Listener Questions / Jacksonville Update | PREI 060
On today’s episode we briefly revisit Jacksonville, Florida to look at some new pre-construction investment opportunities.
I also answer several listener questions about getting started, property tax rates as an out-of-state investor, and whether a cash-out refinance on a principal residence makes sense.
If you missed last week’s episode, be sure to listen to the Market Spotlight: Little Rock, Arkansas.
Enjoy the show!
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Listener Questions / Jacksonville Update
On today’s show, we’re going to cover two things. One, we’re going to have Brian back on the show here to give us a quick Jacksonville update. He’s got some new construction opportunities in the Jacksonville market, which I think you might be excited about. Then I have three great questions that have come in recently from our listeners. I’m going to cover that here right after we talk to Brian.
It’s my pleasure to welcome back one of our Jacksonville providers. I have Brian on the line here who wants to give us an update on the Jacksonville market. More importantly, he wants to give us an update on an exciting new construction project that he has going on. Brian, welcome back.
Thanks so much for having me Marco. It’s good to hear your voice.
Thanks for coming back on the show for a quick update on the Jacksonville market. That’s a good place to start, Brian. Let’s talk about what has transpired since episode number 21, where we did an entire episode with you on the Jacksonville market and we talked about not only what’s going on there, but the product type that you are producing as far as turnkey rental properties. What has changed since then? If you want, just highlight some of the things you talked about in the past that would make good highlights for new listeners.
To revisit just very briefly for the listeners, we started investing in single-family homes and foreclosed property in particular back in ’98 in Bakersfield. That, at the time, had a third of the foreclosure activity in the state of California. We saw it as a huge opportunity. We went in there pretty green and made some mistakes in the beginning and very quickly built a really good team. From ’98 to ’04, we built up a portfolio of a couple hundred homes. Most of the listeners know what happened in California between ’04 and ’06. We were fortunate enough to start liquidating in ’04 and we sold every home that we owned in California between ’04 and ’06. We made a really good play there and made millions of dollars fairly quickly and then moved a lot of the resources and the capital into Jacksonville. Timing wasn’t the best to do that in ’06 and ’07 and Florida was not the best place to be placing capital. We realized that very quickly and then backed off 2008 to 2011 when Jacksonville bottomed out. Then 2011, fast forward to today, we came back into the market slowly in ’11 and since have built up a good sized portfolio. We’re right around 170 homes and providing a lot of turnkey investments for investors like yourself.
An update on Jacksonville, since we spoke last, Marco, which was only about a year ago, honestly, nothing has radically changed. Obviously, the fundamentals are what they are. Really just to focus and give you an update on the timing in the market and where we’re at this cycle, we are still moving through recovery in a buyer’s market, in my opinion, in our niche in Jacksonville. Obviously a year ago, there was more inventory. We definitely have felt the pinch of inventory in our bread and butter solid working class neighborhoods in Jacksonville. When you and I spoke in episode 21, we were probably doing ten or twelve transactions very consistently a month, meaning buying the foreclosures from the bank, fixing them up, renting them out, and then offering them as turnkeys. Fast-forward to today, a year later, we’re probably honestly doing half of that volume. We’re doing five or six a month of those foreclosures. It’s not by our choice. It’s just a matter of fact because the inventory is shrinking here. That’s not a surprise to me because that’s what happens when you’re moving through a recovery.
About six or eight months ago, I started sniffing around for other opportunities within our niche, within our wheelhouse in the areas where we’re already heavily invested in Jacksonville. We put together a joint venture with a developer. We locked down an eleven acre parcel called Glenda Meadows, which I know you have on your site there. We’re developing 34 homes of which the community is actually two-thirds sold out and we literally just broke ground on the first three lots last week. They just poured the slabs on the first three. We have nine or ten remaining. This is just an introduction to that. We have not moved away from our bread and butter business. We still do our half a dozen foreclosures a month in those neighborhoods that I talked about in episode 21. That model has not gone away. It’s just the volume has shrunken because of the recovery. We’re obviously doing some new construction and we’re negotiating a couple of other projects as well after Glenda Meadows sells out, which I anticipate at the rate it’s going, will be sold out in the next 30 days or so.
