucky), they are likely burnt out and realize it’s taken them months or years to complete one property. Unfortunately, at this point they are done with real estate and decide it’s not for them in the long-term, as this has been a very stressful and time-consuming process. They never continue to invest long-term, or take years off without doing anything. This is the typical story of a DIY home flipper that has a full-time job. The seminars and gurus of the real estate world help to over-promote this process as being far easier than the reality. This is what we all the over glamorization of the BRRR model. If the investor had simply dedicated that same time to purchasing turnkey rental properties, they likely would have accumulated a portfolio of multiple homes to provide a good amount of cash flow monthly, thus bringing them closer to financial independence. By purchasing multiple properties over a few years, they would have been far ahead of someone that spent that same time working on a flip. Plus, all the combined benefits of cash flow, appreciation, debt reduction, and tax benefits/depreciation multiply over time with every additional door you acquire and every year that you own the home. Our investors are most likely looking to build consistent passive income over time. The only way to get there is to stay consistent in acquiring multiple cash flow properties every year, then to scale as quickly and as strategically as you can in building your rental portfolio. Taking action to get into those first few rental properties is the most important step!
One other point to mention here is that some properties we sell are below market value, allowing the investor to have immediate equity that they can access sooner via a cash out refinance, or by selling the home for a profit shortly after purchasing it. This would mainly apply to our new-build projects that have a good amount of immediate equity. Please inquire for more information on these.
At this point, we've been dealing with COVID-19 for a long period of time. Initially it was a big concern and no one really knew what to expect. We just had to adapt and roll with the punches. What we found over this past year is that rental real estate (at least in the types of properties in which we invest) has been extremely stable. Our property rentals performed very well throughout the COVID-19 experience. We really didn't see any differences in rent collection, vacancies, or eviction rates. We believe this is due to the fact that we invest purposefully in middle class, affordable housing solutions that will always have rental demand and affordability, regardless of whether a tenant is employed. These types of investments are the most stable types of real estate investments, in our opinion.
Simply put, we don't negotiate prices. If you're a repeat client and you've purchased multiple properties with us, then maybe there's some sort of incentive that we can offer you. However, we really are pricing these properties very appropriately – not to mention aggressively – so that our investors may achieve the returns for which they are looking. We’re not doing the charade of overpricing homes, then negotiating down to where the prices should be initially so you feel like you got to deal. These are priced appropriately to offer good returns and cash flow. Please evaluate the cash flow and ROI based on the prices shown. Also, please note that we have high demand from our clients and usually sell all homes we have within a few days at the prices listed.
The renovations, in terms of the scope of work and kind of rehab done to the property, are based on market analysis and the specific property location. We do have a general standard to go by on all properties to ensure they will produce a positive cash flow for investors in the long-term. Every property is unique, but in general we like to see at least eight to ten years of life remaining on the large ticket items. Otherwise, those items are replaced to ensure the investor is ideally not having to make any large repairs within a short period of owning the property. Once under contract on a property, we are happy to share all renovation work that was done to the home from the local team managing the rehab. Our new-builds have completely new everything, of course.
Yes, you are always welcome to do a site visit and meet with the local team at any point in time, before or after you invest with us. Most people never do, however; we feel they are comfortable with this because of all the due diligence that is performed on the property and the information we provide. We do a very good job of educating our investors on what they're purchasing in terms of the market, the specific location, the rehab that was done to the property, etc. The lender will require third party appraisals and inspections, since they are your majority money partner on the deal. This will ensure the home is priced appropriately for the market and in the condition you expect prior to closing on the property. Having a lender involved is extra verification to ensure the home will be a productive rental, as they would not lend on it if it wasn’t. You're going to get a lot of detailed reports. We're also going to provide a lot of finished photos and reports. The information that we provide, as well as the third-party due diligence, makes most investors feel very comfortable buying sight unseen. In fact, they feel very educated about the property and what they're actually buying by the time it comes to closing.
Low appraisals do happen from time to time. It's rather rare, so we take them on a case-by-case basis of what our approach is to ameliorate the situation. Under no circumstances are you simply required to pay the difference on a low appraisal, like some companies require. Keep in mind that you can always cancel the deal, if needed. If there is a low appraisal, we evaluate the appraisal and make sure accurate numbers were used. Appraisers do make mistakes on square footage, bed/bath count, etc. We can contest the appraisal by providing more accurate information, or order a second opinion to have another appraisal done. We can also come up with a solution that makes sense for everyone to move forward based on price adjustments, or similar solutions depending on the situation.
