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The Lessons of ‘Rent Ready’ And Turnkey Investment Properties

by Chris Clothier on January 22, 2014 · 25 comments

  
RENT READY

I own one of the largest passive investment property firms in the country and if there is one term we have worked hard to distance from our company it would be…  (Actually there are two terms that we work hard to distance from our company, but I am just going to focus on one.)

This term plagues the entire investment real estate world and now we are seeing Turnkey companies actually advertise it to draw in unsuspecting investors…

Rent Ready!”

Bursting The Bubble Of Rent Ready Properties

I am not sure when I first began to pay attention to what investors meant by the term ‘rent ready’, but it did not take me long to realize it should make buyers very wary.  In my opinion, ‘rent ready’ is nothing more than a term made up by real estate investors to justify spending fewer dollars on a renovation.  Once the property is ‘rent ready’ you stop spending money!

I had two groups of investors in our offices from Australia and New Zealand and they each recounted stories of having been introduced to turnkey companies in Memphis and Kansas City.  They both told remarkably similar stories of how the turnkey companies showed them their houses and walked them through their processes.  When they stopped the tours to ask about certain repairs that seemed obvious to them, the response was that they were not going to repair those items or do those cosmetic fixes because “they wouldn’t bring in any more rent”!

They were told that spending a dollar that didn’t bring you in a dollar in rent was foolish!  They also recounted sadly how some of the investors in the group shook their heads up and down as if that logic made perfect sense.

After being involved in real estate renovations now for the better part of 10 years, my own thoughts on this subject have evolved.  Over the past three years, our company has embarked on a program designed to prove that ‘rent ready’ is a term akin to ‘lipstick on a pig’ and that buying rent ready properties from rent ready turnkey providers will actually cost an investor more money over time…not less.

The Advantages Of No Deferred Maintenance

On January 1, 2011 we made two fundamental shifts in our business.  One – we decided that deferred maintenance was a cuss word!  You can read other articles I have written about this topic for the BP blog.  Two – we decided that we were no longer offering a one-year lease.  From that day forward, properties were going to be renovated to the highest level possible eliminating deferred maintenance and rental contracts were going to be two years or longer.

(As a side note -this is what you have to do sometimes in business…just decide what you are going to do and then do it!)

To show you the results of eliminating the ‘rent ready’ term, I am going to show the results side by side.  This example represents what is still fairly prevalent in the Turnkey industry as a rent ready property and a property where more money, time and attention has been paid to eliminate deferred maintenance and provide a better property for a renter and owner.

Rent Ready                                                                          No Deferred Maintenance
$9,000                              Rehab Costs                            $20,000
$0                                       Permit Costs                           $800
0                                        Permits Pulled                          1-4
$850                                   Rental Rate                             $995
$500                                       Deposit                                $995
$80,000                       Price To Investor                        $94,900
1 Year                    Length of Rental Contract                2 years
$2,300                  Cost of Move-Out Repairs                $960

In the above scenario, where apples are compared to apples, it looks like the rent ready property would cost an investor fewer dollars and that the tipping point where they meet would be somewhere around year six or seven.  That is often how these properties are sold.  You will make more money quicker with the lower priced, lower renovated property.  When an investor buys that property, that may be the case right up until reality hits them like a 2×4 across the forehead!

Deferred maintenance is a killer that takes money out of your pocket every step of the way.  From lower rents, lower length of occupancy, higher monthly on-going maintenance bills, higher move-out costs and the real killer is the cash call when you have to replace a major system for several thousand dollars.  Those things cannot be quantified on paper and the ability of each small issue to compound into another small issue and to compound into a major issue cannot be understated.

When we looked back over the performance of our own portfolio, it was obvious that our decision was the right one.  We saw our days on market waiting to rent reduced by half on average.  We saw the cost of after move-out renovation cut by over half.  We saw our client retention (tenants are clients too!) absolutely go through the roof because they were so much happier and satisfied with the product and service they were receiving.  We even saw renters renting our properties instead of the cheaper properties across or down the street because they could tell that one property was taken care of by a high-quality management company where the other had a ragged look and that reflected on that property management company.  We were quickly learning lessons about marketing and delivery and those lessons drove the performance of our company.  From investors to tenants, if they could smell BS because the properties did not match the marketing phrases they were gone and we found both groups of clients happy to pay more for our services because they could see the quality matched the marketing.

Where The Talk Meets The Walk

In the Turnkey business, it is easy to borrow marketing phrases from companies that you see having success.  If you ever catch me on the street, be sure and ask me to tell you the story about meeting with a company who copied all of our marketing phrases without actually doing anything they marketed.  It is a classic and just about floored me when I was told the whole story.  Before I digress, let me get on point with learning to walk the walk and not just talk the talk and how an investor can tell the difference.