We’re just going to keep looking for opportunities. We’ll never force deals. There’s a reason why we backed off of buying in 2002 and 2003 and then started liquidating in California. At the end of the day, the market’s going to tell you what to do. We’re still doing solid five or six a month on the foreclosed property in these older established neighborhoods. Now, we have this opportunity of this new construction. In fact, the new construction is about a mile from where I own the majority of our established portfolio. It’s in that West side pocket that I talked about, so still on the same wheelhouse, price points are obviously different. I’d say in the older established neighborhoods, we’re probably a C+, B- type rating. The new construction is definitely a bump up and I would say A, A- rating as far as the neighborhood goes and the price point is different.
In our typical renovated home in these older established neighborhoods, our sweet spot’s about $100 to $115, three-bedroom, two-bath, four-bedroom, two-bath that’s rented between $1,000 and $1,100 a month. The new construction is two different floor plans. The sales price is $160 on the smaller 1,500 square foot and $168 on the 1,600 square foot. We’re doing four-bedroom, two-bath, attached two-car garage on both floor plans and then just doing some different elevations and mirroring the floor plans for this little boutique community that we’re building out in Glenda’s Meadow. Like I said, it’s two-thirds sold out, so we have about ten left. I’m sure a question would be in a ratio of homeowner to renters. When we’re done building out Phase 2, because Phase 1 of Glenda Meadows was already built out, it’s about 60 plus homes. That is completely occupied. To our knowledge, there are only one or two rentals out of the 60 plus homes in there. When we’re done with the build, that will be in the [70:30] ratio homeowner versus landlord when Phase 2 is built out. It’s an interesting little project. It’s a solid neighborhood. Again, it’s in our wheelhouse. It’s just a new construction product versus our older renovated homes.
These are all pre-construction, right? None of these are on the ground yet, they’re being built?
That’s correct. The remaining ten or so lots that we have are obviously at the back end of the project. The way the process works is you hit the nail on the head. We’re selling pre-construction homes. We’re getting a $3,000 security binder that goes to the escrow company that’s going to facilitate the closing for the investor. They could lock in at the two sales prices that I just quoted today for $3,000. Honestly, that last third of the 34 homes, they would be looking at summer of next year before completion. In a nutshell, what I’m saying is you’re locking into the sales price on a brand new construction home that will be completed sometime in the summer of next year. Obviously, I could give you the exact date depending on the lot once we talk to the investor. We have management obviously lined up. Because you’ll be in that last third of the community, you’re not the guinea pig. Obviously the two-thirds will be built out and some of them will be FHA sales, some of them will be rentals, some will already have that momentum and the comparables and everything set so you’re coming in on the back third of that project.
These are really nice properties. I remember buying four new construction homes in Southwest Florida back in 2005 and 2006. Actually, they weren’t even new construction. They were pre-constructions so they weren’t even built. I didn’t take possession for six to twelve months on those properties. The product type you have here is about 160,000. They’re four-bedroom, two-bath homes. They’re over 1,500 square feet. They’re in what we would grade as an A- type neighborhood. What I find interesting is the price per square foot is $105, which is relatively speaking, compared to other new construction projects, cheap. I see a lot of projects out there $130, $140 a square foot. I don’t know how you’re doing it. It must be a really low land cost.
That’s exactly right. You make your money when you buy, as you know you’ve been doing it a long time too. We did get a great deal on the dirt, on the eleven acres because the previous developer obviously built out Phase 1. He started to do really well but then the world unraveled in the middle of his project and he didn’t develop those last eleven acres. That’s where we came in in the last year and picked it up and worked with the city to get all the permitting going and the plot map. It’s definitely been a little bit of a project but new construction is. Like I said, we literally just poured the three slabs in the last week for the first three homes. Just to manage everyone’s expectations, the remaining ten that are available, we’re only doing three new startups every 30 days because the last thing I want to do is flood the market with homes for sale or homes for rent, 30 of them in one little pocket all at the same time. We’re obviously doing it slow and strategically and treating it as a little boutique community, which again is a community that’s already built out. We’re just building out Phase 2.