Property management is an essential piece in building a successful portfolio over time. You need to have management in place with proper tenant screening procedures, as well as a team that is responsive to both the tenant and the owner. As we’ve been investing in these areas, we have networked and partnered with the best management teams in an area that we are highly confident will provide excellent services to our clients. Remember, we are professional investors ourselves; we have personally vetted our partners extensively before bringing our clients to them for management. We are usually vertically integrated into their system, enabling us to have oversight on our clients’ investments and ensure management is doing an adequate job. It is important to know that there is no obligation to use our management teams; we are happy to support whatever makes best sense for your investment portfolio.
Typical managerial fees do vary by location, but would most likely be between 8-10% of the gross monthly rent collected. The industry standard for the Midwest and Southeast is typically 10% for these types of asset classes, so we're right in line with that. Another standard fee to be aware of with management is if a tenant moves out and you need to re-lease the property. There could be, but not always, a new leasing fee ranging between ½ to a full month’s rent, depending on location. Once we decide on a location in which to invest, we will dive much deeper into the specific management structure and answer any other questions you may have.
We're very meticulous in screening for tenants and have generally standardized the process across most of the markets in which we operate. However, there could be some variance that is specific to the legislation and common practices of a given location. Tenants have to both fill out an application and run credit and criminal background checks. Common numbers would be a minimum 600 credit score. They can't have any eviction history or criminal history on the report. They usually need to make 3X the monthly rent, which is verified with their employer. They also need to have at least six months of sustainability at their current employment position. We ask for three non-family references that we're actually able to contact. We also require two previous landlords’ references, not just the current landlord who may want to get rid of them. Lastly, we perform a personal interview which can be done virtually or via a phone call. As you can see, the tenant screening process is usually very meticulous, as this is an essential piece to ensuring a successful rental portfolio long-term!
The average occupancy time for tenants is usually 3.5-4 years; average leasing time is 18 to 21 days. If you take a four-year occupancy and round up a 21-day leasing time to one month (30 days), that calculates out at 2% vacancy. We're consistently between that 2-4% vacancy. So while these numbers are not guaranteed, we do track them to have a good idea of how we expect our rental properties to perform. This also allows you to see that there is a justification for the numbers we input in our pro forma. These percentages for vacancy, maintenance, etc. are not just arbitrary numbers. It should also be noted that as you acquire multiple rental properties, you will likely will see a lot more stability in your percentages. Ideally those numbers will reduce with the more properties you own. That is why, for sustainability, it is vitally important to have a well-diversified portfolio of multiple streams of income with multiple properties in different locations.
$80,000-$150,000 on average for single-family investments. We do have properties outside of those ranges, but not too far below the $80K range because we want to stay in better neighborhood classes. We have multifamily, commercial, and brand-new construction that are also more expensive. Multifamily investments typically range from $120,000-$500,000. You can see all of our current properties on our website under the inventory tab.
We’d like to run through an example for simplicity purposes. If we use a $100,000 property in the Midwest where you're putting 20% down ($20,000 down), you're probably going to be experiencing a net cash flow of anywhere from $3,000-$4,000 annually. This is after all expenses and debt service are taken out, which would yield you a 15-20% cash-on-cash return. That's not considering appreciation, debt reduction as a tenant pays a home loan down, your tax benefits, and depreciation. All those things combined increase your ROI dramatically over time for every property you acquire and with each year you own the home.
There are obviously transaction associated costs with any real estate transaction, with the lender, title company, and appraiser. There's no additional cost for investing with us beyond what is standard for any standard home purchase.
If you are using conventional financing, you are required to put down 20% of the purchase price. You will also have standard closing costs that are associated with the transaction and are needed out of pocket. We typically budget about $3,000 per transaction for closing costs, which can vary based on the property, the lender you are using, and the state in which the property resides. This breakdown would be about $1,000 for lender fees, about $1,500 for title fees, and $500 for appraisal.
