The Lessons of ‘Rent Ready’ And Turnkey Investment Properties
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.)
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This term plagues the entire investment real estate world and now we are seeing Turnkey companies actually advertise it to draw in unsuspecting investors…
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.