The listeners should know that these are, not only attractive homes, but from a cashflow perspective, they are very attractive. The rates of return are decent. What’s important to understand is if you’re comparing an apple to an orange, you have to realize that anytime you’re looking at new construction these days, you’re not going to find the same rates of return as you’ll find on newly refurbished properties. New construction will always be a little bit lower. With these, there’s a bit of an equity play or appreciation play with this because of where the Jacksonville market cycle is. The tremendous amount of population growth that’s going on and the one year delay, or I don’t know how long it’s going to be, but let’s just say it’s a year from now before you take possession of these properties, chances are pretty good that you’ll have a gain in equity because the market is continuing to go up. Would you say that’s true?
Absolutely. I’m always ultra conservative on throwing around the old equity word there but I totally agree with you. Obviously there’s a reason why we’re doing this project. There’s also a reason which I glazed over a couple of really important things we backtrack. You’re right, the rents are going to be a little bit less than 1% which we have in our typical model. In that $160, $170 price point, the rents are going to be in the $1,300, $1,400 range. You’re right. You still have a very good cash-on-cash return. I totally agree with you that we’re getting into this project at a really good time. Honestly, I think that there will be some solid equity in there by the time that thing’s built out. There’s equity in it now. There are some sales comparables just south of us that Lamar is doing in the $180 to $190 range in the same exact square footage. There’s some built-in equity now and we’re obviously trying to leave some money on the table for the end-user or the investors, simply because that all ties back to the cash-on-cash returns. If we’re too aggressive with the pricing, it’s going to drive down the return and then obviouslyyou’re not going to get the response that you’re getting. There’s a reason why we sold out two-thirds of it before we even put the first hammer on it.
In a nutshell, you’re hitting a good point there. There’s cash now from the rental income and there’s definitely going to be cash later when it’s a healthy time to sell. To manage everyone’s expectation on that, which I know I talked about in a previous episode, again, Jacksonville is a solid working class town. Nothing radical happens here as far as a huge run-up and then a falling off the cliff, at least in these neighborhoods. That does happen in the higher end areas of Jacksonville like out at the beaches. In these working class neighborhoods, you’re definitely going to be a little bit more stable slow steady growth. I would still look out that three to five years before you even would consider selling it. Obviously I’ll communicate with our investor base, what’s going on in the market, where are we at in the cycle as we move through the recovery.
Those are on our website right now. If anyone is listening and wants more information, just give our office a call. Talk to your investment counselor. We’ll give you more information on the project, the location, the development. We can put you in touch with our boots in the ground. If you want to go and take a look at some point in time, there will be some finished product so we can go out there and tour this particular product.
We give tours all the time. We have one going on today. We had a bus full of people yesterday. We have an open-door policy. If your community wants to come out and they want to do business virtually, obviously, we do a ton of that as well. Whatever’s best for the investor, we can facilitate.
Brian, anything else you want to add?
It’s just great to catch up. Excited about the opportunity. Just to manage everyone’s expectations, I mentioned very briefly, we are negotiating some other projects of similar size. I love that little footprint, that ten to fifteen acres, 30 to 40 homes, because you’re able to control all the moving parts a lot better instead of going into these really large building projects where a lot of things can change. By the time something like that’s built out, obviously markets can shift on you. I’ll just keep being nimble and quick like we are, like we’ve always been, try to provide a really good service to the investor. I did mention we’re going to be holding a few of these as rentals ourselves in Glenda Meadows because again for us, it’s always, “Put your money where your mouth is.” My partner and I are going to hold a couple of these and enjoy the cashflow and then the equity growth like we talked about.