A common point of confusion is about pre-paid taxes and insurance due upfront at closing. As much as another $2,000 could need to be put down at closing, but these are NOT closing costs. These are simply prepaids that we account for on our pro forma on a monthly basis. If you’ve purchased a home previously, you may be aware of how this works. If you want the lender to make your annual tax and insurance payments for you (which is not required), they will collect an entire year of taxes and insurance upfront at closing to be paid by you into this escrow account. This way, the lender already has the money in the account when it comes time to pay the tax and insurance when it is due the following year. You will notice a portion on all of your monthly mortgage payments is collected for future tax and insurance payments for the following year. This is referred to as your PITI payment (principal, interest, tax, and insurance). When you sell the home, you would have paid a year in advance into an escrow and will receive a refund of said money in the escrow account. Thus, it’s important to know the exact break-down of your closing costs and prepaids. Ultimately, what this means is that – in addition to your 20% down – you could end up needing to put down a total of $4K to $5K, but not all of that is true closing costs and not all of that is required. Most people choose to have the lender escrow for their taxes and insurance, as it’s much more convenient to not have to worry about making their own tax and insurance payments every year.
We classify them by A,B,C, and D neighborhoods. Now, it's important to note that there's no national rating system. Ratings are all subjective, meaning they’re based on the criteria of the rater and can vary between different locations. We typically operate in mainly B-class or middle-class areas. That's where a good balance is achieved between having an adequate cash flow, but still attracting quality tenants and strong appreciation over time. Now, the question is: what is a B-Class area and how do you define that? We have very specific criteria that we use to define a B-Class area. When we look at a middle B-Class area, the biggest factor we're looking at is tenant-to-homeowner occupancy percentage. We typically want to see about a 50% tenant-to-homeowner representation. Of the 50% renters, a minority of those should be section 8 or government subsidized housing tenants. This shows us a strong representation of both residential occupants and market rate tenants, as this area is an attractive place in which to both own and rent properties. Also, you are likely to see median household income in a B class area and median home prices that all vary geographically. As you go up in neighborhood class, home prices become higher, there are fewer renters, higher income earners, etc. From an investment standpoint, the higher the neighborhood class, the higher the likelihood of better long-term appreciation and longer-term tenants. However, this is not a hard-and-fast rule by any means. Also, since the homes are more expensive, more money down is required. This likely yields a lower ROI as rent does not incrementally increase as the price does. Thus, there is a balancing act we all must play in order to determine the right market, neighborhood class, cash flow, and ROI when trying to best accomplish our goals. These are all things we assist you with in determining over time – and remember, it’s always a good idea to be well diversified across multiple areas and asset classes!
Transportation, schools, and crime ratings are also very important to consider. However, this seems to be a topic of significant confusion for someone researching an unfamiliar area. They often do an online search to attempt to get information on a location, only to find a great deal of conflicting reports concerning these topics. This is why it is vitally important to consult someone with intimate local knowledge – someone that truly understands a location and can speak to these topics. Many sites, like Zillow, have very large geographic areas from which they are gathering information and that would not be representative of a specific submarket within a given zip code. There are often “pockets” of areas that are quite good for investing, but the area as a whole may seem like it has no attractive schools since only public schools are represented in the stats, not private schools. Again, local knowledge of an area is essential to accurately determine the tenant demographics and investment opportunity in an area.
Local knowledge is essential! Our local teams have been operating in these same locations for years and know exactly how homes should be valued, as well as the realistic rents for specific properties and locations.
Please also keep in mind the source of your information. In terms of "comps", if you're using zillow/trulia/redfin/realtor.com or some other online source for estimated market value, those are not evaluating true comps. Those sources have no way of telling the condition of the home or what rehab has been done. Many of the homes in these same areas are often sold to flippers below market value because of back taxes owed or work that needs to be put into the homes. That is why the bank requires a third-party appraisal to be done to the home, to make sure it is priced appropriately based on actual comps (in the same condition, similar metrics like sq ft, year built, renovations done, etc.). That will be your verification that the home is priced accurately according to actual comps; a licensed appraiser actually walks the home to give you a true determination of value.
If, for some reason, the appraisal comes back low (which is very rare), we first want to ensure the appraisal has accurate information. Appraisers can make mistakes in terms of square footage, lot size, etc. that could affect value. In any case, if the appraisal comes in low, we can of course see what options we have in terms of adjusting pricing accordingly in order to make sure you are purchasing the home at its true market value. You always have the option to simply exit the contract or choose another home that better suits your needs, if you feel that is the best option for you. We want to be sure that you are confident about the home you are purchasing. We sell many homes every month to investors in all these areas, so if you ever decide to exit the property, you should be able to easily liquidate it to another investor within a timely manner. You will be building equity every year that you own the home simply through appreciation and debt pay down by the tenant. Not to mention that rents generally go up over time, allowing future returns to be better than what you are projecting today! Hopefully this all makes sense. Please let me know if you have any other questions on this.