It takes business acumen and savvy to build a turnkey company.  Most think it only takes the ability to buy some houses and slap some paint and sign a tenant.  There you go – Turnkey!  Meanwhile, to attract the buyers they borrow phrases and concepts from companies that they see are successful.  The belief is that it is the marketing words that are actually attracting clients and not the product itself.

So when an investor is attracted to a company for all their great attributes and their wonderful service and product and what they see is a three-man band with glitter, confetti and houses that are ‘rent ready’- well, the walk is not meeting the talk.  As an investor it is natural – heck, it is human nature – to be attracted to marketing pieces and slogans.  We inherently give people the benefit of the doubt.  But you have to pull back the layers with questions and really look into the heart of a company and their operation to know if the marketing matches the product and the service.

If their marketing is all about how different they are from high priced competition, then you have to ask, “how is paying less for you to do less going to benefit me as a buyer?”.  If the marketing is all about customer service and you see three employees then you have to ask, “who is going to be giving me great customer service again?”.  If the marketing is all about efficient operations and lower costs you have to ask, “how can you afford to do all of the services you promise?”.

Investors have to remember that 40%+ of all business are out of business after 3 years.  In the real estate industry specifically, 42% of businesses fail in four years and the overwhelming reasons are for incompetence and lack of experience.  Who do you want to buy your properties from?  Most would conclude that ‘rent-ready’ property from turnkey companies promoting “cheap” instead of quality, would be a bad bet for long-term stability.  As an investor, I learned my lessons the hard way and had to break my habit of being attracted to shiny objects, marketing slogans and “cheap, rent ready” properties.

So before you buy from a turnkey company, be sure to ask for their definition of ‘rent ready’ and then remember, they may have read this article!  You may have to dig a little deeper to separate the companies farming pigs from the high-quality operators.

Photo: SDCityBeat.com

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{ 25 comments… read them below or add one }

Michael January 22, 2014 at 10:44 am

Great article! I’ve been investing for quality from the start, and it’s easy to separate myself from the competition. I’ve had banks and appraisers balk at my “above market rents” and I’ve had to explain to them that my units rent immediately and I have almost no vacancy due to the quality of the units and the buildings. In my market, the norm is “rent ready” and my clients (tenants) appreciate something more and are willing to pay for it. Not only do I make more money and have less headaches, but the tenants take better care of the units because that is what they are used to.

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Chris Clothier January 22, 2014 at 11:36 am

Michael –

You are right on track! Simple decisions like doing more extensive renovations and spending a few extra dollars here and there will impact your investment all the way through the process. It will lead to longer stays, fewer maintenance calls and if you give your tenants good and dependable service, they will stay and pay rent on time. It is amazing how the law reciprocity works even in real estate. And for a company like mine, when those things happen, guess who else is happy? The investor who purchased the renovated property as an investment.

Thanks for the comments – Chris

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Alex Craig January 22, 2014 at 11:05 am

I have found tenants have become pickier too and the lipstick on the pig approach will keep the house vacant longer and fetch a lower rent.

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Chris Clothier January 22, 2014 at 11:38 am

I absolutely agree Alex. You and I work in the same areas and you can tell a difference not just from the outward appearance of houses, but also how long the rental signs stay up on some properties. They could even be advertised at lower rents and ultimately renters choose properties where it looks like the owner and the management company actually care about the property.

Thanks for the comments and good luck with your business this year. Hope you guys have a great one. – Chris

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Jeff Brown January 22, 2014 at 1:04 pm

You’re one of the good guys, Chris.

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Chris Clothier January 23, 2014 at 9:43 am

Feeling is mutual Jeff! Thanks for the shout-out.

Chris

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Chad January 22, 2014 at 2:50 pm

Great article Chris. I visited Memphis in 2012 and purchased two homes when I returned home the following week. One of the homes I walked through and was thoroughly impressed with the rehab, the other I did not walk through because it was already rented but I was assure that the property was in tip top shape. Can you guess which one went vacant 3 months later and needed thousands in repairs? Fortunately for me, the seller and my property management team made it right but it goes right along with what you are saying.

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Chris Clothier January 23, 2014 at 9:47 am

Hey Chad –

It is good to hear that the company you worked with stood behind the property to make the repairs needed after it went vacant. Here in Memphis and in Dallas we are seeing companies highlight the fact that they don’t spend very much on renovations…holding down the costs for the future investor. That is so backward that I wanted to point out to other entrepreneurs who are selling properties to investors a real life case study where fixing on the front end – holds down costs.