If we have to create a waiting list, then we have to create a waiting list. Keep us posted on your future projects too and we’ll keep those posted up on the website.
It’s great catching up with you, Marco. I’ll look forward to serving the community.
Let’s answer a few listener questions here. The first one comes from Joseph and he says, “Hello. I have been thoroughly enjoying your podcast. My name is Joseph. I’m 25. I hold a Master’s Degree in Nonprofit Leadership and beginning my PhD in Intercultural Studies. However, I am desiring to build a strong passive income outside my profession as many people do. Real estate has always been a passion. I want to build a strong asset portfolio. Where do you suggest I begin? Do I begin by flipping a few properties?” Joseph, great question. A lot of beginning investors have similar type questions. You are fairly young and so you have a lot of time on your side. Regardless of where you’re starting, the first step is to always build your knowledge base. Educate yourself, participate in blogs, listen to podcasts, and read books. Books are like having mentors in your pocket. You can learn from other people’s experience, successes, mistakes, and they are just a fantastic learning tool. Educate yourself with whatever you can, wherever you can. Books are portable and convenient. There are a lot of seminars and other free resources out there. That’s always the starting point. Build your knowledge and learn to talk the talk. You are learning more information about your career and it sounds like you’re in school. I assume you’re in school full-time.
If you are employed, I strongly suggest you keep your job. You want that income. You need the employment to be able to qualify for financing regardless of what you’re doing. Hang on to that income stream. This is a suggestion that I make for anybody and everybody because some people want to go into real estate “full-time” and what they think that means is quitting their job so they can focus all their time and energy on investing. If you do that, you’re actually cutting your own throat. You’re cutting off your income which you need to qualify for financing. Keep the jobs, keep the work, and keep the income. You need it to qualify for financing but you can build up to that.
Regarding your question about beginning by flipping properties, whether you are planning to wholesale properties or flip properties to build up chunks of cash, in other words, your cash stash, that’s not a bad idea. If you have the ability and the desire to do that, by all means, go ahead and do whatever it takes. If you want to run a small business or start a small business on the side to generate some additional income, go ahead and do it because the hurdle that a lot of investors have is not usually credit, it’s cash or capital to deploy. If you have the capital, then you have the downpayment required to make that acquisition. As long as you can finance it, then you’re well on your way and you just have to keep saving enough and saving enough. I’m not a believer in saving cash. The only reason to save cash, in my opinion, is to build up enough for your down payments to keep acquiring one property after another to build up your portfolio. Save as fast as you can, as much as you can until you have enough for that down payment. That could be $15,000, that could be $20,000, it could be $30,000. If you have $15,000, $20,000, $25000, you have enough to purchase an $80,000 or $100,000 or $120,000 property. That’s assuming 20% down with some closing costs. That’s really where you’re at. That’s how you start. Educate yourself. Make sure you have income. Expand your income. I’m not a big believer in budgeting. I’m frugal, so I like cutting costs. Again, the important thing here is to build up that down payment capital as quickly as you can and then immediately get rid of it, meaning deploy it, invest it. That is my suggestion to you. Hopefully, you enjoy your career. Real estate can always be done in addition to and on the side of whatever career or line of work you are in.
The next question comes from Edgar. He asks about tax rates for out-of-state investors, which threw me off a little bit because I didn’t quite understand what he was talking about. He says, “Hello, Marco. Do non-residential investors incur a higher property tax rate when investing out-of-state? I’ve heard it is common for investors investing out-of-state to be taxed as high as 2%. If so, how does that affect their cashflow, but more importantly an investor’s cash-on-cash return? I’m highly interested in investing in turnkey property out-of-state and want to avoid any surprises with a higher tax rate than initially anticipated that could negatively impact my monthly cashflow.” Edgar, somehow this question sounds familiar and I hope I didn’t cover it in previous episode. If I did, I apologize. I’m going to assume that I have not. Property taxes are set regardless of who you are or where you come from. If you are an investor locally, out-of-state, or out of the country, property taxes are property taxes. They are what they are. They’re set.