There’s no such thing as a no-risk investment. Everything has its upsides and its potential downsides. A lot of people ask, “This sounds too good to be true,” or “What's the catch?” Whatever the case is, there really isn't a catch. But just like anything else, you do need to be aware of the risks associated with real estate. It always helps to have a thorough understanding of our business model. We think our turnkey model specifically removes or mitigates a lot of those risks because we have a systematic approach to investing in these areas. We get to control a lot of the variables, but ultimately the biggest variable is always the tenant. If you own enough properties for a longer period of time, you will eventually have a negative tenant or a property that doesn't perform as well as you anticipated. This is why it’s important to have a diversified portfolio with multiple streams of income: to balance out the properties that don’t perform. In our opinion, the investor is always at the highest risk when they have only one rental property. If that property goes vacant, they lose 100% of their income but will still have to pay the mortgage and expenses. Whereas, if you had four or five properties you would still have positive cash flow even with a vacancy. You'll also have unforeseen expenses at times. It's important to account for those and have appropriate reserves. Most lenders require 6 months of reserves for mortgage payments for properties, coming in at around $3,000 per property. That would be a good starting point for initial reserves.
The turnkey route is mitigating exposure to going out and investing in properties all on your own in a market with which you are unfamiliar. If you were to go out and try to acquire a property in a market in which you don't have a team, you knew nothing about the local area, and you were just trying to do it on your own, then it would open up a whole new door to additional risks.
This falls into the category of people asking, “Do I wait to time the market?” We’ve gotten to know very successful investors over time with a very high net worth. No one has ever said that they just got lucky or they waited for the market and successfully timed it. This is why we stick to the fundamentals of investing in real estate, regardless of the current market, and let real estate do what it does over time through appreciation and debt: pay down. If someone were to wait a year to see how things play out or to try to time the market for whatever reason, a year just goes by. That's a year’s worth of cash flow. That's a year’s worth of tax benefits and depreciation. A year of equity buildup as a tenant pays the loan down on the principal reduction. Most importantly, it's a year of education that they've lost out on. It's important – that's why we always encourage everyone to simply take action now and get started. The most important thing you can do is simply get started with your first property, not try to time the market. It’s kind of like dollar cost averaging, but more specific since we have a set of criteria in terms of in what we invest. Getting started sooner to scale up sooner will ultimately allow someone to be far more successful than the person waiting to time the market. That is a gambling mindset and not one we support when it comes to the fundamentals of investing in rental real estate for the long-term.
It would also be important to note that we currently have the lowest interest rates available that we have ever seen in history, so NOW is a very strategic time to take out debt for investment purchases at a very low rate. Alternatively, access equity in a property through a HELOC or cash out refinance to purchase more rental properties.
A 1031 exchange is a perfect example of some of the many tax advantages of investing in rental real estate. This is where, if you sell a rental property, you don't have to pay capital gains by reinvesting in real estate within the provided timeline. If you had a property that appreciated $100,000 over a few years and you sell it, you could have a very serious tax payment that removes a huge portion of your net gain. You could also roll that into acquiring more properties within the time constraints that the 1031 exchange allows. You must identify within 45 days and close in six months of the sale of your first property. This is something we walk many investors through. By doing a 1031, you don't have to pay any capital gains and you can keep rolling that over again and again to exponentially increase your net worth and monthly income without slowing down from a huge tax burden! These are the ways the rich keep getting richer!
Taxes are, no doubt, the biggest expense that we have. However, once you start earning a good amount of income, it's sickening to see how much you have to pay in taxes – both state and federal. If there's any way to reduce that, that's just added income you can reinvest that year.
With the cost segregation study, you can do accelerated depreciation and reduce your taxable income annually if you qualify as a real estate professional. Many high paid investors reduce their taxable income to zero every year by acquiring enough real estate and performing cost segregation studies on the rentals. If your income is in the six figures and you are an investor, you need to be learning more about how you can use cost seg studies to reduce the high amount of taxes you are paying each year. These are high level topics that we work on with all of our investor clients in terms of learning about and developing a strategy to implement.
