There is nothing more exhilarating for me when speaking with a new investor than the moment when they get it. The real estate bug has bitten them. They understand the immediate and life-changing power of real estate. Then, they start to peel back the layers of what it means to invest through the buying, renovating, leasing, and holding real estate long-term.
It starts with just one house. But down the road, personal wealth and cash flow will grow over time. This might create an opportunity for their spouse to stay home from work. It might pay for their kid’s college. It could help build a net worth into the millions, reduce their taxes, and pay down the principal of the mortgages—with someone else paying them!
Not to mention, all the while they’ve been helping others have a great place to call home.
All of these are powerful and wonderful reasons to own real estate. But what if you’re not interested in learning how to go through the entire acquisition process, how to renovate a house, and how to manage the properties yourself? In this case, turnkey real estate investing might be an awesome option.
This past week, we’ve spoken with a number of clients who had this exact issue. They wanted to talk through what it looked like to not just own 2-3 properties, but dozens of doors and millions of dollars in assets. This is 100 percent achievable and scalable. Let’s dive into how to make it possible.
The Big Question: What Does it Look Like When You’re Done?
This massively important question is consistently overlooked. It’s so easy to obsess about buying more homes or having a certain net worth. Sometimes it might be analysis paralysis. You might do all the work and research over and over—but never pulling the trigger.
I have been challenging myself lately to really define what my income and net worth goals actually are—and WHY I want them to be there. Otherwise, the natural tendency is to look at the next thing, instead of reaching and completing the goal.
How many homes do you want to own? What are those homes producing for you?
Start with the big picture. Really think about what this portfolio does for you. It must serve to help you solve the problem or desire you have laid out. If it’s for your spouse to be able to quit their job, what is the cash flow needed to replace their income?
Make sure the outcome is clear on what you are looking to solve and by what means you will solve it. For example, “I want to own 30 homes, paid down to under 50% loan-to-value (LTV) and cash flow of $10K consistently every month.
Common Issues Investors Confront When Scaling a Turnkey Portfolio
“It’s hard to finance more than 10 properties.”
This is a common misconception about funding your investment properties. Yes, there is a limit of 10 Fannie Mae mortgages you get with the best and cheapest financing available. That means you can get 10 secondary market loans, with 30-year amortization, at typically the lowest interest rates on the market.
After you have added those 10 doors, a lot of people think they are stuck.
First, if your spouse, parents, partners, can get approved for a mortgage, then you can put 10 in your name and 10 in theirs. But now what?
There are a number of great ways to fund these deals now. You can go through a local community bank and apply for a portfolio loan. This type of loan usually has a slightly higher interest rate and may have a shorter amortization time, such as 15 or 20 years. It does pay off the properties faster, but it also cuts down on the upfront cash flow of the portfolio.
You can also work with an institutional lender. There are many programs out there coming into the single-family space helping investors scale far beyond the community banks’ ability to lend.
The upside of working with your community bank is often you will have a direct relationship with the banker and the loan committee. They will look at it as building that relationship with you over time. Understand your circumstances, and look at being that longer-term partner. The downside is there is usually a lending limit to each individual or business. So make sure you understand how much that bank can lend to you as you establish and grow your business. Make sure you understand where that bank will lend, especially if you’re looking out of your state.
Community banks often hold those loans inside the bank, so this also makes it easier if you decide to buy or sell a property out of the portfolio.
Institutional lenders often have a bit of a higher interest rate than banks, but potentially have 30-year amortization loans. They also have much more money they can lend on a specific portfolio. I was in a room recently in Dallas with one investor who had refinanced 200+ homes in a single refinance with one of these lenders.
The biggest downside to me personally is often pre-payment penalties and being stuck within a mortgage that is fairly inflexible. If you are planning to set it and forget the portfolio for a while, these can be a great option and highly scalable.
“My turnkey provide is tapped out of properties.”
With the rise in the interest of turnkey operators, there are often stories we hear about clients not being able to buy as many properties as they want from their favorite provider. If that is the case, ask them,”Who would you recommend?” The turnkey community is pretty small. We know each other.
Ask them for help regarding who else you could work with, and make a personal introduction. There is a lot of synergy in working with two or three great providers, allowing for a diversity in locale as you scale your portfolio. Just make sure if you decide to move into another market, you do your diligence just like you did the first time.
Don’t let the lack of inventory in one company limit your ability to invest and grow your own portfolio. Make it an opportunity to learn of a few new great companies, and take action, do your homework, and find the right fit for you.
Put your big game plan in place. Understand what it does for you. Lay out your plan. Understand who you want to work with and how many properties you want to buy over what time period and in what location. Learn and grow as an investor. Build several great banking relationships, and execute your plan. Watch your real estate empire grow, and enjoy the success as you grow it. Have fun. Make great lasting relationships. And don’t forget to continue to learn and grow.
Where are you in scaling your turnkey portfolio? What are the biggest issues you’ve run into?