We don’t like paying property taxes, in fact, most people don’t really care to pay a lot in taxes. Property taxes are unavoidable. It’s really how the states and municipalities generate their revenue to pay for whatever they need to pay for. Real estate tax rates vary all across the board in the US. Let’s just say across 50 states, you will see tax rates as high as 2.29% in New Jersey, 2.25% in Illinois, 2.1% in New Hampshire, 1.97% in Wisconsin, and a big one that a lot of people talk about is they’re saying it’s very high is Texas at 1.93%. Most people just round that up to 2%. Texas is a very, very active, popular and a great state to be investing in. It has been for many years. Keep in mind by the time you add all the different layers of taxes for the county and municipality or the city, you’re probably in the 2% to 3% range. However, don’t let that discourage you. The reason is because in a lot of these states, not all of them, but a lot of them where you have, relatively speaking, higher tax rates, that is often made up by the rental income on that property.
You can’t be one-dimensional or one-sided when you look at this and say, “I’m not going to invest in Texas or Michigan or Ohio or wherever it may be, because the tax rates are “too high.”” The fact of the matter is, that’s only one line item, one expense item on your income and expense statement or your profit and loss. You have to look at the bigger picture. What am I taking in? What is the gross rental income? Then subtract your property taxes. You subtract your property insurance and of course property management. Then you’ll budget for vacancy allowance and your maintenance and repairs. What’s left over is your net operating income. That is what your property is producing each and every month as far as gross profit. If you are financing your purchase, of course, you’re going to deduct one more thing and that is your debt service. That’s your mortgage payment. What’s left over typically is going to be positive but what’s left over is your net cashflow. To be myopic and focus on property tax rates alone, you might be tripping over dollars to go after nickels. You have to look at the whole picture. You need to look at how much is coming in and how much is left over. Most importantly, how much is left over. Don’t be too focused on property tax rates.
Back to your question, the property tax rates are the same for everybody. It doesn’t change regardless of where you live or who owns the property. You might be thinking potentially of income taxes and how that applies to you based on where you live. That’s just a personal financial question that I can’t answer for you because I don’t have enough information on your situation. I’m sure you know what that is. If you don’t know, then just check with your personal tax adviser. They can certainly run those numbers. Of course, you can always do a search online and find out what your state taxes are for income-generated from rental real estate. I hope that is helpful but it’s a pretty straightforward question and it has nothing to do with where you live.
This third and final question I’ll go over today is a little bit complicated. It’s a very long, detailed email that I received from Sonny. I’m not sure and I don’t remember what state Sonny is in but I believe it’s in a highly overvalued cyclical market where property values are pretty high. I can see that as well because he says the current home value is $675,000. What his question is, he’s wondering if it makes sense to do a cash-out refinance and redeploy those funds that he pulls out into income-producing real estate, so building a portfolio of rental properties. Again, his email is very long and very detailed. It’s full of numbers. I’m not going to read the whole thing. Basically, what he is asking is, does it make sense to do a cash-out refi? He’s sitting on about $300,000 in deployable cash. They, meaning him and his family, bring in about $100,000 per year of investable cash, which is a great position to be in.
He’s able to pull out about $500,000 in his property, meaning that it would leave him with a new mortgage to replace an existing mortgage that only has $175,000 remaining at a very attractive rate of 2.875% for fifteen years. Some people might look at that and say, “You only have X number of years left over at a very, very low attractive rate. Why don’t you just pay it off and then you’re sitting on your principal residence free and clear with lots of equity?” That goes full circle to the root problem. That is, there is no return on equity. Equity sits dormant. It’s dormant equity. It’s not producing any income or cashflow for you. In fact, it’s not generating any return on investment. Whenever you hear someone say return on equity, that’s a misnomer and it’s just misguided. There is no return on equity.