The tax codes are tailored towards real estate investors. No doubt about it, rental real estate has many tax advantages from owning just one rental real estate property. There is an extensive list of tax benefits we’ve reviewed via our YouTube channel.
To name just a few write offs/deductions: deprecation, mortgage interest, management expenses, any maintenance or improvements to the property, all actives related to managing the property like CPA or attorney fees, LLC structuring, equipment for the rental, etc. The list goes on and on. That’s why it’s very important to have a CPA and attorney specific to real estate that fully understand all the benefits of real estate investing, as well as how to apply them to your specific situation. We help all of our investors develop an investment strategy to take advantage of these tax benefits, along with implementing more creative ways to scale over time via a 1031 exchange or with a cost segregation study.
It's a simple education matter. We're not taught this in school and people just aren’t educated on the subject of investing and financial independence. Not too get too deep up on our soap box, but the educational system is led by people who are not financially independent and rely on the government systems put in place to have a chance at retiring late in life. It is clear that we have to educate ourselves on how we want to build our financial security over time for our families.
The fact of the matter is, many people ARE investing in real estate in general – especially turnkey. The more important question is, why aren’t you? The people sharing the common themes of a high net worth and financial independence are likely all invested in real estate to some degree. People that have high net worth are also the minority. It breaks down to an educational piece. We're not taught in school to invest in real estate or to be a bit financially savvy or independent. We encourage people to go out to educate themselves, but that's only a small part. The bigger step is actually taking action. Those that have the entrepreneurial spirit and are motived to create financial independence are the ones that will take action to accomplish their goals.
There are many different strategies to discuss to allow our investors to most effectively and efficiently accomplish their goals within the timeline that they’ve set. We work with each investor on an individualistic basis to incorporate the most appropriate tax, legal, leverage, etc. strategies to develop a business plan over time. This is an ongoing process that will require many revisions, but the most important aspect is getting started!
Everyone moves at their own pace. We definitely want to take some time to go through a specific strategy with each investor and make sure we have a very clear plan for you based on your specific goals, criteria, timeline, and resources. We can move at the pace that best fits your needs. Most people purchase multiple properties in even their first round to expedite their success long-term, as well as to build a more well-rounded portfolio sooner. Some people just buy one or two – that's fine. As long as you're taking action and getting started, we're willing to work with you in whatever capacity. We want to take progressive steps and get you started. We always want to develop long-term business partnerships and relationships with our clients, but we can't do that unless you’re really ready to get started.
The great thing about real estate in general is that there are so many different ways you can get involved and be successful. As you are growing a portfolio over time and becoming a more experienced investor, you're likely to employ multiple strategies and invest in different areas, ways, and locations. We encourage everyone to do that. Fundamentally, you just have to get started and grow over time with your experience. Some alternative strategies can include BRRR (Buy, Rehab, Rent, Refinance), BRRR Hybrids, syndication, private lending, etc. We operate in all those capacities, offering many different ways to invest over time.
One we have an established relationship with a client and successfully closed a few turnkey properties, we then start to open up more creative paths in which to invest, but it all starts with building a solid relationship upfront. It’s important to realize that this is a partnership; we are vetting our investors just as you are vetting our team. The investors that are easy to work with and on which we can rely to follow through are obviously the ones that we are going to come to first down the road for different creative options!
Yes, we have ways you can be a private lender to invest in short-term or long-term projects. Typical minimum investment amounts are around $100,000; we can offer double digit returns on your capital backed by actual physical real estate. If this is something that interests you, please email us at [email protected] and put PRIVATE LENDING in the subject line to learn more about these opportunities. We strongly believe that if you are a novice investor, you are likely better off building your own rental portfolio before exploring this option – or at least acquiring some rentals at the same time as lending capital. Please read below for some reasoning why. Ultimately, owning physical real estate will offer the highest returns, lowest risk, and most education, in our opinion. That is why we encourage all investors to build a strong rental portfolio first.
We always want to tell investors that the best thing you can do (especially if you're a new investor and have under 10 properties) is to build your portfolio first. You're going to get a better return based on appreciation, tax benefits, cash flow, and leverage. Use leverage, especially right now at the lowest interest rates we've ever seen in history. Go out and build your own portfolio first. Once you have additional expendable income, then you may invest in other placements like syndications – or maybe take on a more active role. Both these options are higher risk. Syndication is highly risky. With this, you're not using leverage to acquire the property. You have little control over the investment because you may be invested in syndication with hundreds of other people, so you will likely not learn much. It is literally turning over control of your money to someone else. Syndication is more of a route to possibly pursue once you have ample income and a strong portfolio, when you're not looking to expand your own rental portfolio or take on more leverage and you just want to place money somewhere else.