Thanks for your comments!

Chris

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Jason January 22, 2014 at 3:09 pm

Chris,

I like your approach. I find its more than just renovations to look nice. We do renovations to save our tenants money. Everything from windows to artificial lawns. While budget limits what we can do, we are able to rent quickly and for top market rents. Our rentals rehabs are closer to retail then rental.

Jason

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Chris Clothier January 23, 2014 at 9:59 am

JAson –

You make a great point! It is not just about looks or performance of the big systems, but also about helping tenants hold down utility, water and upkeep costs. If they save money, they stay longer, period!

thanks for the comments – Chris

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Adam Schneider January 22, 2014 at 6:07 pm

Chris,
Good perspective. I’m glad you are challenging the status quo and the cliches…What’s so special about a 12 month time frame, anyway? Good work on that. The devil is in the detail regarding terminology in most industries. 2 people can and do have completely different expectations from the same catch-phrase. Also, there is a skill and an art to making the judgment calls about “rental ready”, but the ones who stick around generally pay more short term for the long term gain, and have cost efficiencies that are behind the scenes–not right in front of the renter such as the property appearance.

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Chris Clothier January 23, 2014 at 10:03 am

Adam – You are right on point. REnt ready is a term that anyone can use and it simply describes a property that is ready for a renter. I have known people to use it because it is part of the culture of our business and their properties are flawless. However, in many instances it is a term that describes a mindset — spend only the dollars it take to rent the house. IMO, that is a recipe for tenants, toilets and turnover. It is so much easier and less expensive to outlay the money on the front end and go from there.

Thanks for the comments – Chris

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Paul January 24, 2014 at 10:54 am

Chris,

As usual, I take so much from your writings. I love your integrity and not necessarily judging but leading through example regardless of the integrity around you. You have a cool calm rational approach that is highlighted by your aside comment “(As a side note -this is what you have to do sometimes in business…just decide what you are going to do and then do it!)”

Keep it up Chris. The world could use (and should appreciate more) quality leadership.

-PRJ

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Chris Clothier January 24, 2014 at 3:20 pm

Hey Paul –

I appreciate the compliments. This is a family business and we all have our personalities and you are correct on one point – I am the calm, cool rational one! We’ll see how much trouble I get from them for that comment…

Business is not as complicated as some people think and others seem to make it. Be clear and precise, do what you say you are going to do, treat people the way you expect them to treat you and help others get what they want out of life. None of that is original – people have been telling others for years that those are the keys to getting ahead and having a successful business.

Again, I do appreciate your comments and don’t hesitate to reach out if I cn do anything for you.

Chris

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Geoff January 24, 2014 at 2:39 pm

Very good article. It really doesn’t cost that much more to renovate correctly from the beginning, a lot of it can be accomplished through quality material choices. I have been pushing 2 year leases more and more with some pretty good success and focusing on tenant retention. Have you had any troubles with prospective tenants not wanting 2 year leases? Any tips for “selling” 2 year leases to the tenants? Are you dealing with mostly single family homes?

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Chris Clothier January 24, 2014 at 3:16 pm

Hey Geoff –

We do not get much push back on the 2-year lease because the tenant has seen the house. It is easy to create a separation when the prospective tenant has seen other properties with one year leases or talked to other management companies that want 2 year leases and they have something to compare. It is all about service. We train our people in every department on customer service. So there are definitely key words and phrases to use and it helps to train your rental agents on sales techniques such as compare and contrast with other properties in the neighborhood. IF the properties look good and the rental agent has done their job properly by returning calls, showing up on time, being prepared, etc…, then the two year rental is fairly easy with relatively no objections.

Feel free to ask any more questions. I would love to answer and don;t mind sharing.

Chris

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Kyle Hipp January 26, 2014 at 9:50 am

Great thoughts Chris!! I am always amazed at the folks that think cutting corners in such a way would be wise when you are a buy and HOLD investor. When you hold the property for a longer period of time you are just setting yourself up for more work down the road and higher exenses. I can grow my business faster now because I grew slowly from the beginning. I put money into my properties so turnovers are not common and when they happen, they go smoothly. It definately allows for longevity in this business.

One question for you. Does switching to a 2 year lease change any of the legal guidelines that pose any difficulties for you? In my state of Wisconsin their are different rules for providng notice on various things with leases of a longer term.