You’re sitting on a situation where you have equity in a property that you can potentially pull out and pull it out tax-free and move that equity. You’re not eliminating it. You’re moving that equity into other income-producing assets. That’s exactly what Sonny’s looking to do. By doing that, you can diversify and expand your portfolio, increase your overall cashflow because right now, there is no cashflow on that equity. His goal in his email is to create a $5,000 per month passive net income. He’s looking to achieve a target of 12% cash-on-cash return, which is achievable still today even though property values across many markets around the country have gone up. It’s slowly eroding away a lot of these turns that we see in various markets. They’re still there. I did some quick math and what you can do with the capital that you’re sitting on, the $300,000 plus the $100,000 per year plus potentially up to $500,000 of equity that can be pulled out tax-free from the principal residence, is deploy that across sixteen properties. The assumption being that these are $100,000 properties.
The second assumption is that we are putting 25% down even though you can do 20% down on the first four per person. A married couple could do a total of eight with 20% down. Hopefully this is not getting too convoluted but I am trying to really just boil it down to the core numbers. It really works out to be the following: sixteen properties at $25,000 down, which is 25% down on $100,000 property, is $400,000 in invested capital. The assumption here is that you’ve got properties that are not quite fully leveraged but close to. You’ve got properties that are 75% leveraged. I just picked a couple of properties off of our website that are around the $100,000 purchase price. Those $100,000 properties rent for about $1,000 a month in gross rental income. After you deduct all expenses plus the debt service, you are leftover with about $300 per month, sometimes a little bit more, but let’s just be very conservative here and call it $300 per month. $300 a month times sixteen properties is just shy of $5,000 per month in passive rental income. You still have your $400,000 in equity. They’re just spread across sixteen properties instead of all in one property in a cyclical market which probably has higher downside risk than these other properties that you would be investing in. You’ve actually eliminated a lot of your downside risk potential by spreading and diversifying into other markets, moving that equity around, generating $5,000 per month in rental income, and if you pull this out of your principal residence and now you have a new mortgage, your $5,000 per month will easily cover the debt service, or in other words, your monthly mortgage payment on your principal residence that you have now placed there for that $400,000 or $500,000 in equity that you’re pulling out. It makes financial sense.
A lot of times, the numbers will help you make your decisions. They will help guide you into making the right decisions. That’s the nice thing about income real estate or investment real estate is that the numbers guide you and you can separate yourself from the emotional aspect of it. You’re not shopping for a house for yourself and you need the right paint and right carpet, the right colors in the house, etc. These are rental-grade properties that you’re looking at. They’re really space that you’re renting. When you look at it objectively, you can make rational and objective decisions.
Sonny, I’ve taken your email and I’ve really boiled it down into the bottom line because I just wanted to skip over a lot of the math and pros and cons that you’ve outlined here. I think you get the drift and you see where I’m going. There are far more pros than cons here. The only cons, if you want to even call it that, is you’re resetting the clock, if you will, by putting a new mortgage, a new 15 or 30-year mortgage on that property at a slightly higher interest rate. Although that may not be a bad thing because you’re actually coming out further ahead, you still can accelerate the mortgage payments on that property and meet or exceed the same payoff cycle that you have right now. Anyway, we can talk about that. You can always give one of our investment counselors a call or you can give me a call, we can talk about it further.
That’s it for now. I will cover some more investor questions or listener questions on another episode. Be sure to download our free report, the Ultimate Guide to Passive Real Estate Investing. We get a lot of great feedback on that. I know it’s been helpful for many, many people. Please go ahead, submit your questions for me on our website, PassiveRealEstateInvesting.com. Just click the Ask Marco link and I will cover your questions on future episodes.
If you are on the fence of thinking about investing in real estate and you haven’t pulled the trigger but you know you are getting close or you need to, then by all means, give one of our investment counselors a call for a free strategy session. Remember to subscribe. Thanks once again for all your great ratings and reviews on iTunes. We’ll see you all on our next episode.
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