Well, you are not alone. Many people become very excited about the idea of rehabbing and flipping their own rental property. While it can be one way to build in equity, it is a high risk, time intensive process that has many variables. It is vitally important to be aware of that. We always recommend that, if you are a new investor or new to investing in a location with which you are not familiar, it is a much safer approach to first acquire some cash flowing properties in a location with an established team, like ourselves. Become more familiar with a location and learn the process. Once you have a good foundation of cash flowing properties, you can easily go on to take on a more active role with some of your own rehab projects, if that is what fits your goals. Investing in turnkey rentals is also a great way to scale and diversify more easily and quickly than you likely would on your own. There is nothing preventing you from doing both simultaneously, either. For instance, if your goal was to acquire 5 properties by next year, it would be unrealistic to rehab all of those on your own if you don’t have multiple crews going and this isn’t your full-time job. Having some cash flow ready turnkey properties available is an easy way to scale your portfolio across a few different markets quicker, making you that much closer to accomplishing your cash flow goals!
With the turnkey route you get immediate access to a professional, local network that can assist you in whatever you are looking to accomplish. This reduces the amount of time, risk, and money required to build your own teams in a location from the ground up!
More thoughts below about how we’ve seen new investors be somewhat misguided with the over-glamorization of the BRRR method, as well as how we’ve had to bring them back down to reality:
A novice investor is often excited about the idea of flipping a home because it seems sexy and easy – especially after attending a weekend seminar led by a ‘guru’ or listening to a podcast with a successful home flipper. They’re determined to find their property to flip and to be proud to say they completed a successful flip. It takes them months to find the right deal – they end up initially overpaying, then underestimating the rehab budget. They find out that babysitting contractors is a full-time job (for which they don’t get paid) and the project ends up taking months to complete. They’re exhausted and just want it to be completed. By the time they refinance it or sell it at a profit (if they’re lucky), they are likely burnt out and realize it’s taken them months or years to complete one property. Unfortunately, at this point they are done with real estate and decide it’s not for them in the long-term, as this has been a very stressful and time-consuming process. They never continue to invest long-term, or take years off without doing anything. This is the typical story of a DIY home flipper that has a full-time job. The seminars and gurus of the real estate world help to over-promote this process as being far easier than the reality. This is what we all the over glamorization of the BRRR model. If the investor had simply dedicated that same time to purchasing turnkey rental properties, they likely would have accumulated a portfolio of multiple homes to provide a good amount of cash flow monthly, thus bringing them closer to financial independence. By purchasing multiple properties over a few years, they would have been far ahead of someone that spent that same time working on a flip. Plus, all the combined benefits of cash flow, appreciation, debt reduction, and tax benefits/depreciation multiply over time with every additional door you acquire and every year that you own the home. Our investors are most likely looking to build consistent income over time. The only way to get there is to stay consistent in acquiring multiple cash flow properties every year, then to scale as quickly and as strategically as you can in building your rental portfolio. Taking action to get into those first few rental properties is the most important step!
As with all investments, the biggest limiting factor is capital. If you are simply committing a down payment to each property you purchase this will limit the number of homes you purchase each year. Over time, and as your portfolio grows, you will have built up momentum with equity growing in the homes you own. This is done through appreciation & debt reduction each year in addition to saving up cash flow from the property for another down payment.
Over time, you can look to 1031 exchanging some properties that have equity to scale your portfolio quicker. This is why we like to view RE investing growth as exponential over time vs. a linear progression. This is because cash flow, appreciation, debt pay down, tax benefits/depreciation, etc. multiply each year you own a property, and with each additional rental you add to your portfolio.
We also have investment opportunities available that allow you to scale much quicker than this by coming into a property with immediate equity. For example, our new construction projects in Cape Coral are purchased for $275k. Those are currently retailing in the $320k to $340k range.
This allows you to have a significant amount of equity immediately that you can do a cash out refi on to get most of your capital back out to reinvest. Or you can sell to a retail buyer to have a large gain to reinvest. It's all about being creative and taking action on the most appropriate investment strategy congruent with your goals.