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Chris Clothier January 26, 2014 at 11:13 am

Hey Kyle –

I don’t know if you sell to other investors or simply hold the properties for yourself. If you hold them for yourself then you are doing yourself a huge favor for the future. Keep a long-view perspective. Forgo today’s pleasure for future payoff. It will make your life of owning real estate much more enjoyable. If you sell properties, prepare to be attacked for raising the prices of your properties to investors because you do better work. It is an easy attack from competitors to fend off – you after all are providing an ultimately much better value and rewarding experience for an investor. But for many out there it is much, much simpler to attack other companies and investors than it is to improve your own company or properties.

As for the two-year lease, you are very smart to be looking at the legal ramifications. Consult your attorneys who handle evictions and review of your leases. For us, there have been no changes, but that would be something that could be easily over-looked.

Thanks for your comments Kyle – Chris

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Sharon Vornholt January 26, 2014 at 12:37 pm

Chris –

That is a great post.

Your business shows the difference in someone that has taken the time to build a top notch business model, and the guy that avoids making repairs that should always be done before renting the property and therefor attracts low quality tenants. (and I know some of these)

Sharon

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Chris Clothier January 29, 2014 at 8:09 am

Hey Sharon!

Thanks for leaving your comments on the article. Getting comments from you and others here is almost like preaching to the choir, but I think the article hits home about a reality for many investors. Some struggle with the decisions of when to put money in the property and hopefully they can see that the front-end investment pays off in the end. Hope things are going great for you in Louisville.

All the best – Chris

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Shaun January 28, 2014 at 3:49 pm

Great piece here Chris.

However to be a Devil’s advocate a little though.
It IS foolish to make repairs and upgrades that do not add to your rent. Now for example say that you are going to put a nice new higher end kitchen in your unit. There is data showing that if you have a dated early 90s kitchen you get the same rates as a new upgraded one then that is a waste of money.
More likely you have to access when it makes sense. Say similar units get $700 and ones with the nice new kitchen gets $775. To get the nice stuff you will be paying $5500 all in. So you need to get that extra $75/month extra for a little over 6 years to break even. At that point it is a business decision if it is worth it.
Now you of course have to do all the basics to make sure that the place is safe and won’t have maintenance issues. You don’t get paid more for fixing leaky pipes but that is something you need to do to protect the property.

Examples of places that I have bought recently. Nice single family that has a roof that is over 20 years old. Doesn’t look so hot but no actual issues with it yet. Going on 2 years without any problems with it so I have been able to “pre-pay” a portion of the costs by putting away reserves and will eventually have a roof several years newer than if I replaced it right away.

Now if I was buying a TURN KEY place I would have probably wanted that replaced since I would not likely have gotten the same kind of discount. However if they were offering it at a $5000 discount because they said it would need a new roof in a couple years then that would be different too.

It is all about being honest and upfront and making intelligent business decisions.

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Chris Clothier January 28, 2014 at 10:45 pm

Hey Shaun –

You bring up great points. Renovation dollars should not be wasted whether it is redoing a kitchen a bathroom or doing un-necessary yard work like planting expensive shrubs, trees and flowers because they look pretty. Those are all wastes of money. However, those are not the things we are talking about. I have seen investors leave carpet in a property – even stained carpet that cleans up ok, but still looks old and cheap. Does it serve its purpose? Yes. Does it attract a top paying renter who will pay top dollar and stay for multiple years? Probably not. That is the rub. You will attract better tenants and more rental dollars by presenting a clean, fresh, new looking property instead of skimping and leaving it rent ready.

I thought your advice was really good though about not wasting money over-doing certain things and I don;t disagree with you on an item like roofs. You should not waste money in any area, but you have to spend it in the right areas to maximize your opportunities.

Thanks for the comments Shaun. – Chris

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Shaun January 30, 2014 at 2:03 pm

Hey Chris,

I had no doubt that you will look at things critically and make smart business decisions when evaluating a property.

Just wanted to make the discussion clear that you have to look at each property and each situation to decide the best course of action. “No Deferred Maintenance” doesn’t mean replacing things that don’t need it or putting in overly expensive upgrades. Some properties may warrant going high end if that is what is needed to get tenants or you can get a significant bump in rents. If you can’t then it is throwing dollars away.
There is obviously a minimum standard to ensure that the place is clean, safe and in good working order but I take that as a given (Though sadly not everyone does).

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Adam Schneider January 28, 2014 at 4:28 pm

I love professional, mature, thoughtful, dissenting opinions like the one just presented! There’s so much value in being a critical thinker and considering different perspectives.

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Chris Clothier January 29, 2014 at 8:10 am

Adam –

That is what BP is all about. Presenting opinions, getting feedback, having good discussion and then moving on to the next topic.

Thanks for taking the time to read the article and all of the comments. – Chris

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